October Beige Book Highlights

Highlights from the Beige Book released by the FOMC today:

Summary

The weakest sector was commercial real estate, with conditions described as either weak or deteriorating across all Districts. Banking also faltered in several Districts, with Kansas City and San Francisco noting continued erosion in credit quality (often with more expected in the future). One bright spot in the banking sector was lending to new homebuyers, in response to the first-time homebuyer tax credit. Finally, labor markets were typically characterized as weak or mixed, but with occasional pockets of improvement.

Real Estate

Most Districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses. Contacts reported that sales were boosted by the government’s tax credit for first-time homebuyers. Resale activity also edged up in parts of the New York District, although prices continued to be depressed due to a substantial volume of foreclosures and short sales. New and existing home sales remained flat in the Philadelphia District, and home sales continued to decline throughout the St. Louis District. Sales of higher-priced homes were very slow, according to Philadelphia, Cleveland, and Kansas City. Moreover, real estate agents in the Boston and Cleveland Districts were uncertain about the future of home sales once the tax credit expires. Availability of financing continued to be a concern for potential buyers in the Cleveland and Chicago Districts.

Residential construction activity remained weak in most Districts. Atlanta reported that construction remained very low, and Cleveland expected new home construction to proceed at a slow pace. Chicago indicated that construction on existing developments edged up, but St. Louis reported that construction activity declined. Kansas City reported that housing starts stabilized, although levels remained well below a year ago and were not expected to improve over the next three months. Philadelphia noted that builders continued to offer increased incentives to boost sales.

Commercial real estate continued to weaken across the 12 Districts, although even this sector had scattered bright spots. Each District indicated that demand for private commercial real estate was weak, with New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco all characterizing activity as declining further since the last report. An inability to obtain credit was often cited as a problem for businesses that wanted to purchase or build space. High vacancy rates were noted as a key concern especially for landlords who were not offering concessions. And, while industrial real estate in the Richmond District was generally weak, renewed interest by retailers to revisit postponed expansion plans was also noted. Finally, public nonresidential construction activity funded by federal stimulus projects was a source of strength in the Cleveland, Chicago, Minneapolis, and Dallas Districts, but gains were often offset by state and local government cutbacks.

Banking

Many Districts continued to report weak or declining loan demand, and many noted further erosion of credit quality. For example, demand was reported as stable or declining by New York, St. Louis, and Kansas City. Cleveland noted that commercial and industrial lending was soft and consumer lending was flat or reduced. In the Richmond District, modest signs of improvement in consumer loans were cited from banks in areas typically supported by the health care and education industries. Philadelphia also reported a small gain in consumer lending. San Francisco said that loan demand was largely stable or perhaps rose slightly. A major exception to the general pattern of weak or declining lending activity was in residential real estate. Most Districts cited the federal government’s first-time homebuyer program as supporting residential lending activity. However, Dallas reported that residential mortgage demand was disappointing, and St. Louis mentioned a moderate decline in real estate lending.

Credit quality continued to be a problem, and rising delinquencies were often noted. For example, credit quality was described as stable or declining in the Philadelphia, Cleveland, and Kansas City Districts. Half of the contacts for Kansas City expected loan quality to continue to erode over the next six months. Cleveland stated that the quality of loan applicants had deteriorated somewhat, mostly on the business side. Delinquencies were also widely reported to be up; New York particularly noted rising delinquency rates among both consumer and commercial mortgage loans.