CNBC - What a Trump Presidency could mean for the housing market

 

CNBC article on what a Trump presidency could affect Housing Affordability.

CNBC Article on Trump could do for Real Estate market

The Highlights: 

“We’re going to open up the tracks of federal land for housing construction said in a Aug 15^th news conference. We desperately need housing for people who can’t afford what’s going on”.

As of mid -2023, there has been a shortage of 4 million homes in the US according to the National Association of Realtors (NAR).

There’s been a small increase in new homes built this year, but its still not enough to meet the high demand for housing…experts say.

Here’s how Trumps policies could affect the housing market:

1) Deregulation to increase affordability.

At the end of his first Presidency, Trump signed an executive order “Eliminating regulator barriers to affordable housing: Federal, State, Local, and Tribal opportunities”.

[Weitz – the author references this, but then provides no details on what this entails. I intend to look up this order and provide a post on it in the coming days..... the report can be found here: HUD Report].

We will eliminate regulations that drive up housing costs with the goal of cutting the cost of a new home in half, Trump said in speech at the Economic Club of New York on Sept 5^th.

About 24% of the cost of the single-family home and 41% of the cost of a multifamily homes are directly attributable to regulator costs at local, state and federal level.

2) Impacts on construction workforce

Trump blames rising home prices on a surge of illegal immigration.

“Proposals like mass deportation and tighter border control could impact housing affordability”.

“It's been difficult to recruit native born workers in the construction industry”.

Weitz – this is a shame in my opinion. I’d highly recommend kids getting into the trade industry…. the money can be great especially if you learn the industry and start your own company.

3) Tariffs could hike building costs

Trump proposed a 10% to 20% tariff on all imports…. [which] could push housing costs higher as well as materials for home renovations.

Trump mentioned plans to release federal lands for housing, but federal lands tend to concentrate in rural areas. That does do anything for these densely populated blue areas that really need the most help, Daryl Fairweather, Chief economist at Redfin says.

Weitz – Mr. Fairweather, can the Federal Government dictate the permitting process of city/ local governments? No. These cities are digging their own ‘prospective’ graves. If they make it too burdensome to build in their areas, why would a private developer risk their time/ capital in those areas? These cities need to create their own streamline processing to make it worthwhile for such builds.

WEITZ TAKE

I love the idea of a streamlined version of permitting for every jurisdiction. It’s become so expensive and burdensome in many areas that developers focus the higher value options to maximize their time/ investment return. If the government worked to allow more multi-family options easier, I could see a major shift in where resources and capital are allocated to more projects like that.

That said, as I’ve said many times, we are at a bit of crossroad - I don’t see a magic bullet to ‘cure affordability’, but not lower housing prices in general which will lead to pain for homeowners, developers, investors, and consequently banks, insurance companies, etc. It’s a bit of damned if you do, damned if you don’t situation.

For more information on Snohomish County Commercial Real Estate, feel free to email me at Scott@Weitzcommercial.com or even text me at 206.306.4034. 

Scott Weitz

Weitz Commercial 

Harvard Business Review - U.S. Commercial Real Estate Is Headed Toward a Crisis

 

Interesting article from the Havard Business Review

I’ll include some excerpts from the article as it’s rather lengthy. The original link can be found here.

Harvard Business Review CRE Article

“Over the next two years, more $1 Trillion in CRE loans will come due”.

The damage could metastasize into a full blown financial cris if small and midsize banks fail simultaneously.

As the Federal Reserve keeps interest rates elevated and CRE risk worsen with falling property values, businesses will continue to experience restrictive financial conditions. Executives can nonetheless take steps to potentially mitigate the fallout – including examining banking relationships, extending debt maturities, and securing adequate working capital.

HOW DID WE GET HERE?

The risks of US Commercial banks being overexposed to CRE have intensive as the global pandemic upended long held economic assumptions: perpetually subdued inflation, low interest rates and in office work.

Exacerbating the situation are CRE management costs – including insurance premiums, labor, and energy prices.

THERE’S TROUBLE BREWING

Hundreds of banks hold an outsized amount of CRE loans on their books relative to capital. Small banks and midsize banks have CRE loan values far exceeding risk based capital levels at 158% and 228%, respectively. According to the Conference Board calculations using FDIC Institutional Financial Reports data. This is compared to 142% for large banks and 56% for the largest banks.

