June ’18

The BAN Report: Comptroller Visits Capitol Hill / Home Affordability Worst Since ’08 / Central Banks Diverge on Rate Increases / Small Business Credit Expands-6/21/18

Comptroller Visits Capitol Hill
The Comptroller of the Currency Joseph Otting made his first appearances before the House and Senate last week.    His priorities were listed as follows:
Not surprisingly, CRA and fair lending provoked some controversy.     The Congressional Black Caucus, for one, requested a meeting to discuss comments in which Mr. Otting stated that he had not “personally observed” discrimination in banking.  
The Congressional Black Caucus is requesting a meeting with Otting and relevant personnel involved in drafting the proposed rules aimed at modernizing the law so it can “enlighten” the regulators on the state of discrimination.
“Your inability to speak out forcefully against examples of existing discrimination in this country leaves us with serious doubts about your ability to implement the announced rule changes in a way that appropriately fulfills their purpose,” Richmond said.
In response, Otting said in a statement that he looked forward to meeting with Richmond and other Congressional Black Caucus members “to discuss the recent testimony and how the regulatory framework of the Community Reinvestment Act can be modernized to encourage banks to do more to invest, lend, and otherwise support the communities across the country that need it most so that we can better achieve the original statutory purpose of the CRA.”
Well, modernizing CRA is not off to a promising start!    We believe that CRA must be modernized since the banking system is far different today than it was 40 years ago.    But, unless this is done on a bipartisan basis to mitigate the concerns of community groups, this initiative may be dead on arrival.   In fairness to Mr. Otting, he is new to politics.
Home Affordability Worst Since ‘08
“Slowing home price appreciation in the second quarter was not enough to counteract an 11 percent increase in mortgage rates compared to a year ago, resulting in the worst home affordability we’ve seen in nearly 10 years,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “Meanwhile home price appreciation continued to outpace wage growth, speeding up the affordability treadmill for prospective homebuyers even without the rise in mortgage rates.”
Nationwide the median home price of $245,000 in Q2 2018 was up 4.7 percent from a year, down from 7.4 percent appreciation in the first quarter but still above the average weekly wage growth of 3.3 percent. Since bottoming out in Q1 2012, median home prices nationwide have increased 75 percent while average weekly wages have increased 13 percent during the same period.
Annual growth in median home prices outpaced average wage growth in 275 of the 432 counties analyzed in the report (64 percent), including Los Angeles County, California; Maricopa County (Phoenix), Arizona; San Diego County, California; Orange County, California; and Miami-Dade County, Florida.
An average wage earner would not qualify to buy a median-priced home in 326 of the 432 counties (75 percent) analyzed in the report based on a 3 percent down payment and a maximum front-end debt-to-income ratio of 28 percent.
We think this is a supply issue, as there are a variety of reasons that home builders are not supplying enough homes to meet the demand.   Meanwhile, developers built 358,000 multifamily units in 2017 – the highest since 1989.    These trends do not bode well for boosting home ownership, unfortunately.
Central Banks Diverge on Rate Increases
Central Banks have different outlooks on future rate increases, as some like the Bank of England expect rate increases while others plan on standing pat.
The Bank of England held its benchmark interest rate steady at 0.5%, but officials said they expect economic growth in the U.K. to pick up in the months ahead following a soft start to the year, setting the stage for a rise in borrowing costs this summer.
Norway’s central bank also stayed on hold but said rates will probably go up in September.
In contrast, the Swiss National Bank kept its key policy rate in deeply negative territory and signaled no forthcoming changes despite signs of healthy economic activity and slowly rising inflation, as the bank remains constrained by the actions of the European Central Bank.
Divergence among major central banks has emerged as a key theme recently with potential repercussions on stock, bond and currency markets.
The shifting policy landscape comes against a backdrop of rising uncertainty over the outlook for the global economy, with mounting fears over the prospect of a trade war and signs that a spell of synchronized global growth is coming to an end.
Last week, the Federal Reserve raised short-term interest rates while the ECB signaled an end to its bond program but also said it probably wouldn’t raise rates at least until September 2019. The Bank of Japan, meanwhile, maintained its ultra-easy policies including a minus 0.1% deposit rate and government bond buying.
These divergences are highly unusual in an increasingly global economy, thus creating some unique imbalances between countries.   
Small Business Credit Expands
According to the Biz2Credit Small Business Lending Index, banks of all sizes are expanding their lending to small businesses.
After a decade of sputtering and false starts, big banks and institutional lenders nationwide have stepped up lending in earnest.
Banks with assets of at least $10 billion approved nearly 3 in 10 small-business loan applications in May, up two-tenths of a percent from April, which marks a post-recession high, according to the latest Biz2Credit Small Business Lending Index.
Loan approvals by small banks (which are nearing the 50 percent approval mark), rose by a similar monthly percentage, the index revealed.
Institutional lenders, including pension funds and insurance companies seeking larger returns on capital, also stepped on the gas in May, approving nearly 65 percent of loans to small businesses nationwide, up one-tenth of a percent from April, according to Biz2Credit.
Lenders are approving more small business loans on the back of a stronger US economy that’s lifting many boats, analysts say.
It’s hard to tell if lenders are loosening credit standards to boost lending, or whether its simply an improving economy.    The NFIB’s Small Business Optimism Index recording its second-highest level in the survey’s 45-year history.

