Eq: Total Market
There have been growing fears over the real estate market for the last couple of years, and now one corner of the market is in the middle of a growing apocalypse. Retail real estate is currently on trend to have by far the worst year in memory. Already in 2018, 77 million square feet of retail store space has been closed. In 2017, which was seen as the pinnacle of the collapse, 105m closed the entire year. The sector has been hit by the rise in ecommerce and changing shopping habits. Now landlords don’t even know what to do with all their space. They will likely “Try to re-let it as a gun range or a church—or it’s going to go back to being a cornfield”, says a head of real estate at a private equity firm. The US has 24 square feet of retail space per person, by far the highest in the world.
FINSUM: Not only do you have ecommerce as a threat, but consumer spending is starting to tighten as we near the end of this cycle. This is going to be a major bust.
While the housing market has been doing well and credit markets still look solid on a fundamental basis, there is big trouble brewing in US housing. The proportion of highly indebted mortgage borrowers is surging. Fannie Mae recently increased the amount of total debt as a proportion of income it allows for federally-backed mortgages from 45% to 50%. Rising house prices and stagnant incomes mean that 1 in 5 mortgage borrowers now have 45% or more of their pre-tax income eaten up in debt every month. That is triple the same proportion of borrowers compared to 2016 and the first half of 2017.
FINSUM: The mortgage market has been running out of prime borrowers, and in response, the proportion of subprime borrowers seems to be rising, though this is being accommodated by increased federal support for such mortgages. Are we headed down the same road again?
There is a lot of rhetoric out there about how the labor market is extremely tight, which will push wages up and force the Fed to raise rates. According to Barron’s, if you really compare this year’s labor market data versus last year, it looks like there is an unemployment pool of at least around 1 million Americans that could re-enter the labor force. This group is often referred to as the “hidden unemployed”.
FINSUM: This means that there is actually more capacity for the labor market absorb jobs than is often reported, meaning there may not be as much upward pressure on wages, and therefore, rates, as expected.
This morning the US released a jobs report that was expected to be very strong, with unemployment maybe falling under 4%. However, the opposite happened, and we have a definitively weak report on our hands. The economy only created 103,000 jobs versus expectations of 178,000 and unemployment held steady at 4.1% rather than falling to 4%. The Labor Department also revised previous months downward, worsening the overall picture.
FINSUM: This is an interest result and one that seems more likely to keep the Fed leaning towards dovishness. We would say this is clearly bullish for bonds, and a little bearish for stocks.
We at FINSUM have been keeping a close eye on the economy, and in particular, looking for any signs of the end of the current business cycle. Today, we might have found one. One of the big worries of economists and investors of late has been the slowdown in consumer spending—a concern in its own right, but not conclusive. Today, we might be seeing why. Lenders all over the US have been tightening their businesses and lending out less cash. That has left less money available for purchases. From 2011 through the end of 2016, credit standards had loosened, but since then they have tightened, even as wages have grown and unemployment has fallen.
FINSUM: This decline in lending seems to show that many lenders think there is more risk than reward in the economy, which may in turn bring on the recession they sense is coming.
The type of loans that fueled the Financial Crisis are making a comeback in a big way. Issuance of subprime mortgages is surging once again, with the total volume of loans issued in the first quarter doubling from a year ago. Such issuance fell to almost zero in the years after the Crisis, but specialist lenders have sent it surging yet again. The loans have been very popular in the debt markets as investors have been snapping up the loans. “[Investors] are definitely chasing yields. Whenever these deals come out, for the most part, they are oversubscribed”, says a New York hedge fund.
FINSUM: This is a bit worrying, but given how low the starting base for the market is, this is just not big enough to be a concern, yet….