The International Monetary Fund said there’s little hope the dismal global real estate sector will provide a sustained boost to the overall economic recovery. In its world economic outlook for October, analysts at the IMF said enhanced access to credit and financial innovation led to a buildup in leverage by homeowners worldwide, and the develeraging process may “make the macroeconomic impact of this housing bust greater than in the past.” In the U.S., the IMF said a double-dip decline in the real estate sector is possible and would expose pockets of vulnerability in the banking system. There are multiple issues within the space that remain “threats to the fragile stabilization” of the economy, according to the IMF analysts. The record-high delinquency rates on commercial mortgage-backed securities and considerable amount of CRE debt set to mature will pose problems over the next few years. Resets on adjustable-rate mortgages loom and despite historically low rates, refinancing options are limited due to the number of underwater loans. A few weeks ago, David Stevens, commissioner for the Federal Housing Agency, told Congress that between one-fifth and one-quarter of American homeowners owe more on their mortgage than their home is worth. And there may be renewed strain on credit conditions from loan losses due to delinquencies, the IMF said. IMF analysts ran a stress of the top 40 U.S. banks that showed residential real estate prices declining by 6% and CRE prices dropping 9% next year. If domestic GDP growth slows to 1.2% in 2011, American banks would need $57 billion in additional capital to meet asset ratios, according to the IMF. “Although the capital of U.S. banks thus appears broadly sufficient, substantially more capital would be needed in the absence of GSE and other government intervention,” the IMF said. Analysts expect some economies, such as Spain and Ireland, to recover slower than other parts of the world because the “feedback loop between credit and collateral prices created a construction boom, significantly distorting the allocation of resources.” These economies became too heavily dependent on home construction to drive growth and now suffer from drastic decreases in that sector, which have greatly increased unemployment levels. “In economies where real estate markets are still in decline, the drag on real activity will continue. And in economies where house prices and residential investment are rebounding, concern about bubbles is eliciting policy actions that will temper any short-term boost to economic activity,” IMF analysts said. Meanwhile, in Washington, Treasury Secretary Timothy Geithner called on developing countries to change policy to increase local demand for products and not rely on the U.S. to buy more of their exports. Speaking at the Brookings Institution earlier Wednesday, Geithner said emerging economies, particularly those with significantly undervalued currencies, need to establish “more flexible, more market-oriented exchange rate systems.” “This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same,” he said. This can cause inflation and asset bubbles in emerging economies, or depress consumption growth while intensifying short-term distortions in favor of exports, according to Geithner. He said the IMF now expects the world economy to expand at an annual rate of about 4% next year because “growth is very strong in many of the major emerging economies.” But without changes in economic policy by countries overly dependent on exports to the U.S., “global growth will slow and all of us will be worse off.” Write to Jason Philyaw.
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