Fade Away! US Commercial Real Estate (CRE) Falls To 5% Of Entire S&P 500 Index From 14% In 2008, The Flaw With The 30 Year Fixed-rate Mortgage

Commercial real estate (CRE) is fading away as a component of the S&P 500.

The S&P 500 real estate sector is now just 5% of the entire S&P 500.

Even at the 2008 low, in the worst real estate crisis of all time, this percentage barely dropped below 6%. Meanwhile, demand for commercial real estate (CRE) loans is now at 2008 levels.

Office building prices are down ~30% over the last year and apartments are down ~15%.

Also, Delinquent commercial real estate loans at US banks have hit their highest level in a decade.

The strength of the housing market is masking the weakness of CRE.

Speaking of the housing market, the US is overly dependent on the lopsided 30-year fixed-rate mortgage. Where under inflation and rising rate, the lender (investor) loses. If inflation cools and rates fall, the borrower refinances.

Here is my US House of Representatives testimony of 30 year mortgages. Here is the actual paper by Michael Lea and me.

But these consumer benefits to the 30-year mortgage have costs. It is costly to provide a fixed nominal interest rate for as long as 30 years. And the prepayment option creates significant costs. If rates rise, the lender has a below market rate asset on its books. If rates fall, the lender again loses as the mortgage is replaced by another with a lower interest rate. To compensate for this risk, lenders incorporate a premium in mortgage rates that all borrowers pay regardless of whether they benefit from refinance. Exercise of the prepayment option in the contract also has significant transactions costs for the borrower and imposes additional operating costs on the mortgage industry.

Another major reason for the FRM’s dominance is government support and regulatory favoritism. The FRM is subsidized through the securitization activities of Fannie Mae, Freddie Mac and Ginnie Mae.

Their securities benefit from a government guarantee that lowers the relative cost of the instrument, which is their core product. These guarantees have a significant cost as the government backing of Fannie Mae and Freddie Mac has exposed taxpayers to large losses.
Are the FRM’s benefits worth its costs? Would the FRM disappear if Fannie and Freddie stopped
financing it? Are there mortgage alternatives that balance the needs of consumers and investors without exposing the taxpayer to inordinate risk?

The instrument’s supporters point out that it is easier for investors than consumers to manage interest-rate risk. It is true that lenders and investors have more tools at their disposal to manage interest-rate risk. But managing prepayment risk is costly and difficult and many institutions have suffered significant losses as a result (e.g., savings and loans in the 1980s; hedge funds and mortgage companies in the 1990s and 2000s).

Furthermore, borrowers rarely stay in the same home or keep the same mortgage for 15 to 30
years, so one can reasonably ask why rates should be fixed for such long periods (increasing the loan’s cost and risk). Also, the taxpayer ultimately bears a significant portion of the risk through support of Fannie Mae and Freddie Mac.

One of the lingering questions about government loan modification programs is why borrowers are refinanced into longer-term FRMs rather than less expensive ARMs, such as a 5/1 ARM.

ARMs allow protection for lenders (investors) from inflation and interest rate increases. Consider this another entitlement that elected officials give away and refuse to cut. After all, unfunded entitlements are already at $211.65 TRILLION.

But typically we get scare tactics about ARMs (or VRMs), like this one.

Biden’s Brawndo (The Economic Mutilator)! Fed Paid Treasury $76 Billion In 2022, $200 Million Every Day, Bank Willingness To Lend Crashes, Bank Credit Falls For 16th Straight Week, Biden Enacts War Powers To Get Households To Use Inefficent Electric Heat Pumps

Biden’s terrible economic policies and horrid fiscal managment has put stress on The Federal Reserve. The Federal Reserve paid an estimated $76 billion to the Treasury in 2022 while banks’ willingness to lend has plummeted.

First, let’s look at Biden’s and The Fed’s Brawndo.

One of the key ways central banks absorb liquidity back out of the market is through reverse repo. These are short-term transactions where the Fed sells securities to banks and agrees to buy back at a higher price the next day.

This means banks are being paid to park cash with the Fed instead of injecting it into the economy through loans and fanning the fires of inflation.

That alone is costing the Fed $200M every single day.

In addition, the Fed is spending another $500M in daily interest payments on its reserve policy, i.e. balances that banks are holding in their reserve accounts at the Fed.

Banks’ willingness to lend has plummeted making credit availability increasingly tighter. Current levels have typically ended in recessions.This time is NOT different.

And on the energy side of the market, Biden Invokes ‘Wartime Powers’ to Attack Gas-Powered Furnaces. Of all the stupid things Biden has done, invoking wartime powers to make households use inefficent electric heat pumps instead of gas furnaces in stupid of two levels. First, invoking wartime powers for things unrelated to national defense is reckless and capricious. Second, electric heat pumps in the colder areas of the country is stupid as well. Electric heat pumps are inefficient, unless the goal of Biden and his Idiocracy is to “cull the herd” or kill off people during winter months (I had an electric heat pump in a condo I owned and it was terrible in winter months).

