This graph should speak for itself. To put it in a few short words, "You ain't seen nuthin' yet!"
We are overbuilt, not just in residential but commercial as well. Construction and development loans have always been a high risk/high reward endeavor, well the risk part is coming home to roost. We are at a historical high in the riskiest classes of bank loans, at a time when supply is excessive, the macro environment is downright destructive, and bank capital levels are at all time lows.
It appears as if the banks believe Henry Paulson's bullshi,, excuse me, "assertions" that the worst is behind us, for they appear to be explicitly under-reserving for what I see as a historically high level of RE loan concentrations. This is not even taking into consideration the performance trend of those loans over the last few quarters.
More to the point, look at the last two times real estate has gotten into trouble. Both times really hurt the US, with the earlier one (the S&L crisis) probably costing the US citizen and the banking system the most since the Great Depression. Despite this, the banking industry was much more prepared (in terms of loan loss provisions) to whether the storm then they are now. If you have read through my Asset Securitization Crisis primer and you are a reasonable man/woman, you should gather that we are in a much worse position now than we were in either of the last two downturns. This means that loan loss provisions are going to spike up sharply, and along with it capital requirements increase dramatically (spell the word D-I-L-U-T-I-O-N slowly, for we will be seeing a lot more of it) while earnings plummet. But then again, if the worse is behind us, it doesn't really matter, does it???
I have screeched many times on my blog that some very smart people who should really know better are definitely overestimating the power of the Fed to get us out of this situation. Those guys over at CNBC say, "but we are getting rate cuts, margins are improving, yada, yada." Yes, we did get rate cuts. Yes, margins are improving. But from what level. As you can see, regional CRE lending institutions had it better during the S&L crisis, and you see what happened to over a thousand of them .
The U.S. Savings and Loan crisis of the 1980s and 1990s was the failure of several savings and loan associations in the United States. More than 1,000 savings and loan institutions (S&Ls) failed in what economist John Kenneth Galbraith called "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time."
The ultimate cost of the crisis is estimated to have totaled around
USD$160.1 billion, about $124.6 billion of which was directly paid for
by the U.S. government -- that is, the U.S. taxpayer, either directly
or through charges on their savings and loan accounts-- , which contributed to the large budget deficits of the early 1990s. The resulting taxpayer bailout ended up being even larger than it would have been because moral hazard and adverse-selection incentives compounded the system’s losses.  The concomitant slowdown in the finance industry and the real estate
market may have been a contributing cause of the 1990-1991 economic recession.
Between 1986 and 1991, the number of new homes constructed per year
dropped from 1.8 million to 1 million, the lowest rate since World War II. For the record, we are on track to easily break that housing starts record. Why would anyone bid up the homebuilders??? Study balance sheets and history, people!!!
As a matter of fact, the current environment shows the weakest net interest margins for the last 30 years! To make matters worse, I believe that sooner or later (probably sooner) the government is going to be forced to stop thier core inflation charade as energy, food, housing, and the materials used to produce these commodities, skyrocket through the clouds and into outer space. Of course inflation is under control as long as you don't have to eat, drink, drive or sleep in warm shelter! If real inflation forces the feds hands into raising rates, even just a little, the banks are toast. That little dip in NIMs at 1985 in the graph was probably the straw that broke the camel's back in the S&L crisis. Yes, Mr. Bernanke --- Conundrum! Or maybe not. Mr. Paulson said the worst is behind us!
Below, you can see where we have a whole lot more loans to default on than we did in the S&L crisis, even after adjusting for inflation (not reflected in the chart).
So, after taking all of this into consideration, you can see why I don't think the worst is behind us. As a matter of fact, many focus on subprime, and more recently HELOCs (for good reason). Here is an interesting article on Calculated Risk regarding the losses on HELOC's being understated because the servicers are too busy to get timely information out. But (I know, never start a sentence with a conjuntion, but this is my blog - Enlgish teachers are not allowed here), if one simply takes a gander at what is really going on, you will find there is a broad field to choose from when selecting banks to short.
I think I'll end this here. My next research post will be on muni losses affecting credit default swaps, charge offs in the banking sector, more bank short candidates that I chose to bypass, and a homebuilder update. I will also be hosting a high net worth and institutional investor pow wow on the Hudson River leaving from Chelsea Piers in Manhattan, for anyone of the aforementioned interested in my opinions and outlooks. Stay tuned.