The Biden Administration is gushing about Q2’s Real GDP report of 2.4% QoQ. Wow, after trillions of dollars of stimulus spending and The Fed going wild with monetary stimulus, all we got was 2.4% growth??
New home sales in June fell -2.5% from May to June to 697k units sold. But on a year-over-year (YoY) basis, new home sales are up 23.8%. Thanks largely to The Federal Reserve slow walking the shrinking of their massive balance sheet.
Too much monetary stimulus and The Fed’s failure to remove the Covid stimulus is now hitting new home sales.
Mortgage applications decreased 1.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 21, 2023.
The Market Composite Index, a measure of mortgage loan application volume, decreased 1.8 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index 1.5 percent compared with the previous week. The Refinance Index decreased 0.4 percent from the previous week and was 30 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 2 percent compared with the previous week and was 23 percent lower than the same week one year ago.
Since April 2021, purchase mortgage demand is down -49%, refi mortgage demand is down -87% as mortgage rates are up 115%.
Biden Press Secretary KARINE JEAN-PIERRE: “The American people are beginning to feel Bidenomics”
Prices are up 16.6% and real wages are down 3% since Biden took office.
Well, at least Jean-Pierre didn’t claim like her boss Joe Biden claimed that he “ended cancer as we know it.”
But getting back to Jean-Pierre’s claim that “The American people are beginning to feel Bidenomics.” She is right (for once). Americans are REALLY feeling Bidenomics. And it hurts SO BAD!!!
What hurts so bad? Food (CRB Foodstuffs) are up 56% under Bidenomics. Real weekly wage growth is down -90% since Biden assumed office. Regular gas prices are up 52%. And the 30Y mortgage rate is up a staggering 153%. Yes, Karine, this hurts so bad!
While real wages are down -3% under Biden and the real average weekly wage growth is down -90%. That REALLY hurts so good.
The Case-Shiller home price numbers are out for May. The national home price index is down -0.46% YoY as The Fed slows M2 Money growth into negative growth territory. No doubt Biden (and Karine Jean-Pierre) will take credit for slowing home price growth, although The Federal Reserve slowing monetary stimulus is mostly responsible.
The Fed is still slow walking shrinking its enormous balance sheet. Although The Fed is cranking up their target rate.
The Taylor Rule suggests a 10.42 target rate to cool inflation. They are only half way there!!!
Starwood Capital Group’s Barry Sternlicht recently told Bloomberg’s David Rubenstein about the ongoing crisis in the commercial real estate sector, equating it to a severe “Category 5 hurricane“. He cautioned, “It’s sort of a blackout hovering over the entire industry until we get some relief or some understanding of what the Fed’s going to do over the longer term.”
Currently, the biggest problem in the CRE space is sliding office and retail demand in downtown areas. Couple that with high-interest rates, and there’s a disaster lurking for building owners. According to Morgan Stanley, the elephant in the room is a massive debt maturity wall of CRE loans that totals $500 billion in 2024 and $2.5 trillion over the next five years.
Senior markets editor for Bloomberg, Michael Regan, chatted with John Fish, who is head of the construction firm Suffolk, chair of the Real Estate Roundtable think tank and former chairman of the board of the Federal Reserve Bank of Boston, in the What Goes Up podcast to discuss the biggest problems in the CRE market.
Fish warned that “capital markets nationally have frozen” and “nobody understands value.” He said, “We can’t evaluate price discovery because very few assets have traded during this period of time. Nobody understands where the bottom is.”
For a sense of recent price discovery trends, we were the first to point out to readers of a wicked firesale of office towers in the downtown area of Baltimore City:
As for the overall CRE industry, Goldman Sachs chief credit strategist Lotfi Karoui recently told clients, “The most accurate portrayal of current market conditions with Green Street indicating a 25% year-over-year drop in office property values.”
Sooooo, Powell and The Fed will likely raise rates this week. And maybe a few more times over the next few months. And The Fed remains defiant about taking away the Covid monetary stimulus.
Jared Bernstein was VP Joe Biden’s former Chief Economist and is now chair of the United States Council of Economic Advisers. Pretty impressive! Except that Bernstein is not really an economist. He has a PhD in social welfare from Columbia University. In other words, Bernstein is a Progressive Marxist cheerleader, not a real economist. Perfect for The Biden Adminstration where they installed a small town Mayor with no experience (Buttigieg) as Transportation Secretary.
BERNSTEIN: “Yes, it depends on what your benchmark is.”
Bernstein’s answer reminds me of the infamous reply of President Clinton about having sex in the Oval Office with Monica Lewinsky: “It depends on what the definition of sex is.”
Well, Jared, here is the data.
Since January 2021, regular gasoline prices are up 57% under Biden’s and Bernstein’s Reigns of Error. CRB Foodstuffs are up 55% under Clueless Joe and Diesel prices 50% under Bully Biden. Meanwhile, the Strategic Petroleum Reserves is DOWN -46% under Hidin’ Biden.
Meanwhile, the US Treasury 10Y-2Y yield curve has inverted to -102.45 as it does prior to a recession. I would love to hear “economist” Jared Bernstein explain that!
The Chicago Fed’s National Activity index fell to -0.32 in June. That is negative readings for 6 of the last 8 months.
The Fed still hasn’t removed its monetary stimulypto from the market.
Joe Biden loves to tout “Bidenomics” which is a top-down command economy model with massive Federal spending directed primarily at green energy. But remember that a pillar of Bidenomics is support for labor unions. But “Union Joe” will be remembered as “Inflation Joe” as inflation remains hot. But now the labor unions are threatening to stall the recent rise in real weekly earnings (finally above 0%!).
So why is 2023 shaping up to be one of the biggest years of strikes in the US since the 1970s? Well, it didn’t happen overnight. Two years of negative real wage growth has crushed the working poor as they drained their savings and maxed out credit cards to make ends meet.