Yes, the Biden Administration and The Fed are economic mutilators!

Bloom Off The ESG Rose? WEF’s ESG Sustainability Push Is Waning (Issuance Of Sustainability Linked Loans Down 80% In US)

Huey Lewis and the News said it best about ESG goals: “The elites want a new drug.”

The World Economic Forum (WEF) is a leading pusher of the ESG drug, pushed by the elite class intending to control the world. Unfortunately, numerous American politicians and influencers have attended the Davos meetings and have openly praised the WEF and its leader Klaus Schwab.

ESG refers to the environmental, social and governance information about a firm. There is growing evidence that companies that take their environmental and social responsibilities seriously perform better financially. This has naturally made investors sit up and take notice.

ESG investing, or sustainable responsible investing (SRI), uses this information about a company to inform investment decisions that prioritize all stakeholders.

Here’s how the Forum’s partners are leading the switch to stakeholder capitalism.

There are 3 pillars to ESG and sustainable investment. This reminds me of the 10 pillars (or planks) of Marxism. So ESG is Marxism with a different name, but the end result is the same. Big government control.

But all is not well with WEF’s ESG drug distribution. In fact, ESG flows into socially consious funds were a big thing during Covid (2020) and the first year of Biden’s Reign of Error. But ESG flows slowed sharply in 2022 and seeing net outflows in 2023.

Issuance of sustainability linked loans is down 80% in the US.

US borrowers are retreating en masse from the world’s second-biggest ESG debt class.

The $1.5 trillion market for sustainability-linked loans, in which borrowing is tied to environmental, social or governance goals, has seen an overall slowdown in volumes this year as both interest rates and greenwashing fears rise. But nowhere has the decline been as precipitous as in the US, where the number of new sustainability-linked loans is down 80% from a year earlier.

But ESG is still relatively popular in Europe, Middle East and Africa (orange). But taste for ESG is waning around the globe. But the selection of Biden as President in the US marked a surge in ESG -tied loans in 2021 and 2022 (not to mention the insane levels of spending out of Biden and Congress, much tied to the sustainability, green energy fantasy.

Loans with terms tied to borrower’s ESG goals have fallen worldwide.

Several states (largely blue states like California, Minnesota, Illinois, and Colorado have pro-ESG laws) while several states have anti-ESG laws (largely red states like Montana, Idaho, North Dakota, Kansas, Utah, Indiana, Arkansas, Florida, and West Virginia).

And of course, global warning may not be as dire as John Kerry and Greta Thunberg say.

WEF’s Klaus Schwab about to get sniffed by his 80-year old puppet, Joe Biden. In fact, Biden is singing “I’m your puppet.”

Here is Hunter Biden welcoming the Green Energy fairy and all the trillions in misallocated spending it brings.

NOT Born Under A Bad Sign! Housing Starts Are Down -4.2% YoY As M2 Money Growth Dies (Illegal Immigration Outpaces US Births, But Supply Not Keeping Pace)

Under Biden’s Reign of Error (or green economic transformation), the US has seen over 8 million illegal immigrants enter the US which is a far greater number than births in the US. In other words, Americans apparently are NOT being born under a bad sign. Hence, the US is seeing the demand for housing increase. But …. housing start were DOWN -4.2% YoY in October.

Housing Starts:
Privately‐owned housing starts in October were at a seasonally adjusted annual rate of 1,372, the October 2022 rate of 1,432,000. Single‐family housing starts in October were at a rate of 970,000; this is 0.2 percent above the revised September figure of 968,000. The October rate for units in buildings with five units or more was 382,000.

Building Permits:
Privately‐owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,487,000. This is 1.1 percent above the revised September rate of 1,471,000, but is 4.4 percent below the October 2022 rate of 1,555,000. Single‐family authorizations in October were at a rate of 968,000; this is 0.5 percent above the revised September figure of 963,000. Authorizations of units in buildings with five units or more were at a rate of 469,000 in October.

Total starts were down 4.2% in October compared to October 2022. And starts year-to-date are down 11.3% compared to last year.

In YoY terms (change since one year ago), shows housing starts declining with dying M2 Money growth.

Starts have been down year-over-year for 16 of the last 18 months (May and July 2023 were the exceptions), and total starts will be down this year – although the year-over-year comparisons are somewhat easier in Q4.

The Thrill Is Gone? US Industrial Production Plunges In October As Auto-Maker Strikes Hit (But Also Federal Stimulypto Has Worn Out)

The thrill has gone from all the BIG spending bills from Biden.

