The Federal Reserve finally began an easing cycle last week, and hopes spring eternal that this will be enough to arrest an ongoing deleveraging cycle, shrinking employment, asset deflation, and economic contraction.
Time will tell, but the odds aren’t good.
Lest anyone forget, central banks aggressively eased monetary conditions throughout the 2007-09 and 2000-03 downcycles, and all hell still broke loose.
An extra large challenge in this cycle is that households and corporations took advantage of an extraordinary, ill-conceived, many-century-low in interest rates to load up on debt into 2022. Even as central banks cut overnight rate targets, the payments on offer remain far above what was used in original cash flow and valuation projections.
Many borrowers have fallen behind on payments and tapped more credit to make ends meet.
As loans come up for renewal, carrying costs will continue to rise. As with central bank tightening cycles, monetary easing will take 12 to 24 months to move through the economy.
Further, unless interest rates move back to the pandemic lows, there will be less rate relief coming than many are banking on. See, The rate cut won’t save these real estate investors:
More than $2.2 trillion in commercial-property debt is coming due between this year and 2027, according to data firm Trepp.
…But the Fed’s deliverance won’t be enough for some of America’s most highly leveraged property owners. Lenders that have been willing to extend their loans have run out of patience.
The value of commercial real-estate loans in foreclosure nearly tripled between January and August this year to reach $19.2 billion, according to an analysis of securitized property loans by CRED-iQ.
Other measures of debt distress also rose during the period. Landlords who took out floating-rate loans, which shot up with prior interest-rate increases, are “getting clobbered most,” said Mike Haas, CEO of CRED-iQ.
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