SEPTEMBER 25, 2023 – Most importantly, only 3 months to Christmas:) And I am sure you have seen all of the Christmas stuff in the stores already. Next year it will be out in July. Ridiculous.
Two more recession indicators are wrong this time around. The (Mis)Leading Economic Indicator has declined for 17 straight months. I assume its purpose is to forecast a recession to occur within a few months after several negative readings. It has been wrong for over a year. Maybe this is where the broken record (look it up youngsters) recession mongers get their reasoning for thinking a recession is about to occur. Just fyi, the only other times it had this long of a streak was 1973-1975 and 2007-2009. The two worst recessions since The Great Depression.
The third indicator that has been wrong is M-2 Money Supply. It is more negative than it was in The Great Depression! Yet, no recession. In fact, it is looking like 3rd Quarter GDP may show an acceleration in growth to over 2%. However, I will say that is not a lock as I have seen forecasts from 0.5% to over 5.5% (Fed Atlanta). This quarter will be very unpredictable. But, it should definitely be positive and thus we can officially close the case on there being no recession in 2023.
Let me bring something up for the first time. I think I will be harping on this for the next few years. I believe the reason many prominent indicators are wrong this go around is due to what has happened since the pandemic. Almost all indicators soared to extreme high readings never seen before. And many are falling to record lows. What I am seeing is if you draw a straight line from say 2010 or 2015 through 2023, these indicators are exactly where they should be. i.e. The lows are evening out the highs and overall we are reverting to the mean.
I saw this recently in national retail sales. Adjusted for inflation, retail sales have been flat for the past 18-24 months. However, they increased significantly after the pandemic. If you apply the 2010-2019 compound annual growth rate to 2019 sales, you will be exactly where we are at in 2023. I will discuss more examples and provide more specific information as I encounter graphs showing this occurrence.
FED FUND RATES – The Fed did what it was told to do and held rates the same in September. Also, they went ahead and said what the market has forecast for a long time and that is another rate hike lies ahead. The 100% trend of the Fed following the market continues.
HOUSING – As I noted in a prior blog, the market is signaling weakness in the housing market after forecasting the strength we have seen all year. The homebuilder stock index has declined 10% from its July top. We need to continue to watch this play out. It is telling us we should see weakness next Spring. What will slow the accelerating strength in the housing market? Maybe 8%+ rates on 30-year mortgages? About the only thing I can think of. But, it doesn’t matter. The market just says it will happen. The price trend in the 4th Quarter will tell us if the Spring slowdown is just that or the start of a more significant downturn like we had in the second half of 2022.
REGIONAL BANKS – These stocks have declined a significant 15% from their July highs. Basically, they declined some more after the SVP failure, then soared over 40%, and now down 15% – in the end, they have gone nowhere since the Monday after the SVP failure. What is the market telling us? It definitely says not to expect the 250-400+ bank failures that so many people are predicting. Those people expected such to occur by now, in fact. As far as I know, the number remains at one small bank in Kansas. In regard to CRE loans, banks have been refinancing these all year long at higher interest rates. I haven’t heard of any significant issues. The problems have occurred in the CMBS market – gotta hand it to the supposed smartest lenders and investors in real estate:)
INTEREST RATES – Treasury Bonds have broken below last October’s low. This means interest rates are at new highs for this downturn. As I write this, I see a headline saying they are at the highest level since 2007. However, we are now on the clock to look for a final bottom in this multi-year downturn in prices (increases in yields). That doesn’t mean it will occur next week. I am thinking it is several months away. Maybe around the beginning of the year. Too early to give a reasonable forecast re timing and price (yield). The 4th Quarter price action will get us much closer to predicting when the bottom is in. What should follow will be a strong bond rally back to the range of the Summer 2022 and April 2023 highs (lows in yields). First things first. Let’s have the current downturn play out and get a bottom in place. Bottomline, mortgage rates will not be going down the remainder of the year. And they might head over 8% on the 30-year mortgage.
Well, that was a lot to cover. I will probably post again once we get the October inflation reading.
Til then, Happy Fall.
Shalom,
The Mann
Tag Archives: interest rates
CRE LOAN REFINANCING – A REAL LIFE EXAMPLE
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.
Shalom,
The Mann
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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.
A QUICK INTEREST RATE FORECAST
OCTOBER 24, 2022 – The 30-Year US Treasury Bond yield is peaking around 4.4%. Over the next 3-4 months it should decline to the 2.95% to 3.4% range. I would expect the average house mortgage to decline from the current 7% level to somewhere in the 5%-6% range in the same time period.
This will give the public the feeling that the worst is over and things are getting back to ‘normal.’ NAR and the Fake News Media will pound us with now is the time to buy. Now is the time to get a loan. We are on the rebound. Blah blah blah.
Then we will head back to interest rates above the high we are experiencing this week.
As always, we shall see how this plays out.
Shalom,
The Mann