Monday, December 14, 2009

CMBS update -- very bullish



Here's a graph of the price of a AAA-rated commercial mortgage-backed security index that is published by the folks at markit. Earlier this year, prices fell as low as 56, whereas today they are over 82 and rising. That's an impressive gain, and it comes despite the ever-increasing drumbeat of concern for commercial real estate. What this means is that the market was way too pessimistic earlier this year about the prospects for commercial real estate loan defaults. Even though defaults are likely to rise next year, they are now projected to rise by less than previously expected. This ties into a reply I made on a recent post comment, to the effect that rising default rates are not likely to be bearish for the market or for the economy, since the market has already discounted those losses. Enormous losses have been booked already in our forward-looking markets; what remains to be seen is whether the actual losses are more or less than what has been anticipated. Moral of the story: don't look at the level or even the projected level of CRE defaults, look at the behavior of the prices of securities that will be affected by those defaults. On that score things are getting better even though defaults are rising.

3 comments:

Bill said...

Should this translate into greater availability for commercial loans then? From my perspective, commercial loans for residential apartments have been extremely difficult to obtain despite the tremendous bargains out there.

Scott Grannis said...

I should think that yes, this is a precursor to greater loan availability, but it might take some time to develop. Banks are still quite risk-averse, and traditional lending channels (such as the ones that were able to securitize all manner of loans) are still shell-shocked. There are increasing numbers of willing borrowers out there, but there are still a great many borrowers who are trying to deleverage. But I should think that things will improve over the course of next year.

bean said...

There is alot going on in the cmbs market. Clients are jumping at the chance to meet with our analysts. Thanks for the informative post, dad!