RE Investor Sternlicht Sees 'One Or Two' Bank Failures A Week, UK Economist Says "Entering New Dark Age'

 Billionaire Barry Sternlicht, Founder, Chairman and CEO of Starwood Capital Group has issued an ominous warning about America's regional banks, which he says will fail at a rate of 'one or two' per week.

Speaking with CNBC on Tuesday, Sternlicht says he thinks that primary real estate lenders - community and regional banks - are about to get whacked.

"You're going to see a regional bank fail every day, or not — every week, maybe two a week," he said, adding that Fed Chair Jerome Powell's ongoing rate hikes will continue to have consequences for the real estate sector.

"He's got a hard task with a blunt tool, and the consequence is the real estate markets are taking it on the chin because rates rose so fast. We could have handled this, but we couldn't handle it this fast," he said. "The 1.9 trillion of real estate loans, that's a fragile animal right now."

Watch:

As Schiff Gold notes, the fed must cut to avoid a banking crisis.

Most at-risk firms are smaller banks representing assets under $10 billion, with a handful of larger regional ones. Some might be able to avoid closing by halting expansion plans or offering fewer services. Others might save themselves by merging with larger banks. But with inflation too high for the Fed to cut now, “higher for longer” interest rate policy is looking increasingly likely, and banks with high exposure to troubled commercial real estate are at particular risk of starting a domino effect of small collapses that lead to bigger ones and bleed into becoming a real estate crisis.

...

In all its hubris, the Fed is stuck between preventing a banking crisis and preventing inflation from getting even more out of control. It needs higher rates to reduce inflation, but crucial sectors of the economy that are heavily dependent on lending can’t survive in a higher-rate environment, even if they don’t appear insolvent at first glance.

There are more than 4,000 regional and community banks throughout the United States, however just one - Republic First Bank - has shuttered since the start of 2024, after the FDIC seized $4 billion in deposits and $6 billion in assets last month.

Read more here, here, here, and most detailed here.

Meanwhile, UK fund manager, former MEP, and previously Nigel Farage's economic spokesman Godfrey Bloom has issued a similar warning to Stenlicht, telling former UK parliamentary candidate Jim Ferguson on his podcast that the banks are insolvent.

"We are entering a new dark age," says Bloom, who recommends that people "take your money out of the banks."

Watch:

 https://www.zerohedge.com/economics/watch-billionaire-real-estate-investor-expects-one-or-two-bank-failures-week-uk-economist

Office Tower Turmoil In NYC Worsens Ahead Of Trillion Dollar Maturity Wall

A combination of factors, including remote work, an exodus of progressive cities, higher interest rates for longer, and diminished credit availability, continues to pressure the office tower market nationwide. The latest example of challenges facing the $20 trillion commercial real estate market comes from New York City.

Bloomberg reports that the $400 million loan backing 1440 Broadway, a 25-story tower at the corner of Broadway and 40th Street in Midtown Manhattan, has fallen into delinquent status.

The loan was bundled into commercial mortgage-backed security called JPMCC 2021-1440. 

"One of the loans responsible for this meaningful month-over-month increase was the $399 million 1440 Broadway loan securitized in JPMCC 2021-1440," JPMorgan analysts led by Chong Sin, Terrell Bobb and John Sim wrote in a note to clients. 

The analysts said the deal sponsors "failed to pay the loan's balloon payment last month, and now the loan is considered non-performing matured."

According to JPM data, the serious delinquency rate for office loans hit 7% in April, the highest level since the first half of 2017. 

1440 Broadway has been plagued with a drop in office space demand. One of its largest tenants, WeWork, downsized after declaring bankruptcy in late 2023. Another top tenant, Macy's, has struggled with sliding foot traffic because of fewer office workers in the city. On top of this, the high-interest rate environment has pushed up the cost of financing. 

Here's additional color of the property from JPM: 

"… The property's two largest tenants at securitization, WeWork and Macy's, have presented significant challenges to the continued performance of this loan. At securitization, these two tenants accounted for 70% of the property's rental income. However, Macy's vacated the property at the end of its lease term in January 2024. WeWork declared bankruptcy earlier this year but has worked with the property's sponsors to amend the terms of its lease. WeWork negotiated a 40% decrease in rent as it is now expected to pay just $44 psf for its space in the building as opposed to the $73.26 it was originally paying. WeWork will gradually pay more for its space as the amended lease terms do include steps up in rent. Additionally, WeWork was able to shorten the length of its lease. WeWork's lease was originally intended to end in 2035 but is now expected to end in 2028. We estimate that the property's occupancy rate is now at 58% and a 52% decline in gross rental income from the prior year."

Looking at citywide office occupancy trends, card-swipe data from Katle Systems shows below 50%, an ominous sign office workers aren't returning in droves. 

