A weekend topic starting with WBUR in Massachusetts. “The great unwinding of Silicon Valley Bank’s ambitions has a special sting in Boston, where the failed bank’s parent had vacuumed up two local institutions in recent years, part of its bid to build an empire serving the tech sector. On Friday, the bank’s parent, SVB Financial Group of Santa Clara, California, filed for Chapter 11 Bankruptcy protection, while it tries to sell off its parts.”
“Two other banks also failed last week, and a third, First Republic Bank, this week received an infusion of deposits from a group of the nation’s largest banks. The deal was meant to stop speculation that it too was vulnerable to a collapse. Cornelius Hurley, a former bank regulator who teaches financial services law at Boston University’s School of Law, says the Federal Reserve should have seen the trouble coming at SVB. In all these cases, the banks were receiving large infusions of cash from the Federal Home Loan Bank system, which should have been a clue to the trouble to come, Hurley said, adding, ‘It’s a mess.’”
The Washington Post. “Aaron Klein, a former top official at the Treasury Department, said the Fed and its regional bank in San Francisco should have spotted a number of ‘massive red flags.’ That included the ‘explosive growth’ at SVB, its high degree of uninsured deposits and its effort, months before it failed, to borrow money against its investment holdings — a move meant to create liquidity that it could return to depositors seeking withdrawals — from the Federal Home Loan Bank of San Francisco.”
“By the end of last year, SVB was the biggest borrower at what is seen as a lender of next-to-last resort. U.S. officials and Wall Street banks had to rescue the second-largest borrower there, First Republic Bank, on Thursday, with larger institutions placing $30 billion on deposit there to ease concerns.”
“Instead, Klein said there is no evidence that the Fed ever intervened in SVB’s case. ‘You have a lot of authority to slow the institution’s growth,’ Klein said. ‘How the Fed supervised them seems to be under greater lock and key than Area 51,’ the secretive U.S. military base some believe is where the government stores evidence of alien spacecraft.”
The Real Deal. “Signature Bank’s real estate lending didn’t lead to its failure, but its book of loans may be a cause for concern as the FDIC looks to sell the shuttered institution. Signature was one of the largest lenders to rent-stabilized buildings, which have seen their values drop since New York state lawmakers passed reforms in 2019 limiting rent increases. The legislation drastically reduced the amount of money that lenders could make from these loans — and increased the risk of delinquency.”
“‘Loans that were taken out through the end of 2018 were at peak valuations. Values are down 25 to 55 percent since then,’ said Michael Weiser, president of GFI Realty Services, a brokerage that represents many landlords who borrowed from Signature. ‘I’d venture to say there are a fair amount of problems there,’ he added.”
Curbed New York. “The crypto crash and a bank run might have been the straws that broke Signature’s back, but its reliance on predatory multifamily loans might have eventually pulled the bank down, speculated Will Spisak, a senior program associate at New Economy. ‘These models are unsustainable.’ What made the math even more unsustainable was the 2019 rent-stabilization reform — which made it harder for landlords to convert their rent-stabilized units to market-rate ones. These loans were also a problem for Signature in the long term because they almost guaranteed that landlords were putting less money into the building itself (a common tactic for getting existing tenants out, by not making repairs or improving the building), which potentially made it harder to sell later.”
“One landlord who banked with Signature, Sugar Hill Capital, has already gone into default earlier this month on 50 buildings, most of which are rent stabilized. ‘The finances still are not working,’ Spisak said.”
“Within 24 hours of the FDIC’s takeover, Barika Williams, executive director of the Association for Neighborhood and Housing Development, which led campaigns against these loan practices, put out a statement on behalf of the organization calling Signature’s collapse ‘no surprise.’ ‘Their multifamily lending was a huge problem and built on this very unstable house of cards and predatory practices,’ said Williams. ‘The things we were flagging are things the regulators could have more deeply scrutinized or required them to take more steps to fix.’”
The New York Post on California. “As San Francisco commercial occupancy reached an all-time low in the last couple years amid the pandemic, a new reality has set in for Silicon Valley. Major tech players are looking to sell their expansive corporate campuses in the area, or reconsidering new developments. Approximately 21% of SVB’s commercial loans were for office properties. Investors are still assessing the bank’s takeover by federal regulators, which left its $2.6 billion commercial loan portfolio in a brief limbo.”
“Luxury condo prices in the heart of downtown San Francisco have plummeted as well, as drug abuse and crime have spiraled out control — and as many techies continue to work remotely. The median sale price of a two-bedroom condo, for example, has fallen nearly 20% since 2021, while sale prices in surrounding areas have slipped only 7%.”
From Newsweek. “The collapse of Silicon Valley Bank (SVB) is likely to shake up one of the country’s most expensive housing markets, experts say—California. Sales in California have dropped significantly in the past year, having plunged 42.8 percent in January from January 2022. California has also seen some of the steepest home price drops in the country since mid-2022, when most experts announced that the U.S. housing market was moving towards a significant correction after over two years of boom.”
“In the Bay Area, Oscar Wei, deputy chief economist at the California Association of Realtors said that home prices have been dropping a little faster compared to other areas in Southern California or the Central Valley, ‘and that’s partly because of the tech stocks’ impact.’ In January, the median sale price in the Bay Area was $1 million, down 35 percent from the peak of $1.54 million in April 2022, according to the California Association of Realtors.”
The Globe and Mail. “With everyone on edge, one saving grace is that global banking watchdogs have forced systemically important banks to beef up their capital reserves – that is, cash and other liquid securities that serve as buffers when things go bad. Canada’s banking watchdog, the Office of the Superintendent of Financial Institutions, has been at the forefront of this effort, and Canada’s banks are praised globally for their stability and risk management.”