[I’ve cut and pasted the following provisions as the depth of data is frankly more than I want to try and summarize]

As CRE property values fall and the debt service on associated loans accumulates, borrowers are becoming delinquent or defaulting. The portion of these loans that are nonperforming more than doubled — from 0.54% to 1.25% — over the six quarters from the Q3 2022 cycle low, according to data compiled from BankRegData.com and the FDIC. Compare this with the just 0.87% rate six quarters after the cycle low, in the second quarter of 2006, which preceded the 2008–09 Great Recession. However, only the largest banks are reporting increases in nonperforming loans and charge-offs (i.e., losses). Reported CRE loan delinquencies exceeding 90 days have surged from under 1% in mid-2022 to 3% in early 2024 for the largest banks, while delinquency reports for all other banks remain near 1%, according to The Conference Board calculations using FDIC Institutional Financial Reports data. (By comparison, delinquency rates reached 5% in 2010 in the wake of the 2008–09 Great Recession.)

Meanwhile, CRE loan losses for the largest banks spiked to 0.6% in early 2024, while other banks are reporting virtually zero losses. By comparison, such losses topped 1.4% in 2010.

The reason for the different behaviors is that the biggest banks face greater regulatory scrutiny and are required to maintain larger capital cushions, prompting swifter realization and write-offs of souring loans. Smaller and midsize financial institutions — many of them regional and community banks — are evidently not marking down CRE loan losses but may be managing stresses differently.

These institutions are likely engaging in “extend and pretend” behaviors that lengthen loan maturities with the hope that property valuations will recover in the future. They also may be seeking to widen capital buffers through M&As with similarly sized or larger financial institutions.

WHAT COULD TRIGGER A CRE CRISIS

Multiple troubled banks simultaneously raising equity capital would prove challenging and potentially destabilizing for the U.S. banking system. Any hint of doing so could cause massive depositor flight (i.e., bank runs), creating a redux of the March 2023 panic across global financial markets when only three U.S. banks came under pressure. Digital banking has accelerated the speed at which these runs might occur.

The clock is ticking for banks delaying recognition of CRE loan losses, and the timing of the financial market fallout — potentially starting later this year — could be during a vulnerable period for the economy. The Conference Board expects that U.S. real GDP growth may be weaker, the unemployment rate slightly higher, and interest rates still near multi-decade peaks, when a cascade of banks begin reporting losses.

Other CRE crisis triggers could include a U.S. recession; interest rates that stay higher longer than expected; and/or financial market upheaval from a fiscal crisis (e.g., the looming January 2025 debt ceiling) prompting investors to demand greater credit risk compensation in the form of higher yields.

THE POTENTIAL FALLOUT

As these loan losses begin to mount, an increasing number of banks — mostly regional and community banks — risk having insufficient capital cushions. A 10% loss on CRE loans would leave more than 100 mostly small and midsize banks, representing nearly $700 billion in assets, undercapitalized. A 20% loss would render over 900 banks undercapitalized, including some larger banks.

 THE DEPTH BREADETH AND DURATION OF A CRISIS

Pandemic accelerated troubles in CRE markets may take more than a decade to resolve. The sharp rise in interest rates has caused commercial subtypes to lose value. Commercial properties prices have already fallen 21% from their mid-2022 peak according to Green Street.

HARDENING COMPANIES FOR A CRE STORM

Corporations should prepare for an extended period of tight lending, elevated borrowing costs, and possible market liquidity shortages. Prudent corporate managers should extend their debt maturities and add a cash liquidity buffer – now.

Corporate managers should know of any provisions allowing their financial institutions to transfer depositors’ assets to third parties for management. In such cases, executives should be aware of the safeguards their banks have I place should third party asset managers come under duress.

WEITZ TAKE: 

It's so refreshing to find an article like this.... I can't confirm their data is correct, but the context is right on. It's hard to say how long the 'can will be kicked down the road', but I struggle to see a cure for this without significant bank losses and upending of many parts of the commercial market. 

For more information on Snohomish County Commercial Real Estate, continue to follow this blog and/or reach out to me anytime. 

Weitz Commercial

Scott@WeitzCommercial.com

T: 206.306.4034 (feel free to text me)

108 Union Ave

Snohomish, WA 98290