Challenge for CRE Financing as China & others Dump Bonds
China and other global buyers are taking a smaller piece of the debt issued by the U.S. and other major economies. The Wall Street Journal reports it is a change that may test the long-held belief that overseas money has kept interest rates low in the developed world.
For much of this century, the world’s money has increasingly sought the safety of the bond markets of big, Western nations, principally the U.S. but also Germany and Britain. During that period those countries, and their citizens and companies, borrowed money at remarkably low interest rates.
“There is uncertainty that has been brewing for years and now being heightened and pushed along with Trump’s intended global policies. Let us not forget that we are long-in-the-tooth on historically low interest rates and busting central bank balance sheets,” says Ken Riggs, President of Situs RERC.
The Journal reports that foreigners are steadily pulling back: As of November, for the first time since 2009, less than 30% of the $20 trillion market for U.S. government debt was held overseas, according to the latest official data, released in January, from the Treasury Department and Federal Reserve. In the U.K., it is now 27%, compared with a record of 36% in 2008. In Germany, it is 49%, down from a peak of 57% in 2014.
“As foreign investment leaves the bond markets, interest rates are going to catch the brunt of this message. The glimmer of hope is that the unprecedented quantitative easing policies that central banks have enacted will continue. However, they are being pushed to the wall as the prolonged low-inflation environment comes under examination and the U.S. puts the great recession in the rear-view mirror,” Riggs says. “Even if protectionist government policies boost domestic economic growth in these Western countries, this foreign pullback will have an impact as markets do not like their expectations of their forecast to be clouded.”
Mama Mia!: Italian Lenders’ Results Show Suffering Continues
Full-year results from Italy’s largest banks reflect the deep wounds the country’s financial system continues to suffer, showing how long the road to recovery is for Italian lenders.
In the past week, four of the country’s largest banks posted a patchy set of numbers for the last three months of 2016.
This is the first set of results for major banks since the Italian government stepped in to bail out Banca Monte dei Paschi di Siena SpA in December, after the lender failed to secure €5 billion ($5.35 billion) from private investors to stay afloat. The Italian government set up a €20 billion rescue fund in December that will also be available to other ailing banks, should they need it.
Analysts and bankers hailed the move as a great leap forward in shoring up the financial system. However, several Italian banks are still grappling—and will likely continue to—with high costs and decreasing revenue.
One of the main drags on local lenders’ profitability is the massive amount of bad loans still sitting on their balance sheets, which requires provisions for potential losses quarter after quarter.
Ken Riggs, President of RERC states, “Italy has a massive amount of non-performing loans on its books as a by-product of the recession. It will take a long time for banks to rise above the water. However, there are still many good opportunities available for investors who are thinking about purchasing NPLs, particularly those that are collateralized by commercial properties. Investors do need to be cautious about the valuations of these properties before making these deals.”
The most toxic bad loans, or so-called sofferenze, where a debtor is deemed insolvent, stood at €200 billion in December, roughly the same level as for the same month of 2015 and 1% higher than in November.
Rock-bottom interest rates continue to take a heavy toll on Italian banks, as they are predominantly commercial lenders and make most of their revenue from lending.
To make matters worse, Italy has been in and out of recessions in the past 10 years, while losing around a quarter of its industrial production.
read more: Wall Street Journal
Sacre Bleu: Is Frexit Ahead
France isn’t Greece. But as investors worry about the impending presidential election, French bonds have shifted from trading like haven German bunds to be treated more like troubled Italian debt.
The reassessment of France—from part of the eurozone’s financial core toward its periphery—shows the heightened concern about far-right National Front leader Marine Le Pen winning the presidency.
The effects on trading were visible even as fears about France receded this week. The daily move in French yields was much closer to that of Italy than of Germany, both as yields rose and fell. This shift began shortly before the U.S. elections in November, amid talk of a populist surge.
Ms. Le Pen will almost certainly lose, but that doesn’t mean French bonds are wildly mispriced or traders are mistaken to treat France more like Italy than Germany.
