The stress stems from mortgage lending and real estate financing.
The inventory of new homes remains high.
The pipeline for additional units is a potential problem for the banks' balance sheets.
If you've been following conventional wisdom, you've probably heard about a retail banking slowdown, caused by the inverted yield curve. Of more importance, however, is the financial stress facing the sector, stemming from mortgage lending and real estate financing. It's not just housing; the challenges affect all facets of the business -- residential and commercial properties as well as development.
Several key regional banks will be reporting quarterly results this week, and their comments and guidance should provide a proxy for the health of the housing and consumer markets as well.
In addition to these earnings reports, investors will have plenty of other signals to help them assess whether the real estate market is continuing its drag on GDP growth. The Fed will release the Beige Book on Wednesday, and Fed Chairman Ben Bernanke will make his testimony to the Senate Banking Committee on Thursday. Also slated for release are the January reading for the National Association of Home Builders' housing market index as well as housing starts for December.
We know that the inventory of new homes remains high and that the pipeline for additional units is a potential problem for the banks' balance sheets. I've been writing about the concerns of the Treasury, the Federal Reserve board of governors and the Federal Deposit Insurance Corp. with regard to the banks' balance-sheet exposure to both residential construction and commercial real estate loans. The agencies have observed that commercial real estate concentrations have been rising over the past several years and have reached levels that could create safety and soundness concerns in the event of a significant economic slowdown.
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At time of publication, Suttmeier had no positions in any of the stocks mentioned, although positions may change at any time.
Richard Suttmeier is the chief market strategist for RightSide.com, where he writes the Small Stocks and Sector Report. Early in his career, he became the first long bond trader for Bache and later began the government bond department at LF Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the U.S. capital markets. He has also been the U.S. Treasury strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. He appreciates your feedback; click here to email him.
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