After its surprising bounce last month (on a seasonally-adjusted basis, because it crashed NSA), US Industrial Production was expected to decline 0.3% MoM in October. It was worse – down 0.6% MoM from a downwardly revised September print (from +0.3% to +0.1%). October’s decline is the worst since Dec 2022 and the YoY drop of 0.8% is the worst since the COVID lockdowns. AND Federal stimulypto is wearing off (M2 Money growth surge peaked in February 2021, but has slowed into negative growth starting in August 2022.

Notably, once again, the non-seasonally-adjusted industrial production tumbled more than then seasonally-adjusted data…

Source: Bloomberg

On the manufacturing specific sector, consensus was for a 0.4% drop MoM but it was considerably worse, dropping 0.7% MoM (and September’s print was revised down from +0.4% to +0.2% MoM). That is the biggest MoM drop since March and biggest YoY drop since the COVID lockdowns.

That is also the 8th straight month of YoY declines for Manufacturing production.

Source: Bloomberg

Output was weighed down by a 10% plunge in motor-vehicle production as the annualized rate of car assemblies dropped to 9.22 million units, the least since February 2022. Excluding parts production, autos and trucks production fell 16.5% MoM – the biggest drop since the COVID lockdowns…

Source: Bloomberg

Starting in September, the United Auto Workers union authorized targeted strikes against the Big Three Detroit automakers, disrupting production at the companies and at their suppliers. The UAW reached tentative agreements with management in late October, laying the groundwork for a rebound in factory output in November.

So theorteically, we should see bounce back next month. Unless demand – as WMT hinted at – has fallen off a cliff.

Fiscal Inferno! US Debt Hits $33.7 Trillion With Unfunded Promises Hitting $211.7 TRILLION, $629k Per Citizen! (REAL Hourly Compensation Has DECLINED By -5.1% Under Bidenomics)

We are currently in a fiscal inferno under Biden/Yellen.

And US Treasury Secretary Janet Yellen is just a girl who can’t say no … to big government spending.

In fact, Congress and the Biden (mis) Administration are spending like the proverbial drunk sailors in port. US national debt is up to $33.7 TRILLION. That transates to $259,103 per taxpayer. With US debt to GDP of 138%!

Now, HERE IS THE REAL BAD NEWS! Unfunded promises that politicians made to Americans (Social Security, Medicare, Medicaid, etc.) now stands at $211.6 TRILLION. That equates to $629,000 per citizen. Maybe that should be the deal at the southern border: all immigrants must pay $629,000 for admission!

And the Federal budget deficit keeps on getting worse.

The budget deficits under Biden/Yellen have been the worst in history. So much for Biden whispering “Bidenomics is working!”

Rents in the US remain unaffordable to many.

And Yellen, our nation’s financial consigliari, hasn’t said much about the dire decline in income tax receipts.

But Biden’s favorite country China, a classic top-down command economy like Biden and Yellen love,

On Sunday, President Joe Biden tweeted, “Right now, real wages for the average American worker is higher than it was before the pandemic, with lower wage workers seeing the largest gains. That’s Bidenomics.” That’s right, Joe! Except real hourly compensation has DECLINED by -5.1% under Biden.

Smells Like Fed Spirit! Homebuilder Confidence Fall To 34 In November Due To High Interest Rates … But 2024 Should See A Decline In Mortgage Rates

Its beginning to smell like Fed spirit! As the 2024 Presidential election rapidly approaches, The Fed will be pressured into lower interest rates to haul Biden’s befuddled and corrupt ass across the finish line. Or his replacement, Greasy Gavin Newsom. (Leaving an oil slick in his wake).

Lowering the mortgage rate will benefit the real estate market, which is currently been “Biden’d.” Due to inflation and The Fed’s mission to crush inflation.

High mortgage rates that approached 8% earlier this month continue to hammer builder confidence, but recent economic data suggest housing conditions may improve in the coming months.

Builder confidence in the market for newly built single-family homes in November fell six points to 34 in November, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today. This is the fourth consecutive monthly drop in builder confidence, as sentiment levels have declined 22 points since July and are at their lowest level since December 2022. Also of note, nearly the entire HMI data for November was collected before the latest Consumer Price Index was released and showed that inflation is moderating.

Mortgage rates will likely decline in 2024 as The Fed reverses its inflation-crushing policy for Presidential election interference.

And Morgan Stanley forecasts the Fed Funds Rate to plunge to 2.375%.

Joe Biden is 80 and not exactly the most energetic President that can inspire confidence.

Maybe the economy needs Viagra.

I really wish Biden would stop babbling about “his” approach to economic growth, a Chinese Communist approach of top down economic management.

Under Biden, Americans have seen a 17.6% price hike and a 3% pay cut. Inflation has averaged 5.9% — more than double the level of inflation under any of the last four presidents.