Unionized workers have taken advantage of upcoming contract expirations with companies to bargain for better wages and benefits. Many unions say companies can boost wages because profits have been off the charts.
This summer might go down in history as the “Summer of Strikes” because 650,000 American workers are threatening to walk off the job imminently (some have already hit the picket lines):
Unions for United Parcel Service Inc. and Detroit’s Big Three automakers are poised to join them in coming weeks if contract negotiations fall through.
A Bank of America analyst warned a United Auto Workers strike is at 90% odds of happening as union contracts with automakers Ford, General Motors, and Stellantis expire in September. Some logistics experts believe Teamsters will reach a deal with UPS, but that deadline (July 31) is quickly approaching.
Labor historian Nelson Lichtenstein, who leads the University of California, Santa Barbara’s Center for the Study of Work, Labor, and Democracy, said this summer could “be the biggest moment of striking, really, since the 1970s.”
What’s shaping up to be a summer of strikes comes as inflation spiked to levels not seen since the 1970s. The good news is that it has cooled in recent quarters.
Still, two years of negative real wage growth crushed the working poor — many are in rough financial shape.
So far, strikes have not had a broad economic impact, but that could change overnight. Increasing labor actions are happening across the Western world, also in Europe, for the same reason in the US, due to a cost-of-living crisis sparked by high inflation.
Under O’Biden (the combined reign of economic errors of Presidents Obama and Biden), we won’t see any strike breaking for the good of the economy. Rather, the Biden Administration will be missing in action (or sending in Kamala Harris or Transportation Secretary Pete Buttigieg to do … nothing.
US office space vacancies (white line) have soared since 2008 as The Fed’s massive monetary expansion (blue and green line) has not helped. But Fed monetary expansion DID help drive office prices! At least until 2022, when office space values began to fall. Notice that office values are falling as The Fed withdraws monetary stimulus.
During the regional bank failures in March, we directed our readership to focus on the next potential crisis: “CRE Nuke Goes Off With Small Banks Accounting For 70% Of Commercial Real Estate Loans.”By late March, Morgan Stanley warned clients of an upcoming maturity wall in commercial real estate, which amounts to $500 billion of loans in 2024, and a total of $2.5 trillion in debt that comes due over the next five years.
In a recent Bloomberg interview, Barry Sternlicht’s Starwood Capital Group warned that the CRE space is in a “Category 5 hurricane.” He said, “It’s sort of a blackout hovering over the entire industry until we get some relief or some understanding of what the Fed’s going to do over the longer term.”
The current downturn in CRE could persist for years, if not through the end of this decade. Jan Mischke, a partner at the McKinsey Global Institute, along with Olivia White, a senior partner at McKinsey, and Aditya Sanghvi, a senior partner and leader of McKinsey’s real estate special initiative, published a note in Fortune, warning “$800 billion of office space in just nine cities could become obsolete by 2030.”
The authors of the report blame the CRE downturn on the “shift to remote and hybrid work prompted two further shifts in people’s behavior”:
First, many residents, untethered from their offices and therefore less fearful of long commutes, moved away from urban cores. New York City’s urban core (that is, the dozen densest counties in the metropolitan area) lost 5% of its population from mid-2020 to mid-2022. San Francisco’s urban core (San Francisco County, Alameda County, and San Mateo County) lost 6%.
Second, consumers began shopping less at brick-and-mortar stores–and far less at stores in urban cores, where people were now less likely either to work or to live. Foot traffic near stores in metropolitan areas remains 10 to 20% below pre-pandemic levels, but the differences between urban and suburban traffic recovery are substantial. For example, in late 2022, foot traffic near New York’s suburban stores was 16% lower than it had been in January 2020, while foot traffic near stores in the urban core was 36% lower.
As fewer employees work in the office, demand for office space will fall. By 2030, such demand will be as much as 20% lower, depending on the city–even in a moderate scenario in which office attendance goes up but remains lower than it was before the pandemic.
And as fewer consumers shop at brick-and-mortar stores, demand for retail space will fall as well, according to our model. In the urban core of London, the hardest-hit city, demand for retail space will be 22% lower in 2030 than it was in 2019 in a moderate scenario.
Some of the most significant declines in office and retail space demand through 2030 will be in major US cities such as San Francisco and New York City.
The authors note that the demand for “residential space will suffer less”… Well, according to their forecasting model.
“The reduced demand will have major impacts on urban stakeholders. For example, in just nine cities that we studied especially closely, $800 billion of office space could become obsolete by 2030. And macroeconomic complications could make matters even worse,” the authors continued. Without office workers in downtown areas, economic recoveries in major cities will be a “U” shape or, in some cases, an “L.”
The unraveling of downtowns is already underway. We shared a video this week of scenes of San Francisco’s downtown transformed into a ‘ghost town.’ Building owners in the crime-ridden metro area are already giving up and defaulting as vacancies rise, crime surges, and refinancing is near impossible in today’s climate as the Federal Reserve keeps interest rates sky-high to tame the worst inflation in a generation.
We shift our attention to Baltimore City, where office towers are being dumped in an apparent firesale.
The authors failed to report that the sliding demand for office towers isn’t just because of “remote and hybrid work” but also due to an exodus of companies fleeing crime-ridden progressive cities that fail to enforce law and order.
If McKinsey’s predictions are correct, certain segments of the CRE market are expected to experience prolonged turmoil for years. Some US mayors have proposed an immediate solution to convert office towers into multi-family units. However, this transformation could take years due to the time-consuming processes of obtaining permits and construction.
Yes, the maestros of real estate asset bubbles (Yellen) and eventual deflation (Powell)!
Confounded Interest - Anthony B. Sanders 
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