“Investors are still skittish after being blindsided in 2016 by the Brexit decision and the election of President Trump,” says Ken Riggs, President of RERC. “Investors clearly see the populist similarity between Marine Le Pen and Donald Trump. Although analysts believe there is only slight chance of Le Pen winning the French presidency, the analysts have gotten it wrong before!”
Investors are trying to price two things: the risk that France leaves the euro and the loss that would result from being repaid in devalued francs instead of euros. Many, particularly outside France, think both risks have risen. Ms. Le Pen’s chances are slight, I’ll come to this later, but a “Frexit” from the euro would be so catastrophic for bondholders that even small increases in the chance she will occupy the president’s Élysée Palace have a big impact on bonds.
read more: Wall St Journal
U.S. Home Prices Through the Roof — Hit New Highs
A lack of inventory of houses for sale is forcing U.S. home prices to new highs.
Median single-family home price hit $240,900 in the third quarter, up 5.2% from last year’s $228,900 and last quarter’s $240,700.
The National Association of Realtors reporting the median single-family home price increased in 87% of the 178 measured metropolitan areas.
Seven of the top 10 markets with home price increases were in the West, including San Jose, California, where the median home price hit $1 million.
“Mortgage rates around historical lows and solid local job creation created a winning formula for sustained home buying demand all summer long,” NAR Chief Economist Lawrence Yun said.
At the end of the quarter there were 2.04 million existing homes available for sale, 6.8% less than last year. The average supply for the quarter was 4.6 months, down from 4.9 months last year.
“Unfortunately for house hunters in several of the top job producing metro areas around the country, deficient supply levels limited their options and drove prices higher – especially in markets in the West and South,” Yun said.
Top Regulator of Wall Street Banks Steps Down
Daniel Tarullo, the Federal Reserve official who spearheaded the U.S. government’s aggressive push to make banks safer after the 2008 financial crisis, plans to step down in early April.
As the Fed governor who oversaw the regulation of Wall Street, Tarullo often took the lead in implementing new rules and in defending the government’s response to the crisis before Congress. He earned a reputation as one of the toughest supervisors of banking. The industry may welcome the arrival of whomever President Donald Trump puts in charge of banking supervision.
“Dan led the Fed’s work to craft a new framework for ensuring the safety and soundness of our financial system following the financial crisis and made invaluable contributions across the entire range of the Fed’s responsibilities,” Fed Chair Janet Yellen said in a Friday statement.
Tarullo, 64, is leaving well short of the 2022 end of his term. His time on the Fed board was marked by one of the busiest periods in the central bank’s history, with massive demands from the 2010 Dodd-Frank Act to overhaul the U.S. financial system in an effort to prevent a repeat of the 2008 meltdown. The Fed and other agencies put sweeping capital, liquidity and risk-dampening rules in place that have profoundly changed how banks do business.
read more: Bloomberg
Morgan Stanley Heading South West?
Morgan Stanley is exploring a move to Hudson Yards, the vast development site on Manhattan’s West Side, The Wall Street Journal reported, citing people familiar with the matter.
The bank is considering purchasing the remaining 2 million square feet at 50 Hudson Yards, the planned tower where money manager BlackRock Inc is also expected to move its headquarters, the Journal said.
BlackRock, the world’s largest asset manager, plans to move its headquarters in 2022 from midtown Manhattan to a new office tower in the Hudson Yards district, the developers said in December.
Drop in This Company’s Stock Could Signal Trouble for Housing
Shares of Zillow dropped more than 7% erasing roughly $400 million from its market cap, after the online real estate listing company forecast a larger than expected loss for the rest of year.
Although predicted revenue was in line with analysts’ expectations, the company said it could lose as much as $40 million in 2017, significantly higher than the $600,000 in red ink Wall Street had been looking for.
Zillow, which runs brands such as Trulia and StreetEasy, reported positive figures for unique monthly web traffic to its sites and beat revenue and adjusted earnings estimates, but investors seem to be more focused on potential trouble on the horizon for Zillow, but also the housing market in general.
