the Problems are the Path: Foreclosures and Short Sales

The stock market was up over 300 points before the FED made their announcement on no interest rate cut.  Then the follow up by Chairman Powell put the icing on the cake.  The key comment to my evaluation is: "the decision to cut rates would be a consequential one because it could ignite substantial market rallies that boost spending and investments".  There in lies the crux!  The stock market is too high and is feeding spending in their belief.  Real estate is too high and is curbing affordability and fueling speculation in flipping....my comment not FED.  since then the stock market has lost steam and has had negative results.  UP for the week but rally stopped since Powell spoke.

The target levels of 5.1% for end of year 2024, 4.1% end of year 2025 and 3.1% for end of year 2026 are nothing more than target based upon hope....again my opinion!  If Trump wins all the targets are off the table!  Trump has stated he wants or is considering firing Powell.  That would mean a Stalin Purge at the FED to be replaced with Trump Economists.  Trump people want economic growth not manipulations of interest rates to play with the economy.  LET IT ROAR!

If Biden wins Powell and Crew hang on and the FED's target stays in place.

The target is a Recession target.  There is little doubt in my mind that Commercial Real Estate is in for a Purge.  Stalin lives again in Commercial real Estate. While most of you my readers, do not see the market of commercial property as I see daily, the Cap Rates that dictate property values all went up after Powell's speech.  Too many leverage loans in Commercial Real Estate were made during the 2020 era based upon low rates lasting longer that are in need of refinancing.  Property that once had 6% cap rates went to sub 7%, new properties popped out at 7-9%.  The property types are all those who are risk of losing tenants.  The 4-7 unit malls with an anchor tenant like Starbucks.  Retail sector is getting hit hard as the fear of retailers losing to Amazon and Costco; as well as, the eBusiness of Wall Mart and Target.  Banks are closing and consolidating as online banking takes over the need to walk in and see a teller.  Tellers are replaced with cash machines in 7/11 gas stations or small units in Safeway Stores.  Walgreens and CVS are closing and walking away owing lease payments rather than paying for money loosing stores where there greatest competitor is their own store too close to one another.  then add to that other similar competitors too close to one another.

As long as rates remain historically high the ability to refinance remains high when compared to the net operating income.  In most cases there is no" net operating income (NOI)", only a lose.  Banks and lenders do not want office buildings or empty banks and drug chains that are built solely for one type of tenant.  Convert office space to housing is a dream.  The conversion cost would further drive affordability as the building codes would make the cost escalate and another form of NOI negative.

The FED is repairing their balance sheet.  The balance of debt owned is being adjusted to the type of debt and maturity.  While at the same time the Balance sheet is slowly decining.  That mean money is being pulled out of the economy,  Less mone will keep interest rates high which will evenntually cause and collaspe soemwheres in the economy.  The FED knows that and needs to have the ability to bail out again, so the balance sheet repair is very necessary.  

The Governor's on the Federal Reserve Board do not have an enviable position. Damn if they do and damned if they don't.  They then need ot battle with a President and Congress on a SPEND SPEND SPEND budget. That ends up with an economy whose GNP declines and cannot keep up with debt. "What a revolting development", a quote from an old TV series "Life with Riley".

The economy can't start roaring again until real estate and the stock market looses some steam and corrects to a level of affordability and rational value levels.  There is nothing rational about Roarin Kitty and the price of GME stock!!!  Another error in government was to allow less regulation in the Securities industry and let in an open casino for investors without the regulation of prudent action.  

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Silicon Valley Real Estate Newsletter

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