AUGUST 23, 2023 – I will just give the link to an article on this subject. It supports my argument that CRE loans are not a worry for the overall banking industry. However, I am sure there are other articles with other data that suggest otherwise.
Between the stats in this article and my posts showing that higher interest rates can easily be absorbed as CRE loans are refinanced, there just isn’t solid evidence that 200+ banks are going to go under by yearend. Or even in 2024. The count is at one small bank in Kansas so far.
It looks like the ones being hurt by CRE loans this cycle are the so-call sophisticated investors – CMBS lenders and REITs. Apparently, they outsmarted themselves:)
UPDATE – AUGUST 10, 2023 – I just came across some interesting information. Over the past decade, regional banks only had 18% of their loan originations backed by office properties – larger banks had 26%. They also originated a lower share in hotels, industrial, and retail properties. Regional banks had 47% of their volume in apartments compared to 29% for larger banks. The concern about regional bank loan portfolios being decimated by office building loans is obviously unfounded.
AUGUST 9, 2023 – In mid-June I posted about the so-called CRE loan debacle that lies ahead. I provided some hypothetical numbers that showed for the most part borrowers will have no problem with their refis.
I just reviewed an appraisal of an apartment property that I also reviewed 5 years ago when the borrower purchased the property. The bank was kind enough to provide me the loan details then and now. So, let’s see how the numbers work out.
2018 – A $633,000 loan was made against an $800,000 appraised value (purchase price was $840,000). The LTV was 79%. Annual Debt Service was $49,670 based on a 4.89% interest rate and 20-year amortization. The appraiser estimated NOI at $60,387. The DSCR was 1.22.
2023 – The outstanding loan balance is now $527,230. The current appraised value is $1,280,000. The new LTV is 41%(!). Annual Debt Service will be $49,814 based on a 7.20% interest rate and 20-year amortization. The appraiser estimates NOI at $97,474. The new DSCR is 1.96(!). ((I was curious what interest rate would make the Annual Debt Service result in the same 1.22 DSCR as when the original loan was made. It is 14.27%! I shout to the moon that everyone can easily afford 7%+ interest rates!!! Wake me up when we hit 14%:) ))
This will be the case with most apartment and industrial loans. Net Operating Income has increased significantly more than Annual Debt Service. Higher interest rates of 200-300bp will not be a problem for borrowers.
As I noted in my June post, office and retail property loans probably will run into issues. I also think the above is more applicable to income-producing property loans than owner-occupied property loans.
As I write this, regional bank stocks are up 38% from their lows a few months ago. The market is telling us it has no concerns about CRE loans. I believe the market over the economists and pundits that are a broken record about CRE loan and a recession.
Addenda – In the real-world example above, I kept the refinancing at the current outstanding balance. The borrower is actually getting new monies and refinancing $800,000. The Annual Debt Service will be $75,586. The resulting LTV is 63% and DSCR is 1.29. Even with a significant increase in the loan amount, the loan ratios are in safe territory.
I continue to say both commercial and residential borrowers can easily afford 7%+ interest rate loans.
JULY 30, 2023 – This is my 3rd and last post regarding my forecasts for the remainder of 2023. Today’s topics are banks and housing.
BANKS – I have been saying since the SVB/SBNY closings that week after week goes by without any closures. Finally(!), last week we had a bank in Kansas get closed down by the FDIC. Also, PacWest was acquired. At this point, we remain closer to my forecast of 0-10 closures than the 176-200 closures forecast by many people.
As for CRE loan defaults, I have dealt with an office building (100% leased – it appears the borrower went bankrupt for some other reason) and two churches (same loan). We shall see if this picks up.
The Regional Bank Index (KRE) continues to soar and is about 20% above the low set the Monday after the SVB/SBNY closings. It is a full 40%+ (!) above its most recent low. Please let all of them people that told you that banks were going down the tubes what you think of their opinions! They have cost the masses a 20%-40%+ return – in less than 4 months at that!!!
As an aside, the market is saying that it does not believe there will be a CRE loan debacle for banks. Either not many CRE loans will default and/or banks are well prepared and capitalized to handle the defaults.
HOUSING – Let me just present a bunch of stats that clearly shows the strength of the housing market. New home sales increased 28.4% from July 2022 to June 2023. According to the Case-Shiller Index, home prices are within 1% of their June 2022 peak. Redfin reports home prices are up 2.1% from a year ago. The American Enterprise Institute’s (AEI) Home Price Appreciation (HPA) Index was up 0.7% month-over-month in June. It has been up every month this year. Annual appreciation is at 2.9% and projected to increase to 6%-7% by yearend. The Homebuilders Stock Index is up an incredible 60% (!)from last year’s lows. Those who forecast a crash in the housing market continue to be way off the mark.
SUMMARY – With both bank and housing stocks at their highs, the markets are saying both industries will do very well through year end and into early next year. There is no sign yet of a slowdown occurring for either industry. Sadly, all of those economists, market forecasters, and pundits have kept the public from making 20%-60%+ returns in these industries. But, that has been the norm since the world’s largest casino came into existence.
To sum up up the 3 posts:
Inflation will be stubborn and rise slightly over the remainder of the year – probably stay in the 3.5%-4.0% range.
The economy has a near zero chance of going into a recession. Yes, GDP will slow down from the amazing 2.2% rate that occurred in the first half of the year. I will put this hidden little sentence out there to refer back to in 12-18 months – The chance of a recession occurring looks to be 4th Quarter 2024 into 2025. I suspect that a year from now the broken-clock recession mongers will have given up and admitted the economy is strong, et al. Just in time to be wrong again:)
And, per above, banks and housing should be rock solid into the 1st Quarter of 2024.
I will provide updates per usual. But, will revisit the 6-month forecasts (for 1st and 2nd Quarter 2024) around the Holidays. Yes folks, less than 5 months til Christmas:)