The housing market had a very strong 2016, but cooled off a bit as the year closed out. There were 5.45 million sales of existing-homes last year, the highest level since 2006, according to data from the National Association of Realtors. But existing-home sales fell 2.8% in December to a seasonally adjusted annual rate of 5.49 million. The regression meant total sales only rose 0.7% from the previous year.
Higher mortgage rates would tack on another layer of cost to housing prices that already appear to be getting too high for many. And with the uncertainty that Donald Trump’s presidency brings, the housing market may be one of the first dominoes to fall if the economy turns south.
read more: Fortune
All About Jobs: Unemployment Claims Near 43-Year Low
The number of Americans filing for unemployment benefits unexpectedly fell last week to near a 43-year low, amid a further tightening of the labor market that could eventually spur faster wage growth.
Initial claims for state unemployment benefits dropped by 12,000 to a seasonally adjusted 234,000 for the week ended Feb. 4, the Labor Department said. That left claims just shy of the 43-year low of 233,000 touched in early November.
Claims have now remained below 300,000, a threshold associated with a strong labor market, for 101 straight weeks. That is the longest stretch since 1970, when the labor market was much smaller.
The labor market is at or close to full employment, with the unemployment rate at 4.8 percent after hitting a more than nine-year low of 4.6 percent in November. The economy created 227,000 jobs in January.
Further tightening in labor market conditions could boost wage growth, which has remained stubbornly sluggish despite anecdotal evidence of more companies struggling to find qualified workers.
FinTech: Eli Mae’s New CIO
Ellie Mae has named Hitachi Data Systems Corp. IT executive John Abel as its new CIO, as the mortgage-software firm shifts to the cloud.
Mr. Abel, who has more than 20 years of experience in enterprise tech, will be responsible for overall digital systems, while partnering with individual business units on IT issues, the company said.
He replaces former CIO David Robbins, who retired late last year. Mr. Abel officially took over the position on Monday, a spokeswoman told CIO Journal.
As it shifts to a “cloud-based platform company,” Mr. Abel said in a statement, his role will be to build and deploy a comprehensive internal IT strategy to keep pace with growth.
Peter Hirsh, executive vice president of technology and operations, said the firm is in the process of streamlining and scaling its enterprise IT systems “to support our growth and transformation as a platform company,” he said in a statement.
Prior to joining Ellie Mae, Mr. Abel was senior vice president of IT at Hitachi Data Systems, a subsidiary of Hitachi Ltd., starting in August 2013. There, he oversaw the company’s strategic shift from selling hardware to selling cloud-based software and services, the company said. He had previously been the company’s vice president of IT for nearly five years, according to his LinkedIn profile.
Founded in 1997, and based in Pleasanton, Calif., Ellie Mae has been one of the best-performing tech IPOs in recent years – since going public in 2011, its shares have gained 1,271%.
Its software automates the mortgage process by collecting appraisals, titles, income history and other documents for lenders, who pay monthly subscription fees of about $75 per user, among other fees.
read more: Wall St Journal
For Chinese Home Buyers, Seattle Is the New Vancouver
When Anna Riley, a Seattle-area real-estate agent, held an open house for a new $2.3 million listing in the tony city of Bellevue late last month, the pool of prospective buyers was different from the usual assortment of tech magnates, sports stars and chief executives.
Twenty groups of buyers visited the property in the Seattle metro area—and all of them were Chinese.
“Every single one,” said Ms. Riley, an agent at Windermere Real Estate, noting that Asian investors had typically, before last year, accounted for about a quarter of the firm’s prospective buyers.
Chinese real-estate buyers are suddenly descending on the Seattle region. Some are lured by perceptions the coastal city is a bargain, others by warm memories of the 2013 Chinese film “Finding Mr. Right,” which put Seattle on the pop-culture radar there.
The biggest draw, though, might be the fact that it isn’t Vancouver. In August, the Canadian province of British Columbia imposed a 15% tax on foreign investment in the city, which until recently was a popular destination for Chinese. The tax applies to anyone who isn’t a citizen or permanent resident of Canada and buys a home in metro Vancouver.
read more: Wall Street Journal
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