Displaying items by tag: rates

The last few years have been brutal for first-time homebuyers. Prices have been trending higher for the last decade and accelerated in the post-pandemic period. The last couple of years have also seen affordability take a huge hit due to interest rates making mortgages more expensive, a consequence of the Fed’s battle against inflation.

Further despite many headwinds, home prices have remained flat rather than go down and provide relief to buyers. This was, in part, due to low supply as many homeowners elected to hold onto their homes and low monthly payments rather than move. However, there are some signs of positive developments.

The major one is the Fed pivoting and starting to cut rates which is expected sometime in May or June. One caveat is that declines in the mortgage rate in the summer and winter of last year led to sizable jumps in mortgage applications, indicating a healthy amount of pent-up demand if conditions ease. This means that any relief could be short-lived as prices could resume rising if activity picks up. In the interim, one group of winners could be cash buyers given that there could be some forced sellers who are unable or unwilling to refinance at higher rates. 

Finsum: The sharp rise in home prices in the post-pandemic period and spike in interest rates has been brutal for prospective home buyers who have seen affordability crumble. Here’s why 2024 could present more favorable conditions. 

The crisis in commercial real estate (CRE) is starting to have knock-on effects on banks according to Federal Reserve Chair Jerome Powell. In an interview with 60 Minutes, he remarked, “It feels like a problem we’ll be working on for years… it’s a sizable problem.” He added that most of the negative impact would be concentrated on smaller or regional banks who have greater exposure to CRE.

Already, the Fed stepped in following the collapse of Silicon Valley Bank in June of last year to prevent further damage that could impact the broader economy. In addition to this stress, banks are dealing with an inverted yield curve which has made lending less profitable, and it has led to the uncomfortable position of paying out high rates on deposits while holding loans made at much lower rates in the past. 

Ultimately, the crux of the problem is that demand for office space has declined due to more companies adopting remote work or hybrid arrangements. According to estimates, there could be 1 billion square feet of unused office space by the next decade. Another cause for concern is that over the next few years, loans will mature and need to be refinanced in a much more difficult environment. Given these bleak fundamentals, it’s inevitable that lenders will take losses.

Finsum: In a 60 Minutes interview, Fed Chair Jerome Powell warned that weakness in commercial real estate was starting to impact the banking sector. Already, the Fed intervened last year to prevent contagion following the collapse of Silicon Valley Bank. 

Pacific Investment Management Co. (PIMCO) has been quite pessimistic on private credit and sees major downside if rates don’t fall as expected. This is contrary to many in the industry embracing private credit like Blackstone and Apollo Global. 

In contrast, PIMCO is looking to take advantage of the crisis that it’s forecasting. It also has larger implications for the economy and markets given that private credit has taken the bulk of risky lending which used to come from investment banks. 

PIMCO’s thesis rests on the US economy slowing in 2024 and a hard landing in Europe and the UK. If the economy remains resilient, then rates are unlikely to fall as much as expected. This would put stress on private markets where there is less transparency and price discovery. The firm believes that many borrowers are quite risky and quite exposed to a decline in revenues. They believe that about a quarter of private credit portfolios could face difficulties if rates don’t fall or are less than expected. 

PIMCO spies an opportunity if private lenders face pressure from its creditors based on portfolio values dropping. This would allow PIMCO to squeeze out other lenders by buying into debt at a discount. It would also continue a trend of the firm moving away from its roots of fixed income investing and increasingly into alternative assets. This segment has grown from $32 billion in 2016 to $170 billion in the first half of 2023. 

Finsum: PIMCO is bearish on private credit due to concerns about balance sheet risk with risky borrowers, bearishness on the economy in 2024, and the market pre-emptively pricing in a dovish Fed.

Cohen & Steers believes that 2024 will mark a turnaround in private real estate following years of being plagued by issues like a drop in office occupancies and high interest rates. The firm emphasizes that real estate remains a cyclical business with many indications that we are near a trough in the cycle. It acknowledges that some pain is still coming as large amounts of debt will mature in the next couple of years and require refinancing, likely leading to more defaults and distressed assets. 

However, this will present an attractive opportunity for investors according to Cohen & Steers. The firm sees private real estate following the same trajectory as public REITs, lower prices in the interim before a gradual recovery as the Fed shifts to cutting rates later in the year. 

The firm favors newer properties in the sunbelt over older properties in coastal markets. It sees migration out of high-cost cities and into the suburbs continuing, facilitated by technology and remote work opportunities. 

In terms of various segments, it sees less opportunity in Industrial properties due to high prices and indications of a supply glut and lower occupancy levels. It sees office properties as continuing to struggle given unfavorable secular trends. Specifically, it recommends staying away from older office properties which were built for a different time and workforce.

Finsum: Cohen & Steers believes that private real estate is near the bottom, and that buyers at these levels will be rewarded in the long-term. 

The combination of tighter money and falling valuations have led private equity sales of portfolio companies to their lowest levels since 2009. Now with some signs of thawing in markets, private equity firms are looking to exit positions and return money to investors.

It’s led to a negative cycle for the industry. The lack of exits has adversely impacted investors’ willingness to pledge money for new funds which has hampered the industry’s ability to make deals. 

According to Per Franzen, the head of private capital for Europe and North America at EQT AB, “Private equity players have to face reality at some point. They need to invest remaining capital and go back to the market to raise new funds, which means a need to drive exits and improve distributions.” Reportedly, some big deals are on the horizon such as Hellman & Friedman looking to sell its energy data platform, Enervus, KKR exiting car park operator, Q-Park, and Carlyle finding a buyer for luxury watch parts manufacturer, Acrotec Group

Another consideration is upcoming elections which could complicate efforts to exit positions. This increases the urgency to make moves in the first half of the year. There are also expectations that private equity could be looking to take advantage of any dislocations or discounts as the industry has $1.4 trillion in cash on the sidelines. 

Finsum: Private equity firms are looking to exit positions in the coming months in order to return cash to investors.