Current Credit Crunch is Even More Severe than in Early-1990s, Says Witten at NAHB Construction Forecast

By Keat Foong, Executive EditorWashington, D.C.—The 2008 bank credit crunch may be even more severe than that of the early-1990s recession, suggested Ron Witten, president of Witten Advisors LLC. Witten was speaking at the National Association of Home Builders’ (NAHB) Fall Construction Forecast Conference this week. Witten pointed out numbers from the Federal Reserve Board showing that 81 percent of banks surveyed are cautious about commercial real estate lending in 2008. This number compares with a high of 60 to 70 percent who were cautious in 1990, according to a graph displayed at the presentation. “The banking credit crunch is tougher now than in the early-1990s,” said Witten. While banks are “less interested in talking about new loans than repayment,” Witten noted that on the permanent financing side, however, capital continues to flow to the multifamily rental sector. “Thanks to Fannie Mae and Freddie Mac, multifamily mortgage financing is still functioning. It is still pretty active,” he said. “Long-term mortgage debt is still very much available.” The healthy state of long-term debt financing, he pointed out, is the reason prices for apartments have not eroded as much as in other real estate sectors. He said apartment cap rates have risen by about 50 basis points in the past 12 months. However, he cautioned that investment sales volume remains thin for firm predictions to be made at this point.  Witten said that while land cost is cheaper due to falling home prices, hard construction costs have continued to increase. The net result is that all-in development costs have increased by single digits, which is an “increase nevertheless.” Witten said that lenders are providing 60 percent instead of 75-80 percent loans today, and borrowers need two times as much cash.