The CRE mess is far from over. In fact, it is a rolling disaster, with the real fireworks coming later this year if interest rates remain elevated. 

In a recent note, we cited Mortgage Bankers Association data showing that $929 billion—20% of the $4.7 trillion total—in commercial mortgages held by lenders and investors are due later this year. The figure is up 28% from 2023 and inflated by amendments and extensions from prior years. Nevertheless, borrowers must now bite the bullet and pay up or default.

Remember that surging CRE defaults risk triggering hundreds of small regional bank failures. We warned about this in a March note titled "$1 Trillion In 2024 CRE Maturities Could Lead To Hundreds Of Bank Failures."

https://www.zerohedge.com/markets/office-tower-turmoil-nyc-shows-stress-ahead-trillion-dollar-maturity-wall

Americans expect mortgage rates to rise to nearly 10% in the next three years: NY Fed

 Americans expect home prices to keep rising, the New York Fed survey says

U.S. consumers expect mortgage rates to approach double digits over the next three years, according to a new survey by the New York Federal Reserve.

Households have a gloomy view of mortgage rates. Consumers on average said that over the next year, they expect the 30-year mortgage rate to rise to 8.7%, and in three years, to 9.7%, "both of which are series highs," the NY Fed said.

But some are holding on to the hope that they'll fall: Households on average believe there is a 61% chance that rates will fall over the next 12 months, the Fed said, which is also a series high.

The rate on the 30-year mortgage averaged 7.28% as of Friday afternoon, per Mortgage News Daily. Last October, the 30-year crossed 8%, which pushed affordability to a 38-year low.

The New York Fed survey, released Monday, is focused on housing and is part of the broader Survey of Consumer Expectations. It collected data on consumers' experiences, behaviors, and expectations related to housing. The housing portion of the survey has been fielded annually since 2014. The survey was fielded in February 2024.

Americans also believe that home prices will rise over the next year by 5.1%, up from 2.6% in February 2023. And over the next five years, people expect home prices to grow by 2.7%.

Those surveyed said they expect rent prices to increase by 9.7% over the next year, and by 5.1% over the next five years.

The median home-sale price as of April 28 was a record $383,000, according to a report from real-estate brokerage company Redfin (RDFN). Prices are up 4.8% from last year, as the market deals with persistently low housing inventory.

Rent prices only rose 0.5% in April, according to data from Apartment List, to $1,396. The pace of growth has slowed significantly over recent months as the number of homes for rent has increased.

High prices and mortgage rates are discouraging people from moving. The likelihood of people moving to a different primary home fell to a low, the NY Fed said.

Renters were also downbeat on their chances of becoming homeowners, as 74.2% of renters said they had trouble obtaining a mortgage. That's an 8.4 percentage point increase from last year.

Only 40.1% of renters said they would ever own a home - down by 4.3 percentage points - and marks a low low.

https://www.morningstar.com/news/marketwatch/2024050697/americans-expect-mortgage-rates-to-rise-to-nearly-10-in-the-next-three-years-new-york-fed-housing-survey-finds

NY Fed survey finds Americans bracing for higher housing costs

 Americans are once again bracing for another round of higher housing costs, the New York Federal Reserve said on Monday.

As part of its latest Survey of Consumer Expectations, the regional Fed bank found that respondents see higher near-term increases for both rent and home prices, although they do see some relief over the longer haul for home prices. Households also see no relief on home borrowing costs.

The New York Fed said that in February respondents predicted home prices would rise 5.1% a year from now, up from the 2.6% they predicted a year ago. But five years from now, respondents see home prices up by 2.7%, from 2.8% in last year's poll.

On the rental front, respondents reckon costs a year from now will be up 9.7%, the second-highest reading in the survey's history, from 8.2% in the poll done in February 2023. Five years from now, survey respondents see rent "essentially flat," the New York Fed said, at 5.1%.

The report found that respondents still have a "strongly positive" outlook on housing as an investment. They also expect mortgage rates, already high, to go higher. Respondents predict the average mortgage rate a year from now will be at 8.7% and will be at 9.7% in three years, with both readings at record levels.

The New York Fed report suggests that the U.S. central bank could face fresh challenges getting inflation back down to its 2% target with the expected cost of housing still rising robustly. The Fed has been vexed by unexpectedly strong price pressures in the first months of this year, bringing into question whether it will be able to cut interest rates in 2024. High mortgage rates related to Fed policy have deeply chilled activity in the housing market.

https://www.marketscreener.com/quote/currency/AUSTRALIAN-DOLLAR-US-DOLL-2373531/news/NY-Fed-survey-finds-Americans-bracing-for-higher-housing-costs-46638103/

Renters are the biggest losers in Louisville’s new registration law

 My home state of Kentucky is known primarily for bourbon, horse races and ranking at or near the bottom of things like education, women’s health and poverty. But none of this is surprising considering Kentucky lawmakers’ unending commitment to patently backward policies. 

