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April 4, 2006

Two-Thirds of Lenders Nationwide Say U.S. in Midst of Real Estate Bubble And Half Say Burst has Begun or Will Shortly, According to Phoenix Lending Survey Results

PHILADELPHIA (April 4, 2006)—Two-thirds of lenders nationwide believe a real estate bubble currently exists in the United States—and half of them believe it has already begun to burst or will burst in the next six months, according to the results of this quarter’s Phoenix Management “Lending Climate in America” Survey.

A significant 93 percent of lenders surveyed expect an anticipated housing correction to result in real estate prices declining 10 to 20 percent across the country.

“In the minds of lenders, the housing bubble has moved from ‘Loch Ness monster’ myth status to an economic reality that could have a significant, negative impact on the lives of many Americans,” said Michael E. Jacoby, Managing Director and Shareholder of Phoenix Management Services. “A year ago, 46 percent of lenders believed we were in a housing bubble. Today, that number has climbed to 66 percent—and many of them believe a correction is imminent and could lead to a drop in housing prices of up to 20 percent.”

When asked when they believed the housing bubble would burst, thirty percent of lenders said it has already begun to happen. Twenty percent predicted it would occur in the next one to six months, and 27 percent thought it would happen seven to 12 months from now. Nine percent said it would occur in 2007.

Among the 92 lenders who participated in this quarter’s survey, only nine percent said they did not believe a housing bubble existed.

When asked which area of the country was likely to be most affected by a housing correction, 30 percent of respondents named the Northeast, followed closely by 27 percent who predicted the West Coast. Fourteen percent named the Southeast, and five percent, each, named: the Mid-Atlantic, the Mid-West, or said all regions will be affected equally.

Half of all lenders believe a housing correction will result in real estate prices dropping up to ten percent. Forty-three percent of lenders said the decline would be as high as 20 percent.
Despite their belief in the existence of a housing bubble, real estate was not the issue that lenders thought posed the greatest threat to the health of the U.S. economy.

When asked to select from a list of six issues that had the most potential to hurt the U.S. economy, 38 percent of lenders named the federal budget deficit. That was followed by the war in Iraq (18 percent), the trade deficit (14 percent), the sluggish job market (12 percent), low household savings rate (9 percent) and the real estate bubble (9 percent).

Overall, lenders remain wary about the future of both the economy and their customers.

For the first time in five years, they believe the short-term outlook for the economy is stronger than its long-term outlook.

“When we asked lenders how they expected the economy to perform over the next six months, they assigned it a high ‘C’ grade,” Jacoby said. “But when we asked them how it would perform in the second half of 2006, they downgraded the economy to a low ‘C.’

“Clearly, there are lingering concerns about whether the economy has fully rebounded in a meaningful way.”

Lenders also reported lukewarm growth plans by customers. Twenty-two percent said their customers planned to make new capital investments. Sixteen percent, each, said their customers planned to: enter new markets, introduce new products or services; raise additional capital; or make an acquisition.

Only 14 percent of lenders said their customers planned to hire new employees.

Lenders expect loan demand to remain relatively unchanged, although 39 percent predicted international lending would increase in the next six months. They also remain on the alert for loan losses, with 65 percent predicting an increase.

When asked which industries were the most attractive to their lending institution, lenders named the same three that have topped the list for more than three years—Light Manufacturing (75 percent), Service Companies (73 percent), and Industrial Distribution (72 percent).

Start-ups/New Ventures were deemed the least attractive industry to lend to, with 65 percent naming it unattractive. Roughly 75 percent of lenders reported plans to maintain their existing loan structures in the $1 million to more than $10 million loan size categories.

Two-thirds of lenders plan to maintain their interest rate spread and fee structures on similar credit quality loans. In the under $1 million loan category, 32 percent of respondents said they planned to increase the interest rate spread and fee structure.

Nearly all lenders expect the Fed to raise rates in the coming six months, but they predicted a smaller rate hike of a half-point or less, compared to previous quarters.

About the Survey

The Phoenix Management Lending Climate in America Survey is conducted quarterly to gauge shifts in lenders’ attitudes toward the economy. Eighty-two lenders from commercial banks, commercial finance companies and factors across the country were surveyed this quarter. Respondents completed a written questionnaire during January and February.

About Phoenix Management Services

Phoenix Management Services is an operationally-focused advisory firm, providing turnaround, crisis and interim management and investment banking services to middle market companies in transition. Since 1985, Phoenix has aggressively advocated on behalf of its clients in over 700 assignments nationwide across a variety of situations and industries. With offices in Philadelphia, New York, Boston and Ft. Lauderdale, Phoenix preserves and enhances the value of its clients’ companies by focusing on the operational and financial challenges they encounter.


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