Bidenomics Strikes Again! Foreclosure Sale Notices For Commercial Property Loans Are Exploding, LA Apartment Sales Cratering (Newsom Creates New Potemkin Village For China Xi’s Visit)

Bidenomics strikes again!

After listening in horror to Joe Biden’s press conference after his summit with China’s Xi, I had to ask the following question: what does Joe Biden has in common with Georgia Tech? Answer? They are both rambling wrecks. Biden made a horrendous foreign policy blunder by calling Xi a “dictator” and almost blew it by nearly spillling the beans on our foreign policy negotiations with Israel. SecState Blinken had to intervene. We are represented by Winken (Harris), Blinken and Nod (Biden, who usually looks asleep or confused).

But back to the horrors of a slowing economy.

As the US economy slows down (like Biden himself), we are seeing further cracks in the real estate market. Foreclosure sale notices for commercial property loans are exploding.

And depending on the MSA, multifamily delinquencies are booming, like in Houston, Texas, New York City and Phoenix AZ.

Then we have this headline: “Not Just Office Towers – Commercial Real Estate Sales Crater Throughout Los Angeles.” It’s difficult to find big commercial real estate deals of any kind in Los Angeles. A new report from NAI Capital reveals how severe and universal the decline in activity is throughout the region this year amid collapsing values, higher interest rates, and a new tax on property sales above $5 million.

A related headline screams “LA Apartment Sales Plummet 50% as Investors Confront New Taxes, Higher Costs.” Every submarket saw an increase in vacant units and a decline in year-to-date sales volume in the second quarter. Construction, interest rates, eviction protections, also define 2023.

Yes, I know, California’s real estate woes are mostly the fault of their politicians like Governor Gavin (Gruesome) Newsom. The same guy who ordered San Francisco’s homeless population to be moved creating a new Potemkin Village. But rising interest rates are the fault of excessive spending by Congress and the Biden Administration.

Prepayments on Ginnie Mae MBS are extremely low.

But things are less than rosy in Communist China. China’s housing woes worsen as prices fall most in eight years.

But my favorite headline is from the Babylon Bee (a satire site): “After Five Minutes With Biden, Xi Gives Order To Invade Taiwan.”

Biden’s Mortgage Market! Mortgage Purchase Demand Falls 0.3% Since Last Week And -12% Since Last Year, Stocks, Bitcoin Booming, Gold Enters Contango (Mortgage Rates UP 172% Under Biden)

Biden says he wants 4 more years to finish the job. Like killing off the mortgage market completely, Joe?

Mortgage applications increased 2.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending November 10, 2023.

The Market Composite Index, a measure of mortgage loan application volume, increased 2.8 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 0.4 percent compared with the previous week. The seasonally adjusted Purchase Index increased 3 percent from one week earlier. The unadjusted Purchase Index decreased 0.3 percent compared with the previous week and was 12 percent lower than the same week one year ago.

The Refinance Index increased 2 percent from the previous week and was 7 percent higher than the same week one year ago.

Of course, mortgage rates have been declining slightly over the past few weeks, but remain up 172% under Biden.

At least the stock market is booming after the inflation report signalled that The Fed is likely done with rate hikes.

On the gold front, we are seeing evidence of contango.

Bitcoin? Down a wee bit after a staggering rise in price over the past year.

Here is China’s Xi meeting with Biden’s likely replacement, “Greasy Gavin” Newsom and Newsom’s likely Treasury Secretary, Janet “Too Low For Too Long” Yellen. Newsom, Yellen and Xi all want havoc in America.

We WILL Get Fooled Again! Purchasing Power Of US Dollar DOWN -15% Under China Joe Biden (Top 1% Doing Great Under Bidenomics, Not The Middle Class)

Republicans elected Mike Johnson from Louisiana as House Speaker, then were surprised when Johnson agreed with big spending Senators McConnell and Schumer on Biden’s mega spendathon. Also, several Republicans voted with Democrats NOT to impeach Cuba Pete (Mayorkas) for allowing 8 million illegals to cross the southern border. Bottom line: the Biden Administration and Congress are closely held subsidiaries of the elite 1% and US large corporations. The middle class be damned! But we will get fooled again in every election.

Since Biden’s inaugration in January 2021, the purchasing power of the US dollar is down a staggering -15%.

Yes, under control of large corporations and the 1%, the economy is an economic wasteland. But the 1% are doing great under Bidenomics! With The Fed’s help of course.

Here is a chart of core inflation relative to M2 Money printing. Easy way to cool inflation … stop printing money!

Here is China’s Xi and America’s “China Joe” Biden.

Seriously, Biden has always been known as being stupid and corrupt. Now he has dementia. A PERFECT President for the 1% in their war against the middle class. Biden is the penultimate “useful idiot” with an emphasis on idiot.