“But those buffers could now be tested. ‘We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector … with more seizures and shutdowns coming,’ BlackRock chief executive Larry Fink wrote Wednesday in his annual public letter. He described Silicon Valley Bank’s collapse as the ‘price we’re paying for decades of easy money.’”
Better Dwelling. “The world’s largest alternative asset manager looks a little strapped for cash. Blackstone made headlines over the past few years for its real estate shopping spree. Deploying what seemed like unlimited capital, it bought everything in sight. Heck, they probably even outbid you for grandma’s home. That’s come to an abrupt end, as it defaults on hundreds of millions of its commercial mortgage-backed securities (CMBS), sending over $1 billion in mortgage debt into special servicing.”
“After the GFC, the CMBS market was mostly stagnant. That changed in 2020, when the low rate boom hit. Everyone and their uncle wanted more real estate exposure, so a market was made. By 2021, CMBS issuance returned to the highest level since 2007. Don’t worry, it’s different this time. Until it isn’t, but moving on… in short, it’s a funding vehicle for real estate. Blackstone is a classic case of excess leverage meeting the end of stimmy. It consumed as much leverage as it could, as quickly as it could while assuming it would never end.”
The Guardian. “The most up-to-date indicators suggest house prices have dropped year-on-year by 6%, and the central bank De Nederlandsche Bank (DNB), Rabobank and the IMF predict falls to come, but not enough to correct the recent, extreme price rises. The Dutch economist Mathijs Bouman says that although the housing market has previously seen “hysterical” fluctuations, things got out of hand during the pandemic when mortgages dropped to about 1% as central banks lowered interest to stimulate the economy.”
“‘In the last 30 years, there has been a consistent set of politics based on the ideology of home ownership, encouraging us all to buy as strategic, calculating mini-capitalists,’ says Dr Cody Hochstenbach, an urban geographer at the University of Amsterdam. ‘People are encouraged, hounded even, to borrow as much as they can. The result is to drive up prices and increase the risks, locking people in homes if prices fall because they cannot sell without leaving a debt.’”
Radio New Zealand. “The Reserve Bank and the Minister of Finance have been attacked over monetary policy and inflation by the free market think tank, the New Zealand Initiative. In a report, Made by Government: New Zealand’s Monetary Policy Mess, senior research fellow Bryce Wilkinson has renewed criticism of the RBNZ’s handling of monetary policy before and during the pandemic, which left interest rates too low for too long resulting in inflation getting out of control, and stimulating the economy triggering the housing boom.”
“The paper said the RBNZ and many other central banks around the world were too confident about their policy frameworks, their economic models, did not pay close enough attention to keeping inflation in check, and then acted too late to correct their mistakes. ‘New Zealand’s recent monetary policy outcomes are worse than unsatisfactory,’ Wilkinson wrote. ‘They include whiplashing house price volatility, consumer price inflation far above the RBNZ’s 1-3 percent target range, and a $9 billion loss on the Reserve Bank’s large-scale asset purchase programme (bond buying).’”
“He said as a result the RBNZ had lost credibility as an inflation targeting institution, and had become partly politicised through the way it was being managed by the Minister. It made little difference that the RBNZ was in the same camp and had made the same mistakes as other central banks around the world. ‘The outcomes for New Zealanders count, and the inflation and fiscal cost outcomes were poor.’”
From Mises.org. “So, sales have fallen and, at least according to Redfin, prices are falling too. This is what we should expect to see in any environment where the real estate market is not being incessantly fueled by easy money from the central bank. After all, easy money for real estate markets had been the main story since 2009. In recent months, however, the Fed has allowed interest rates to rise while pausing efforts to add more mortgage-backed securities (MBS) to the Fed’s portfolio.”
“Without those key supports from policymakers, the real estate market simply lacks the market demand that is necessary to sustain rapid growth. Contrary to what countless mortgage brokers and real estate agents tell themselves and each other, there is precious little capitalism in real estate markets. It is a market that is thoroughly addicted to, and dependent on, continued stimulus and subsidization from the central bank.”
“It’s now been more than a decade since we had any idea what real estate prices actually would be without enormous amounts of stimulus from the Fed. The money-printing-for-mortgages scheme entered its first phase throughout 2009 and 2010, and then was almost non-stop from 2013 to 2022, topping out around $1.7 trillion in 2018. The Fed had begun to pull back on its MBS assets in 2018 and 2019, but of course reversed course in 2020 and engaged in a frenzy of new MBS buying. In that period the Fed purchased an additional $1.4 trillion in MBS.”
“For now, though, the investor class remains relatively optimistic. Marcus Millichap CEO Hessam Nadji was on Fox Business last week flogging the now well-worn narrative that we should expect a ‘small recession,” but Nadji did not even entertain the idea that there might be sizable layoffs. Instead, he suggested that there is now a mere temporary softening of demand, and that will reverse itself once the Fed reverses course and embraces easy money again. In other words, the Fed will time everything perfectly, and it will be a ‘soft landing.’”
“This well captures the attitude of the ‘capitalists’ heading the real estate industry right now. It’s all about the Fed. Without the Fed’s easy money, demand is down. Once the Fed pivots back to forcing down interest rates and buying up more MBS, well then happy times are here again. Gone is any discussion of worker productivity, savings, or other fundamentals that would drive demand in a areal capitalist market. All that matters now is a return to easy money. The real estate industry will get increasingly desperate for it. In 2023, it’s become the very foundation of their ‘market.’”