Are Regional Banks In Trouble? What That Means for the Economy and Real Estate

The Weekly Recap

Manhattan rents soar to another record high at almost $6k a month, the new CPI data is enough to potentially pause rate hikes, fears of regional bank failures are starting to pick up again. US consumer credit card debt exceeds $1T, the job market has returned to pre-covid norms. Zoom, the company that made work remote, is telling their employees they can’t be fully remote anymore for work and in another sign that we can’t have nice things for long, shark attacks are happening at Rockaway Beach.

Are Regional Banks In Trouble? What That Means for the Economy and Real Estate.

When Silicon Valley Bank went belly up back in March of this year, followed very shortly by Signature Bank and then First Republic Bank, the strength and solvency of our mid-size/regional institutions began to come into question. Could they survive a run on confidence in their sector and do they have the strength to remain solvent if panic hit consumers causing massive volatility and a “run” on the institution?

There were plenty of contributing factors to the above that included but were not limited to, sharp increases in interest rates, devalued commercial real estate assets and having almost no cash on hand. The folks in DC did their best to quell concerns by having the FDIC insure ALL deposits. Customers still withdrew their money though and searched for bigger, more established institutions. Now Moody’s has downgraded a hefty group of regional banks and said it may downgrade major firms like BNY Mellon and Truist Financial, that are dealing with the same problems today.

Moody’s cited the increasing risks of profitability due to weaking economic conditions, specifically their impact on commercial real estate portfolios. Even banks trying to sell commercial-property loans are hitting a market with no takers as commercial real estate default concerns continue to escalate as offices remain empty. Banks have found a series of ways to stabilize their earnings and reduce their capital needs but fear in the bond market shows that they are not out of the woods yet.

The new issue that was highlighted by the Moody’s downgrade is that these institutions have been forced to pay consumers more for deposits at a pace that outstrips growth in what they earn from loans as an incentive to keep depositors in-house. Analysts do stress that the US banking system is still strong overall but that over the next 12 to 24 months, profitability is under pressure, regulation is rising and so are credit costs.

If regional banks continue to suffer that will drag down real estate and the economy with it. These banks own 67.2% of all commercial real estate loans and 37.6% of all loans. The commercial real estate mortgage market is worth upwards of $4.5 Trillion and millions of people rely on the customer/relationship banking that they have with their community/regional banks to grow their business and support their families. Stricter lending standards among smaller banks is likely to slow economic growth overall.

Market Performance

Here are how some other indexes and asset classes have performed as of this mornings opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market over the past week as well as newly signed contracts in Manhattan.

Mortgage Rate Update

For the third straight week, mortgage rates continued creeping up and are now just shy of seven percent. There is no doubt continued high rates will prolong affordability challenges longer than expected, particularly with home prices on the rise due to low inventory. In a good sign though, upward pressure on rates is the product of a resilient economy with low unemployment and strong wage growth, which historically has kept purchase demand solid.

News You Can Use

• US Bank Shares Drop as Moody’s Cuts Ratings, Warns on Risk Bloomberg

• Manhattan Rents Soar Again NY Post

• Fed Seen Pausing Rates After Tame CPI Data Bloomberg

• US Regional Banks Struggle to Break Free From Government Life Support Financial Times

• Rates on Savings Accounts Are Higher Than Millions of Mortgages Bloomberg

• The Long and Variable Lags Before the Fed Cuts Rates Reuters

• Slower Hiring This Summer Could Take Heat Off the Fed Wall Street Journal

• US Bank Shares Drop as Moody’s Cuts Ratings, Warns on Risks Bloomberg

• US Consumer Credit Card Debt Surpasses $1 Trillion for First Time Axios

• US Banking Industry Starts to Pick Its Battles Against New Capital Rules Reuters

• Property Loans Are So Unappealing That Banks Want to Dump Them Bloomberg

• Harlem, Pummeled by the Pandemic, Experiences a Tourism Revival Wall Street Journal

• Hamptons Partygoers Cast a Worried Eye on New York’s Future Bloomberg

• Consumer Home Buying Confidence At 13 Year Low Reuters

• US Layoffs Fall to Lowest Level in Nearly a Year Reuters

• Zoom, Other Remote-Work Champions Call Employees Back to the Office Wall Street Journal

• Apple’s iPhone 15 is Reportedly Set for Mid-September Launch CNBC

The Deep Insight

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