The BAN Report: Toys ‘R’ Us Post-Mortem / Two More Rate Increases This Summer / The Inheritance Retirement Plan / Stopping Foreign Real Estate Buyers-6/7/18

Toys ‘R’ Us Post-Mortem
As Toys ‘R’ Us goes through a liquidation of its 735 stores in the US, analysts are wondering what went wrong with this former retail juggernaut?    Many are blaming the private equity ownership for loading the company up with debt at the wrong time.
The private equity firms Bain Capital LP and KKR & Co., along with Vornado Realty Trust, took over the company in a $7.5 billion leveraged buyout in 2005. For the next 13 years the owners would watch a succession of executives try to halt the steady slide of Toys “R” Us amid a recession and retail upheaval. As the last big toy store chain, Toys “R” Us had a captive audience. Kids could reasonably be counted on to badger, drag, or otherwise persuade adults to bring them to toy stores, especially if they were fun and hands-on. Those adults would more readily acquiesce if the stores were well organized and the toys competitively priced. There could have been an alternate ending for Toys “R” Us.
Complicating the executives’ efforts, though, was the central fact of the company’s existence: It was living on borrowed money. When Toys “R” Us filed for bankruptcy in September, one figure was particularly clarifying. The company had been paying interest of $400 million on about $5 billion of debt every year for a decade. In the good years, that was almost half its operating profit. Toys “R” Us had U.S. revenue of $7 billion and, even toward the end, a 14 percent share of the toy market, but there was no math that made $400 million look sustainable.
735 vacant stores are another blow to the retail industry.   Last week, the CEO of ICSC Tom McGee had some thoughts about the state of retail.
“Retail real estate is becoming consumer real estate,” meaning the consumer is driving retail real estate more than ever, in part because the physical space has to be experiential to be successful.
 McGee offered some interesting statistics to disabuse the notion that online sales – which the media often reports as 10 percent or more, is truly only 5 percent when you take out catalogue sales (yes, they still happen) and mail order sales, most of which are (legal) pharmaceuticals and medicines. He also said that 69 percent of all VC money geared for retail is for opening or expanding physical stores, even if the press reports that the U.S. is over-retailed.
So, Toys ‘R’ Us wasn’t merely a victim of online shopping, but it wasn’t able to take the expensive steps to re-position its brand in a post-Amazon environment due to its over-leveraged balance sheet and lack of liquidity.
Brandon left unspoken the other shortcomings revealed by the bankruptcy: a lattice of guarantees, liens, security pledges, and collateral. The final confounding account is on the last page of the filing; read it if you dare. Almost every company asset—cash flows, property, inventory, equity in the international operations—was pledged to a lender, sometimes twice. Toys “R” Us had nothing left to promise.
A sad end to a brand most of us have a lot of affection for. 
Two More Rate Increases This Summer
The consensus amongst economists is that the Fed will raise rates twice this summer.
The Federal Reserve is almost certain to raise short-term interest rates at its June policy meeting and will likely follow up with another increase in September, according to economists surveyed by The Wall Street Journal.
Among professional forecasters surveyed in recent days, 98% predicted the Fed’s next rate increase will come at its June 12-13 meeting, with the average probability of a move then pegged at 85%.
Some 76% of the economists predicted the Fed’s next move after June would come at its Sept. 25-26 meeting, with the average probability of a September rate increase seen as 64%. A smaller camp, 19%, said they expected the Fed would wait until December to make its third rate increase of 2018.
The Fed might pick up the pace of rate increases if officials worried inflation might rise too much. But many forecasters think the policy makers have room to be patient, an approach signaled in their most recent policy statement that emphasized the 2% inflation target is “symmetric.” The language reflects the Fed’s consensus view that inflation could rise a bit above 2%, after years running below, without prompting faster rate rises.
The Fed seems to be less coy about telegraphing its intentions, so two more are likely this year, and a possible additional one (four for the year) in December.
The Inheritance Retirement Plan
Sixty-three percent of affluent children between the ages of 18 and 22 say financial stability in retirement will depend on inheriting money. As in, the money their parents spent a lifetime accumulating—or given increasing income inequality, inherited themselves.

