Juggling Dynamite

As I have mentioned several times over the past year (see:‘Genius’ fails again and Commercial realty loan defaults booming, for just a couple), the retail sector is dramatically over built and mean reverting in North America.  As stores close, mall operators are facing a domino effect of falling rents and bankrupt tenants which leads to rising defaults on property mortgages.  This is bad news for the investors who have funneled yield-desperate capital into commercial mortgage backed securities the past few years.

This next “Big Short” has many of the same old characters, products and behaviors as the residential mortgage bust did in 2007-08.  That ought to have served as a warning for people, but apparently not. It seems Michael Lewis will need to write a sequel.  See, Deutsche Bank says next ‘Big Short’ is on CMBS as malls suffer:

Analysts at Deutsche Bank AG, one of the biggest underwriters of bonds tied to U.S. commercial mortgages, say now it’s time to bet against the securities.

The bonds are vulnerable because they are supported in part by leases from retailers, a lagging part of the economy, wrote Ed Reardon and Simon Mui in a note this week. A combination of bankruptcies and closures could lead to faster-than-expected mortgage defaults for stores and malls, as long-term pressure from internet competitors wears many companies down, the analysts wrote.

“Big mall loans have outsize losses for investors,” said Morningstar analyst Edward Dittmer. “We expect the stores like Sears, Macy’s and Penney to close more stores later this year and next year, and as they close, there will be knock-on effects that lead to other mall tenants leaving. This can start the cycle of blight.”

David Stockman suggests President Trump might best spend some time actually addressing economic issues instead of the administration’s travel ban for immigrants from Middle Eastern countries, which Stockman called “a giant misfire:”

“Trump was elected because flyover America is hurting economically. The voters of Wisconsin and Pennsylvania are imperiled not because of some refugees, they’re imperiled because their jobs have all been disappearing for decades. The problem is far more the Federal Reserve, Janet Yellen, the bubbles they’re creating on Wall Street…
Here is a direct video link.

For several years we have been pointing out that demographic trends are turning away from high-cost, high-maintenance housing, in favor of lower cost, more efficient, and easier-to-maintain housing. In Canada especially (and many other countries) this is happening as home prices have ballooned on a household debt bubble.  This is bad timing for baby boomers who are counting currently inflated values as the bulk of their life savings and hoping to sell high in order to buy less, reduce debt, and hopefully–bank some savings for retirement. Best to get on with it sooner, than later.  The pool of able and interested buyers is small and shrinking. See:  A mismatch of buyers and sellers points to pain this year

The US housing market has a big problem on its hands—the types of houses people want to buy aren’t available, and the kind they don’t are. Most Americans are looking to buy starter homes, but there is currently a dearth of options available. At the upper end of the housing spectrum there is lots of availability but little interest. Overall, the balance of homes leads to a 7.4% mismatch between supply and demand, where zero would reflect perfect balance. This will likely lead to swift price rises for lower priced homes and falling prices for higher priced ones.