Welcome To The Real Estate Industry Apocalypse
Higher interest rates are absolutely strangling the real estate industry, and there is no relief in sight. The sudden shift from a very low interest rate environment to a much higher interest rate environment has paralyzed sales. As I have discussed previously, very few homeowners that are currently locked into a mortgage at a low interest rate want to sell, because buying a home to replace the one that they are selling would mean taking on a mortgage at a much higher rate of interest. And millions of potential home buyers have been chased out of the market because of the exceedingly high mortgage payments that they would be facing if they pulled the trigger on a purchase right now. So sales of previously-owned homes have dropped by more than 32 percent over the past two years. In other words, about a third of the entire previously-owned home market has already been wiped out.
When home sales crash, everybody that works in the real estate industry suffers.
And it turns out that home purchases by investors are falling at an even faster rate. Wall Street Silver posted the following to Twitter earlier this week…
I was stunned when I first saw that, but I also knew that I had to confirm if this was true or not.
And I discovered that it is true…
That’s how much investor purchases of homes have fallen since last year, as of the second quarter, according to data from Redfin, as homebuying looks less profitable than during the pandemic housing boom.
Investors, just like private buyers, think it’s a bad time to buy a home.
We have got a major crisis on our hands, and it is not going to go away any time soon.
Things are even worse on the commercial real estate side.
The Wall Street Journal just published an article entitled “Real-Estate Doom Loop Threatens America’s Banks”, and that headline does not exaggerate the current state of affairs at all.
Commercial real estate prices are plummeting all over the nation, and our banks have trillions of dollars of exposure…
The WSJ analysis put total bank exposure to commercial real estate at $3.6 trillion, which it estimates is 20 percent of their deposits. Holdings of CMBS and loans to nonbank lenders accounted for $623 billion of that total at the end of last year.
In the past decade, regional banks went to town on commercial loans, never expecting how quickly the tide would turn against them. Today, losses on loans are leading banks to cut back on lending, furthering the drop in property prices and more lender losses — in other words, a doom loop.
Banks are already pulling back. Debt origination fell by 52 percent for the second quarter year-over-year, according to Newmark; lending volume among banks fell by 48 percent. M&T Bank said it would reduce commercial lending as nearly 1 in 5 of its loans to office landlords was in trouble.
So many of our financial institutions are going to be in very serious trouble because of this.
If the Federal Reserve were to push interest rates all the way to the floor immediately, that would help.
But instead, Fed officials continue to insist that rates are going to go even higher, and that is going to escalate this crisis into a full-blown real estate apocalypse.
And higher rates will also do an incredible amount of damage throughout the rest of the economy as well. This is a point that the Shark Tank’s Kevin O’Leary made very well during a recent interview with Fox Business…
In a recent interview on Fox Business, Kevin O’Leary, the “Shark Tank” investor slammed so-called “Bidenomics” for leaving small businesses behind. He warned that chaos is about to kick off for the “little guy”, which are the 33.2 million small businesses in America, due to the Federal Reserve’s aggressive rate hikes.
“They’re struggling because the Fed has raised rates up to 5.5% in a matter of months,” O’Leary said. “You’re going to hear a lot of people crying about this in the next few months because they can’t borrow anything anymore and they can’t run their businesses.”
He is right.
Small and mid-size businesses all over America are really struggling right now.
Economic activity is slowing down all around us, and they are starting to lay off workers.
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