Capital Markets Show First Signs Of Recovery

As asset prices recover and rise, investors will move off the sidelines and leaders will become more active. Fully reversing the damage caused by the Great Recession will take years, but markets will show improvement by the end of 2010.

As asset values begin to rise, you will see consumers and businesses willing to buy and invest. This will lead to increased investment activity, and ultimately will cause lenders to lend. The process of price discovery always occurs first in the stock market, where assets are freely and frequently exchanged between third parties, with private markets lagging 12-18 months. As a result, we expect private asset pricing, including that of commercial real estate, to begin rebounding in the third quarter of 2010.

There is no doubt that capital markets are rebounding, as witnessed by the nearly 60% bounce in the stock market since the low in March 2009, and the greatly narrowed spreads on LIBOR, high-grade corporate debt, and, more recently, junk bonds. Bank excess reserves at the Fed remain slightly over $1 trillion, suggesting that these banks could create $7 trillion-$8 trillion in new loans. The reluctance of banks to lend primarily reflects their increased focus on dealing with Washington and problem loans, as well as the difficulty of making good loans in a world of falling asset prices. But as asset prices have hit bottom, we expect a return to selective lending by banks.

Dr. Peter Linneman is NAI Global's Chief Economist and professor at the Wharton School of Business, where he was the founding chairman for Wharton's Real Estate department and has been on faculty since 1979.

Please click here to get the full report.

Next Release - Beware Of Inflation

Go Back to the Content Page