Take the city of Louisville’s new rental registry. Coming on the heels of a Metro Council ordinance passed in December 2022, the city requires owners of rental properties to register their properties, pay a registration fee and agree to have them regularly inspected. Properties will also be randomly inspected — though government-owned properties are conveniently exempt.

In announcing the registry, Louisville Mayor Craig Greenberg stated that the registry would help identify problem properties early and provide a way for tenants to report problems without worrying about negative reactions from their landlords. 

While this all sounds good, a cursory understanding of economics (or a small amount of common sense) should give anyone pause. If this policy is intended to help renters, policymakers and those seeking housing in Louisville in the coming months and years are likely in for some unpleasant surprises.

First, renters will find there is less housing. To understand why, consider first the landlord’s perspective. More than 40 percent of all rental properties in the U.S. are owned by individuals or “mom-and-pop” landlords. These small-scale landlords manage a whopping 77 percent of two-to-four-unit properties. They are not remarkably wealthy. The average income for a landlord in Kentucky is just over $50,000 a year. Nationally, the average is just over $69,000. 

Faced with registration fees, having their names, addresses, telephone numbers, and email addresses listed online and random searches — for which landlords are responsible for notifying tenants — many mom-and-pop landlords will simply choose not to rent their properties. 

Moreover, considering that much of Louisville’s rental housing was built between 1940 and 1960, many of these properties won’t be compliant with modern building codes. This means they’ll face numerous potential citations. All of this makes the prospect of renting out one’s property even less appealing. 

How about real estate developers and larger-scale landlords? Faced with similar prospects but on a larger scale, high vacancy rates, crime rates and an otherwise unattractive market, they will take their business elsewhere. 

Second, those that do find rentals are likely to see higher rents. There are several reasons why. As the number of rental units falls, competition among would-be tenants naturally pushes prices higher. 

But there is another reason: elasticity. Elasticity is how economists describe how sensitive or insensitive a group is to a price change. 

When consumers have a lot of alternatives, we categorize them as “elastic,” or price-sensitive. If the price of a good or service rises, they can avoid those higher prices by choosing an alternative. If, on the other hand, they have few options, or it’s difficult to change their behavior in response to a price change, we categorize them as “inelastic,” or price-insensitive. 

Economics teaches us that when a tax or similar policy is imposed in a market, the inelastic group incurs the greater cost of the policy — the side with fewer options is on the hook.

Care to guess who has fewer options in the market for rental housing? That’s right, renters, and especially poor renters. In Louisville, the new policy is aimed at areas with the highest rental rates and the most poverty. Higher rents and fewer units will place an even heavier burden on the city’s worst-off residents. 

That is to say nothing about how this new policy strips (mostly) low-income residents of their right to privacy, because of their neighborhoods and their status as renters. That may even be unconstitutional. It also fails to consider how unexpected or unwanted visits by city officials could be dangerous for them and for tenants. 

No one wants renters to be in dangerous or unsafe housing. But this policy is misguided on many counts. It will harm the very people it is intended to protect. It will increase rents, reduce housing and violate privacy.

If policymakers were serious about improving housing in Louisville and elsewhere, they’d remove the barriers that prevent the creation of housing, not introduce additional impediments. 

Abigail R. Hall is a senior fellow at the Independent Institute in Oakland, Calif., and an associate professor in economics at the University of Tampa.

https://thehill.com/opinion/finance/4636297-renters-are-the-biggest-losers-in-louisvilles-new-registration-law/

Buyers are taking on riskier adjustable rate mortgages as affordability worsens

 Homebuyers in the U.S. are turning to riskier adjustable rate mortgages (ARMs) as high interest rates make it less affordable for purchasers locking in new fixed rate mortgages, according to a new report.

The Mortgage Bankers Association's Market Composite Index, which measures loan application volume, found that the share of activity involving ARMs increased to 7.8% of total mortgage applications.

"One notable trend is that the ARM share has reached its highest level for the year at 7.8 percent," Mike Fratantoni, senior vice president and chief economist for the Mortgage Bankers Association (MBA), said in a release. "Prospective homebuyers are looking for ways to improve affordability, and switching to an ARM is one means of doing that, with ARM rates in the mid-6 percent range for loans with an initial fixed period of five years."

Average interest rates for ARMs that are fixed for the first five years fell to 6.60% from 6.64%, with points decreasing to 0.75 from 0.87 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate declined from last week, the MBA noted.

