Here's a news release headline you don't want to see:

Bank Loan Charge-offs Surge 45% In First Half of 2001

According to Weiss Ratings, a leading bank rating agency, "the U.S. banking industry's net loan charge-offs grew by an alarming 45% during the first half of 2001 compared to the same period last year."

"Loan charge-offs, the loss banks take when borrowers default, totaled $15.9 billion in the period," according to the Weiss -- an increase of $4.9 billion over the $11.0 billion charged off during the first half of 2000.

"This surge was fairly widespread, with 2,993 banks and thrifts, or 30.7% of the industry, registering an increase," according to Weiss.

The concern is not that the banking sector is threatened -- it isn't. In 2000, federally-regulated commercial banks had profits of $71.2 billion according to the Federal Deposit Insurance Corporation. This compares with $52.3 billion just five years ago, in 1995.

"This is just the beginning," said Weiss chairman Martin D. Weiss. "This data does not yet reflect the rise we've already seen in non-performing loans in the first half, a harbinger of more charge-offs to come. Nor does it reflect the sharp decline we've seen in the economy both before and after the terrorist attacks." Instead, the issue is that a lot of individuals and businesses were having tough times during the first six months of the year."

Given such circumstances, it's remarkable that in August existing homes were selling at an annualized rate of 5.5 million units, according the National Association of Realtors -- 5.0 percent above the 5.24-million unit pace in August 2000. The previous record was an annual rate of 5.45 million units in June 1999.

Dr. David Lereah, NAR's chief economist, says that "after setting a new record for existing-home sales in August, our internal tracking shows a downturn following the attack on America, and there will be some natural pullback from big ticket purchases in the months ahead given uncertainty over the future."

Because of the terrorist attack in September, NAR has re-cast its estimates and now "expects home resale activity to average below the 5.0 million-unit rate through the first quarter of 2002. "

The new home market is also likely to be troubled.

"Major parts of the economy had downward momentum as this quarter began (such as industrial production and retail sales), and available signals for October generally show weakness," according to David F. Seiders Chief Economist with the National Association of Home Builders.

"We're currently forecasting 1.45 million housing starts for the fourth quarter," says Seiders, "down 9 percent from the revised third quarter pace, despite maintenance of low interest rates in the mortgage market."

We now face a new economic era, a period without precedent. Will we have a mild recession -- or a deep one? Will the recession be short-lived -- or something that will continue for years?

Even though the consensus view is that home sales will fall in the coming year, you can't ignore the fact that the decline is likely to be relatively small. You can't dismiss the reality that while much of the country was having economic problems during the first six months of the year, both new and existing home sales were strong.

How is it possible to have both strong home sales and many people with troubled finances? The answer, I think, is low rates. Imagine how much worse the situation would have been this year with mortgage rates at 8 or 9 percent -- or higher.

Interest rates are low and there are few signs that rates will rise in the short term. As well, there is an economic component to war, a gearing up that creates jobs and spends money.

Low interest rates and increased government spending are the traditional responses to recessionary trends. Given the underlying strength of the economy -- all those home sales even when a large number of people were having financial problems -- it seems likely that the recession we now face will be shallow and brief, finishing perhaps a year from now.

For more articles by Peter G. Miller, please press here.

Published: October 23, 2001

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .