The construction credit environment was stable over the past month but remains very fragile and continues to be a restraint on starting new projects and continuing with previously started projects. It is hard to disentangle the negative impact of credit de-leveraging from the negative impact of worsening balance sheets due to the recession and the negative impact of Obama’s effort to forestall foreclosures which is undermining the value of lenders’ assets.

Fortunately the Federal Reserve Board has stepped in with an unprecedented amount of credit creation to largely offset all three negative. The FRB never expected to have to do this but they have forced to step in because the Securities and Exchange Commission (SEC) has been inept and the Treasury Department became irrelevant when Congress and the Administration shifted it focus to battling foreclosures instead of capitalizing lenders.

Credit rates generally slipped a little over the past month with more decline ahead well into the year. Nominal rates are very low but real, inflation adjusted, rates are still near average. The small boost from lower rates was far more than offset by tougher lending approval standards and the worsening balance sheets of loan applicants. Lenders are still carrying a huge surplus of lendable funds, hoarding money, because they do not like the loan applications that they are getting and they keeping a cushion against the possibility that Obama’s housing policies will further erode their mortgage related assets.

Frustrated loan applicants are blaming their inability to get credit on either greedy bankers or the banks lack of loan capital. But in many, perhaps most, cases is being denied because the applicant is judged to be not able to repay the loan is a recessionary period.

Several hundred billion dollars of additions to loss reserves — often covered by FRB credit creation - when the 4th quarter books were closed makes it likely that lenders can accommodate normal business operations loan requests for credit worthy borrowers. Lenders should be able to meet the increased loan demands that will come later this year when the economy turns to expansion.

But late in 2010 and beyond expect very expensive credit when the surplus liquidity in the financial markets begins to be extracted to avoid rapid inflation. This means relatively sluggish economic growth after the initial economic recovery. Capital goods industries, including construction, will be operating in a credit constrained environment for several years.

U.S. Construction Finance Environment — March 2009