Fed Beige Book Points to Trouble Spots in Real Estate

Economic activity nationwide is continuing to show signs of improvement, according to the ""Federal Reserve's Beige Book"":http://www.federalreserve.gov/fomc/beigebook/2010/20100609/default.htm released this week, although the pace of growth in most parts of the country was described as ""modest.""

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According to the report, residential real estate activity in many of the 12 Federal Reserve districts was buoyed by the April deadline for the homebuyer tax credit, but demand has already begun to pull back in May. Commercial real estate remains weak, the Fed said, and only a few districts noted a small increase in lending.

Overall Beige Book commentary shows that residential real estate activity improved since the last report, thanks to an increase in home sales and construction prior to April 30th, when buyers had to be under contract to receive the federal tax credit. Now that the credit has wound down, though, contacts in many districts are indicating a corresponding slowing in activity.

Despite the recent uplifts in both sales numbers and home prices, Federal Reserve Chairman Ben Bernanke says the still-weak housing market is hampering the pace of economic recovery. Bernanke argues that despite the homebuyer tax credits, conditions in residential real estate markets have ""firmed only a little"" over the past year.

The Fed’s Beige Book notes that tight credit, an elevated inventory of homes for sale, and the ""shadow inventory"" of

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foreclosed properties on banks' balance sheets are holding back residential development, particularly in the New York, Cleveland, Atlanta, and Chicago districts.

Commercial real estate activity was generally classified as weak, although some districts reported an increase in leasing.

Office, industrial, and retail vacancy rates continued to drift upward in most parts of the country, putting downward pressure on rents. However, these lower rental rates were said to have led to an increase in leasing activity in New York, Philadelphia, Richmond, Kansas City, Dallas, and San Francisco.

On the commercial side too, district reports indicate that elevated inventories of existing properties for sale or rent are weighing heavy on new private nonresidential construction. However, public construction increased in Philadelphia, Cleveland, and Chicago. Stronger industrial demand was noted in several districts.

The Fed said financial activity was “little changed” from its last study. While New York reported underwriting and investment banking activity had strengthened, consumer lending weakened in most districts.

In contrast, the Beige Book says real estate lending increased even though standards on these loans remained tighter than on other loans, particularly for commercial mortgages.

Chicago noted that the secondary market for residential mortgages was beginning to improve, and private equity investment in commercial properties increased in Boston, Chicago, and Dallas.

Loan quality was indicated to be stabilizing or gradually improving in most districts, but remains an issue for banks with large exposures to real estate, the report said.

Contacts in some districts cited concerns over the potential impact of the European fiscal crisis on financial and business conditions, and reported a corresponding increase in uncertainty and financial market volatility.