More Bank Failures Are Coming and There's Nothing the Fed Can Do About It
CRE delinquency rates continue to rise, housing affordability remains historically high and interest rate policy can't fix things.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
My regular readers know that I am keeping a very close eye on the real estate markets. It is this part of the economy that has been and will continue to be the most impacted by the "higher for longer" narrative around interest rates. And, unfortunately, things are not getting any better for either the residential or commercial real estate markets.
For April, pending home sales were at their lowest levels since the lockdowns some four years ago. Even if the Federal Reserve starts to cut rates later this year, a 50 bps to 100 bps decline in average mortgage rates will do little to buoy the moribund housing market.
Tens of millions of homeowners will still have their "golden handcuffs" with existing mortgage rates of 3% to 4%. Housing affordability will remain near historic highs. Bankrate.com put out a report earlier this week noting that the carrying costs around owning a home (property taxes, HOA fees, insurance), outside of one’s interest and principal payment, have increased by 26% over the past four years nationally. Here in South Florida, it is more in the 40% to 50% range. Saving a few bucks with a 6% mortgage rate will do little to change that dynamic.
The situation on the commercial real estate front is deteriorating rapidly and is more dire. CRE foreclosure volume has risen over 100% so far in the first half of 2024 here in South Florida, compared to the back half of 2023, according to a story in Commercial Observer this week. And, supposedly, we are one of the healthier commercial real estate (CRE) markets in the country.
Fitch chimed in this week stating it sees the delinquency rate on commercial mortgage bank securities (CMBS) against office properties hitting 8.4% by the end of this year. For history buffs, that is higher than the peak reached during the Great Financial Crisis some 15 years ago. Values on office properties cratered by 47% back then, peak to trough. Values for office holdings have dropped some 40% from their highs so far, with more pain to come. Fitch sees delinquency rates moving to more than 11% in 2025, it should be noted.
Rising CRE default and delinquency rates will be major problems for community and regional banks that hold a huge chunk of this debt. Pacific Investment Management Co. (PIMCO) came out on Tuesday with its view that we are going to see more regional bank failures due to their "high concentration" of loans to the CRE sector. Moody’s noted last week that it could cut their ratings around a half-dozen regional banks over these same concerns.
In the first half of 2023, the U.S. experienced three of the five-largest bank failures in its history headlined by the implosion of Silicon Valley Bank. This caused a spike in volatility and downturn in the market before the Federal Reserve stepped in with a new lending facility. Those banks' demises were largely a result of unrealized losses on their bond portfolios due to sharply rising interest rates, which eventually caused bank runs against those institutions.
Those issues still exist and the quickly-deteriorating CRE sector is just adding to their woes. In my opinion, it is only a matter of time before we see additional bank failures. The $64,000 question for investors is what the impacts will be for the markets, economy and the availability of credit. My view is that we are going to find out together in the second half of this year.
At the time of publication, Jensen had no positions in any securities mentioned
