Those darn interest rates. The yields on US Treasuries are soaring. It's immediate effect on consumers: mortgage rates surpassing 8% on a traditional 30-year fixed rate loan. For context, just 2 years ago the average rate on the 30-year fixed was as low as 3%. The last time we saw 8% interest rates was 2000.
From our earlier series we learned how mortgage rates are pegged to the 10-Year US Treasury. As the Fed raised rates, so too did the mortgage rates rise. These rises have caused mortgage to drop nearly 7%, week after week, in a major decline. These are 21-year highs for mortgage rates. Will it create ripples across the housing market? Traditionally, rising mortgage rates would push demand and prices down. But that's not happening in the consumer residential market.
Zillow seems to think so. They recently rolled out a program that will provide "grants" to home buyers worth 2% of the 3% needed for an FHA loan. That means buyers are only having to come up with 1% down. Will this lead to another 2008 real estate crisis? August 2023 saw only 4.04M existing homes sold across the United States, the worst number of any August since 2010. At the same time, builders are also incentivizing buyers by offering grants to lower interest rates in "buy downs" from their mortgage subsidiaries.
As an indicator of future construction and health of the economy, building permits fell for the first time after a bull run in construction. However, consumer retail sales exceeded projections. The pressure remains on the Federal Reserve and their long-term plan. For now, Jerome Powell has decided to stay put, at least through the end of the year. There is conversation for rate increases to resume in the first quarter of 2024.
Blackstone, the world's largest Private Equity and holder of Commercial Real Estate, missed its Quarter 3 2023 earnings by a huge 12%, as high interest rates weighed on asset values. They also went public as the first Private Equity firm to join the benchmark S&P 500 index. This same Blackstone, a pillar in the Private Equity world, has recently handed over the keys to a Midtown Manhattan New York office building at 1740 Broadway. Essentially, Blackstone defaulted on its $308M loan, handing the keys back to the lender via a deed-in-lieu of foreclosure.
Consumers showing signs of trouble.
Auto loan defaults are at the highest rate in nearly three decades, amounting to millions of car owners struggling to afford their payments. The percent of subprime auto borrowers at least 60-days past due on their loans rose to 6.11% as reported in September. This is the highest going back to 1994. As payment delinquencies rise, repossessions are expected to continue to rise as well. Cox Automotive estimates that 1.5M vehicles will be seized in 2023, up from 1.2M in 2022.
Credit card interest rates and debts are at an all-time high, with consumers making more purchases with their credit cards in the post-pandemic era we are living through. Total credit card surpassed $1T, yes Trillion, in the second quarter 2023. This was the first time in history credit card debt surpassed this milestone. Furthermore, the average interest rate jumped up to over 21% in August, also the highest on record.
43-million Americans recently started paying their federal student loans again, with around 34% already saying they won't be able to make their payments, according to Morgan Stanley. This another indication that consumers may be running out of excess savings.
These are clear signs of distress at a time when the economy is sending mixed signals, particularly about the health of consumer spending.
In closing.
In closing, as investors, it is important for us to remain true to the fundamentals. One simple fundamental is to increase risk during up-cycles and to decrease risk into capital preservation during down-cycles. Commercial real estate is continuing to shake and the headwinds are strong. However, as a mentor of mine always tells me, "there is cash in chaos if you could find the opportunities within the noise." This is where Ten15 Capital is positioning ourselves, to not only weather the storm, but to find asymmetrical opportunities to preserve and grow our wealth in uncertain times.
This is our opportunity!
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