Before you start growling, consider that this may be a signal of desperation, not greed. The rise in student debt, increased life expectancy and the many competing priorities for money that are considered the “new normal” for younger generations have them wondering how they will pay for it all. According to Aron Levine, head of Merrill Edge, which commissioned a survey of 1,000 “mass affluent” Americans, these young people view inheritance as a sort of safety net. 

Not only are more members of Generation Z (the ones in their late teens and early twenties) betting on an inheritance, but more think it may come from someone other than their parents. Some 17 percent think it could come from friends, compared with 4 percent of people of all ages. Meanwhile, 17 percent are betting their grandparents have something in store for them, compared with 6 percent of everyone polled. And 14 percent of Generation Z members say extended family will shell out some cash, versus 5 percent overall.
Now, it is true that a boatload of money is expected to be passed to younger generations over the next few decades. In North America alone, an estimated $30 trillion could find its way to heirs over the next 30 or so years. Those beneficiaries may have to wait a long time, though: A recent survey from UBS Financial Services showed that 53 percent of people with more than $1 million in investable assets expected to live to 100. The prospect of such a long life could curb the urge to give more money to loved ones while still living.
This is a recipe for at least short-term financial disaster.    Even if these lucky Americans will receive a nice bounty from their parents, what happens if their parents live well into their 90s and even 100s?    Of course, this is a high-class problem, but a problem nonetheless.
Stopping Foreign Real Estate Buyers
Many western cities are trying various unsuccessful measures to stop foreign, mostly Chinese, investors from creating housing bubbles in their market.   
That kind of surging interest has created a flood of capital that is washing over cities throughout the globe, distorting home prices, irritating local residents—and defying almost every attempt to restrain it.
In Vancouver, Chinese home buyers snapped up properties so fast in 2016 that prices escalated at a rate of 30% a month compared with a year earlier. Officials imposed a 15% foreign-buyers tax, and Chinese buyers turned to Toronto, where they soon bid up home prices.
The hot pursuit of places to park money abroad by Chinese investors drove an estimated $100 billion in property purchases outside China in 2016, according to Juwai.com, a Chinese real-estate website. The buying frenzy, which grew from $5 billion in 2010, helped swell prices for housing and commercial real estate in cities on the Pacific Rim and beyond.
Chinese buyers have scooped up condos, apartments and houses from Vancouver to Auckland to Sydney. While foreign capital was welcome in the years following the financial crisis, officials have found that trying to control the flood of foreign money into housing is like squeezing a balloon: Taxes on foreign buyers in one city only divert them to another spot—and sometimes buyers return, taxes or no taxes.
It seems like you can put a lid by taxing foreign buyers, but then they find another city to invest in.   If prices start falling, a higher percentage of foreign investors, as opposed to owner-occupants, could accelerate a downturn.

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