Financial markets turned chaotic again in the last month after being relatively calm for most of the year. Liquidity shrunk further although massive cash injections by the FRB and other central banks pushed rates for less risky investments markedly lower in the second week of September while raising credit rates for more risky investments. The construction consequences are that borrowing rates fell for prime rate mortgages and public works but increased for commercial projects. This dichotomy will persist well into next year until lenders can again trust in the solvency of their investment managers.

Several large and overly leveraged investors ultimately were unable to raise enough capital to replace their losses on subprime mortgages or the bonds secured by them. Their creditors sensed this and forced them into insolvency. Fannie Mae and Freddie Mac got taxpayer guarantees to protect the prime mortgage market but will be stripped of their option to speculate in high risk bonds. Investment bank Lehman Brothers went bankrupt with over $600 Billion of gross debts plus hundred of billions of loan guarantees. Merrill Lynch avoided the same fate by being absorbed by Bank of America. Insurance giant AIG is insolvent and may not survive. There will be more bankruptcies in the financial market.

Surviving investment managers are rationing their scarce funds partly with small rate increases but mostly with tighter lending standards. Remember 2001-03 when developers had to put up more equity capital and demonstrate more pre-construction sales or leases than in 2004-07 to secure construction loans. Financial conditions for commercial construction and real estate are moving back toward the cautious 2001-03 standards. Unless there is an outright drop in economic activity, lending standards will not become as onerous for developers as in 2001-03. But some projects acceptable to lenders in August will not be acceptable in September.

Construction spending and construction starts trends will likely weaken in the balance of the year compared to the latest Reed Construction Data forecasts. Conflicting forces have to be sorted out and weighted. Housing will get a small boost because the second round of the credit crunch cut 30-Year mortgage rates by 50 basis points. Also anticipations of slower growth in the US economy cut oil prices which will boost consumer confidence further. Depressed consumer confidence has been the major on home sales.

U.S. Construction Finance Environment — September 2008

	Financial Market Benchmark Rates
	Previous				Annual Average
	Month				Actual		Forecast
	(Aug 08)	Latest			2006	2007	2008	2009
		Week Ending
Federal Funds Rate (overnight)	2.00	Sep 10 08	1.99		4.96	5.02	2.32	2.29
1-Year Treasury Bill (T-Bill) Rate	2.18	Sep 12 08	2.05		4.93	4.52	2.16	2.66
10-Year Treasury Bill (T-Bill) Rate	3.89	Sep 12 08	3.66		4.79	4.63	3.88	4.38
Prime Bank Rate1	5.00	Sep 10 08	5.00		7.96	8.05	5.32	5.28
1 Base for home equity, contractor and business investment loans
	Mortgage Loan Rates
	Previous				Annual Average
	Month				Actual		Forecast
	(Aug 08)	Latest			2006	2007	2008	2009
		Week Ending
1-Year Adjustable Rate Mortgage	5.25	Sep 11 08	5.21		5.53	5.56	5.16	5.14
5/1 Adjustable Rate Mortgage	6.02	Sep 11 08	5.87
15-Year Fixed Rate Mortgage	6.02	Sep 11 08	5.54
30-Year Fixed Rate Mortgage	6.48	Sep 11 08	5.93		6.41	6.34	6.04	5.88
	Previous
	Month		Latest
Core Inflation Rate2	2.3% (Jun)		Jul 08	2.4%
Inflation Expectations3	2.00% (Aug)		Sep	2.00%
2Based on personal consumption expenditures (less food and energy), year over year. 3Based on rates for 10-Year inflation-protected Treasury securities.