The Cash for Clunker Stocks Rally rolls on as economic data continues to improve. Today, we learned that new unemployment claim fell by 12,000 last week and new home construction rose 1.5% to the highest level in nine months.
Of course, nine months ago was December. And I doubt home construction in any year is very high in December, but it’s probably best not to dig too deep into the data. The Dow Industrials seems to be on a collision course with 10,500.
The current level of home construction was boosted by a surge in construction for new apartment buildings. I guess those people losing their homes still need some place to live…
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*****Commercial real estate prices have dropped 36% since October 2007. It should be no wonder that many commercial mortgage loans are underwater. It should also be no surprise that companies like REIT Maguire Properties (NYSE:MPG) are starting to walk away from properties that are a drag on revenues and earnings. On August 10, Maguire announced that would be "handing over the keys" to seven office buildings in and around
Market research firm Real Capital Analytics estimates that $127 billion worth of office buildings are at risk of foreclosure. There can be no doubt that this would be very bad for the banks holding these loans. The difference between loan value and current value would have to be written off immediately, and even though the Treasury Stress Tests made it sound like banks can absorb additional losses, I doubt that they can.
That’s why the Fed started the Term Asset-Backed Securities Loan Facility, or TALF, back in June. The program is supposed to make it easier for commercial real estate companies to issue debt to raise cash, but the credit requirements are strict. And that’s probably why TALF isn’t working. Bloomberg reports that no deals have been done under TALF.
*****On September 15, the Treasury changed the rules to make it easier to extend the maturity of troubled loans and stave off default. But it seems clear that more will probably be done to keep the tide of commercial real estate defaults from becoming a tidal wave.
It is for that reason that I think it may be time to dabble a toe in the REIT water. We’ve seen the government underwrite the risk in the stock, and so the Cash for Clunker Stocks Rally was born. I won’t be surprised to see REITs become the next category of clunker stocks to start running. And Maquire Properties is about as "clunkerish" as they come…
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