The sudden firesale of real estate loans is perhaps the surest sign that the stars are aligning for a historic real estate crash, which Darren Winters flagged back in July 2022.
“The last shoe to fall could be a real estate crash, which now seems highly likely as the Fed tightening continues into a recession,” I wrote almost a year ago.
Fed hikes are a catalyst for the fire sale of real estate loans and in a futile attempt to tame inflation, the Fed raised rates seven times in 2022, pushing Fed fund rates from near zero to almost 5% in a little over one year. What this means in real terms for typical US households with variable-rate mortgages, monthly interest payments on the loan have increased to over 40%.
As Darren Winters points out, real inflation, which calculates food and accommodation costs, is probably well north of 20%. The publicized core inflation of 5.5% is meaningless because the reading excludes accommodation and food costs.
Food hyperinflation, in some countries, is around 50%, with some food items up over 100%. Those living in Europe will have already experienced shortages of food items, such as coffee, eggs, cooking oil, and fresh produce. The supply chain for low-profit margin food retailers is under severe stress as farmers and producers can no longer supply to retailers at current prices and break even.
Central bank monetary tightening has failed to control inflation
Further tightening could worsen the current crisis, destroy wealth, and collapse supply chains further by increasing borrowing costs and pushing many low-profit margin businesses into loss-making and bankruptcy.
War in Europe, Ukraine is disrupting the global supply of grain commodities and pushing food commodities, prices, and animal livestock prices.
Destroying the Nord Stream pipeline increased the global price of energy.
Exhibit one; World Food Price and Oil Index shows the inflationary impact of the Ukrainian war on the world, food, cereals, and oil prices.
So we have cost-push inflation driven by supply disruptions, and further rate hikes could worsen the cost of the living crisis disrupting supply chains.
Weaponizing the US dollar by imposing sanctions against countries, and running unsustainable public deficits could also be accelerating the de-dollarisation trend. when the world’s reserve currency becomes political it no longer has global appeal as a safe store of value. So when global demand for US dollars falls and the supply increases due to exponential public spending the currency depreciates, adding to inflation.
So is foreign and domestic policy the cause of this current inflation, and if so, has monetary policy become less relevant in controlling inflation?
The banks are not waiting to find out if the Fed’s monetary tightening has tamed inflation, as they are dumping real estate loans in a firesale
Darren Winters comments that not only are banks reluctant to grant new mortgages, they are selling real estate loans in a firesale.
Nobody knows the state of household finances other than the banks; they are the first to see the impact of the cost of living on their customer’s bank accounts as savings dwindle and loan delinquencies spiral.
Surging auto loan delinquencies in the wake of aggressive Fed tightening has made the Repo man as busy as the last financial crisis 2008.
Are the banks now also seeing mortgage loan delinquencies and giving their bond trading desk a heads up with a whisper to dump real estate loans in a firesale?
The Move: Fire sale-Margin Call tells it how it is when a bank’s sell-side desk is on a mission to unload toxic loans at any cost.
We could be on the cusp of the worst real estate crash in history as banks cut credit and dump mortgage loans in a firesale
The real estate market is in disequilibrium, young first-time buyers who bought post-pandemic at the peak could see their home equity wiped out.
Millions of recent first-time buyers could be saddled with a multi-decade debt mortgage on properties worth less than the loan, they could be in negative equity.
Throw in a tightening job market with a cost of living crisis, and it is no surprise that banks are unloading real estate loans in a firesale.
But for those choosing to rent, the rental market is a disaster, with many paying more than half their wages to live in health-damaging fire-hazard dumps. This is a story of FIRE economies propped up with decades of cheap credit-fuelled speculative bubbles. Economies built on a house of card debts. When the cheap credit is gone, so goes the FIRE economy, leaving behind joblessness and slumps.
Banks are dumping real estate loans because maybe they figured we are in a systemic crisis, a currency crisis where central bank rate hikes will do nothing to tame inflation.
So the maintenance cost of home ownership is going through the roof.
Post-pandemic has left the workforce less healthy, and there is a shortage of skilled able-bodied labor. Construction, material costs, taxes, and insurance keep going higher.
We could get to a situation where private home ownership becomes no longer viable, and where only governments and large institutions have access to the capital and can benefit from economies of scale to provide sustainable livable accommodation.
Investing in Brick and mortar for income may not be like it was. Rent controls, property tax and high maintenance costs may make property no longer a viable investment for the small investors viable
“You will own nothing and be happy,” WEF