Adjustable rate mortgages (ARMs) are in higher demand as borrowers look to riskier mortgages as a means of saving money in the near term. (Joe Raedle/Getty Images / Getty Images)

ARMs are a type of mortgage with an interest rate that changes, or "adjusts," throughout the duration of the loan. In certain circumstances this can save borrowers money relative to a fixed rate mortgage, but they can also cause a borrower's payments to quickly increase if rates increase, which means borrowers should carefully consider those factors before taking out a loan.

The Consumer Financial Protection Bureau (CFPB) explains that, "With an ARM, the interest rate and monthly payment may start out low. However, both the rate and the payment can increase very quickly. Consider an ARM only if you can afford increases in your monthly payment — even to the maximum amount."

Overall mortgage demand declined by 2.3% from the prior week. (Nathan Howard/Bloomberg via Getty Images / Getty Images)

Homebuyers and owners refinancing their mortgages have increasingly turned to ARMs with persistent inflation preventing the Federal Reserve from lowering the benchmark federal funds rate, which would in turn allow mortgage rates to decline.

"Inflation remains stubbornly high, and this trend is convincing markets that rates, including mortgage rates, are going to stay higher for longer," Fratantoni said. "No doubt this is a headwind for the housing and mortgage markets, with the 30-year fixed mortgage rate increasing to 7.29 percent last week, the highest level since November 2023."

Borrowers considering an ARM should consider their ability to pay if rates rise and payments increase rapidly, the CFPB notes. (Tim Boyle/Getty Images / Getty Images)

Overall demand for mortgages fell by 2.3% on a seasonally adjusted basis from the prior week.

"Application volume is down for both purchase and refinances declined over the week and remained below last year's pace," Fratantoni noted.

https://www.foxbusiness.com/economy/buyers-taking-riskier-adjustable-rate-mortgages-affordability-worsens

New Biden Energy Rules Will Raise the Cost of a New Home by $31,000

 New HUD energy rules will raise the cost of home construction by imposing stricter building codes. Payback time is 90 years.

Homes To Become Even More Unaffordable

The Wall Street Journal comments on Biden’s New Plan for Unaffordable Housing.

The Department of Housing and Urban Development is mandating costly new energy standards for new homes insured by the Federal Housing Administration (FHA), which will become de facto nationwide building codes.

HUD last Thursday announced that it will require new homes financed or insured by its subsidy programs to follow the 2021 International Energy Conservation Code standard.

Many governments have declined to adopt the 2021 standards because of their higher costs. The National Association of Home Builders says the energy rules can add as much as $31,000 to the price of a new home. It can take up to 90 years for a buyer to realize a payback on the higher up-front costs through lower energy bills.

Not to worry, HUD says taxpayers will help cover the cost. It “is anticipated that many builders will take advantage” of numerous tax incentives in the Inflation Reduction Act “as well as rebates that will become available in 2025 or earlier for electric heat pumps and other building electrification measures,” the rule says.

These incentives include a $5,000 per unit tax credit for “zero energy” multifamily construction that meets prevailing-wage requirements that also raise building costs. HUD adds that builders may also “take advantage of certain EPA Greenhouse Gas Reduction Fund programs, especially the Solar for All initiative” and an investment tax credit that can offset 50% of a solar project’s cost.

Even with the subsidies, HUD estimates the price of a new home will go up by $7,229.

You get a $5,000 credit but only if the builder pays union wages for everything. How much will that cost?

My general rule of thumb is to take government estimates and triple them. That’s for short projects like building a home. But 10x would not be surprising. And this is with subsidies.

Generational Homeownership Rates

Home ownership rates courtesy of Apartment List

Who Are the Renters?

The answer is younger voters and blacks.

Generation Z homeownership is dramatically lower than the home ownership rate of millennials.

And according to the National Association of Realtors, the homeownership rate among Black Americans is 44 percent whereas for White Americans it’s 72.7 percent.

That’s the largest Black-White homeownership rate gap in a decade.

Home Prices Hit New Record High

Case-Shiller, OER and CPI data from St. Louis Fed, chart by Mish

The latest Case-Shiller housing data shows home prices hit a new record high. Adding insults and costs, the 30-year mortgage rate ended last week at 7.50 percent

Youth Poll

On April 20, I commented People Who Rent Will Decide the 2024 Presidential Election

Q: What is it that young voters really have on their minds?
A: Rent

Many with rent as their top concern will switch to Trump. They are fed up with rising inflation. Rent is up at least 0.4 percent per month for 30 months.

Young voters propelled Biden over the top in 2020. Things look very different today. Many voters who do not like either Trump or Biden will sit this election out.

https://mishtalk.com/economics/new-biden-energy-rules-will-raise-the-cost-of-a-new-home-by-31000/