The end of the decline in real estate is nowhere near, and yet U.S. banks may feel it shrewd to hold onto troubled loans in the sector rather than sell them or take losses.

Many of them are remembering that the 'sit on the loan, wait it out, work it out' strategy did pay off for those with the capability and patience to do that back in the early '90s, according to Jacques Gordon, global strategist at LaSalle Investment Management.

Industry experts who spoke at the Reuters Global Real Estate Summit this week were wary about the outlook for banks.

They projected that the commercial real estate downturn is nowhere near bottoming, while demand for home purchases may stay sober until the economy is more clearly in recovery mode and consumer credit conditions improve.

Commercial banks are going to have to see a few better indicators before the balance of funds begins to flow a little bit, said Richard Dugas, chief executive of Pulte Homes Inc (PHM.N: Quote, Profile, Research, Stock Buzz), which will become the nation's largest homebuilder when it finishes buying Centex Corp (CTX.N: Quote, Profile, Research, Stock Buzz). They've simply taken huge hits on their portfolio, and they're not done yet.

That may dissuade banks from making more loans, regardless of whether they plan to keep them or sell them to investors, further dampening activity and economic recovery prospects.

Lender caution wasn't just a byproduct of real estate activity gone amok, but was a byproduct of the financial system going way overboard, said Allen Smith, chief executive of Prudential Real Estate Advisors. Real estate was one piece.


Commercial property prices have plummeted as sellers essentially capitulate to a lingering recession and still-tight credit. Moody's Investors Service this week said prices in April were down 29.5 percent over the prior year-and-a-half.

Barclays Capital analyst Jason Goldberg this month said commercial real estate will bear the brunt of future deterioration among the various loan categories for banks.

He said BB&T Corp (BBT.N: Quote, Profile, Research, Stock Buzz), Comerica Inc (CMA.N: Quote, Profile, Research, Stock Buzz), Marshall & Ilsley Corp (MI.N: Quote, Profile, Research, Stock Buzz), M&T Bank Corp (MTB.N: Quote, Profile, Research, Stock Buzz), Regions Financial Corp (RF.N: Quote, Profile, Research, Stock Buzz) and Zions Bancorp (ZION.O: Quote, Profile, Research, Stock Buzz) are among lenders with more than one-third of their loan portfolios in commercial real estate or construction loans.

Construction loans are an absolute disaster, said Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank Securities Inc.

It is nonetheless difficult to paint heavily exposed banks with a broad brush. BB&T, for example, this month repaid $3.1 billion of federal bailout money it took last year, while many analysts believe Regions may struggle to repay its $3.5 billion without further diluting shareholders' stakes or selling key assets.

Residential real estate is not out of the woods either. Prices of U.S. single-family homes fell 19.1 percent in the first quarter, according to the S&P Case-Shiller Home Price Indices. Economists on average expect April data scheduled for release on Tuesday to show an 18.9 percent drop.


Many economists believe the decline in home prices is closer to the end than the beginning.

Foresight Analytics LLC, a California-based real estate consultant, this month identified what it called the beginnings of a recovery following double-digit peak-to-trough declines in dozens of major markets, including a punishing 60.7 percent drop in the Stockton, California area.

But it also noted that delinquency rates for construction and land loans have tripled since the fourth quarter of 2007, despite an accelerating decline in outstanding construction loans. The rate for condominium construction loans was 32.3 percent in the first quarter, and will head higher, it said.

Parkus said bad market conditions can be a good time for lenders to ramp up activity.

You can get interest rates that are much, much, much better than what we could in the past, he said. You can underwrite to extremely low, conservative, stabilized assumptions and produce great loans. It's in the beginning of the cycle that the best loans are always originated.

Yet Dugas, from Pulte, is not so sure the appetite to make those loans will be there.

There's an awful lot of bad real estate lending that happened in this country that has not yet made its way out through the system, he said. Once burned, twice shy.