The BAN Report 7/1/21
The BAN Report: Home Prices Soar / Office Return Battles / Record Stock Sales from Unprofitable Firms / Surfside Tragedy / NCAA Opens Up College Athletes / The 9MM Midwest CRA Portfolio-7/1/21
Home Prices Soar
First off, Happy Bobby Bonilla Day! Today, we fully appreciate the beauty of compound interest. We can also wonder at the remarkable strength of the US housing market. Home prices in April rose by 14.6% from the prior April – the largest increase in the history of the index.
Housing prices accelerated their surge in April 2021,” says Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “The National Composite Index marked its eleventh consecutive month of accelerating prices with a 14.6% gain from year-ago levels, up from 13.3% in March. This acceleration is also reflected in the 10- and 20-City Composites (up 14.4% and 14.9%, respectively). The market’s strength is broadly-based: all 20 cities rose, and all 20 gained more in the 12 months ended in April than they had gained in the 12 months ended in March.
“April’s performance was truly extraordinary. The 14.6% gain in the National Composite is literally the highest reading in more than 30 years of S&P CoreLogic Case-Shiller data. Housing prices in all 20 cities rose; price gains in all 20 cities accelerated; price gains in all 20 cities were in the top quartile of historical performance. In 15 cities, price gains were in top decile. Five cities – Charlotte, Cleveland, Dallas, Denver, and Seattle – joined the National Composite in recording their all-time highest 12- month gains.
“We have previously suggested that the strength in the U.S. housing market is being driven in part by reaction to the COVID pandemic, as potential buyers move from urban apartments to suburban homes. April’s data continue to be consistent with this hypothesis. This demand surge may simply represent an acceleration of purchases that would have occurred anyway over the next several years. Alternatively, there may have been a secular change in locational preferences, leading to a permanent shift in the demand curve for housing. More time and data will be required to analyze this question.
“Phoenix’s 22.3% increase led all cities for the 23rd consecutive month, with San Diego (+21.6%) and Seattle (+20.2%) providing strong competition. Although prices were strongest in the West (+17.2%) and Southwest (+16.9%), every region logged double-digit gains.”
While these increases will likely taper off, the current home price rally is not being driven by loose lending like the last crisis, although it is being fueled by high commodity prices, government stimulus, a loose Fed, and foreclosure and eviction moratoriums. Moreover, home prices are rising globally.
From the U.S. to the U.K. to China, housing is riding an extended boom. Global valuations are soaring at the fastest pace since 2006, according to Knight Frank, with annual price increases in double digits. Frothy markets are flashing the kind of bubble warnings that haven’t been seen since the run up to the financial crisis, a Bloomberg Economics analysis shows.
On the ground, outrageous stories are rife, with desperate buyers promising to name their first-born after sellers and derelict buildings selling for mansion prices.
In the US especially, rapid home price appreciation is a direct result of a lack of new construction. As we have been arguing for as long as this blog has been in existence, the US went from over-subsidizing home ownership to over-subsidizing renting. It is still difficult for smaller homebuilders to get enough credit to build homes at the rate of demand. Fortunately, lumber futures tanked more than 40% in June, so the lumber bubble appears to be bursting.
Office Return Battles
As companies push their employees to come back to the office, many employees are threatening to quit, as they’ve adjusting to their new lives without daily commutes, setting up one of the most difficult HR challenges for companies in years.
Before Covid, Blaze Bullock, 34, was on the road one week a month as a marketing consultant in the auto industry.
Then, when the country shut down, Bullock began working remotely. “Now they want me to start traveling again and visiting car dealerships,” he said. “I don’t want to do that at all.”
Bullock said he likes working from home and spending more time with his friends and family in Salt Lake City. “I realized this is the only way I want to live.”
The pandemic has caused a lot of people to reevaluate, particularly when it comes to work.
In what’s been dubbed the “Great Resignation,” a whopping 95% of workers are now considering changing jobs, and 92% are even willing to switch industries to find the right position, according to a recent report by jobs site Monster.com.
Most say burnout and lack of growth opportunities are what is driving the shift, Monster found.
“When we were in the throes of the pandemic, so many people buckled down, now what we’re seeing is a sign of confidence,” said Scott Blumsack, senior vice president of research and insights at Monster.
Already, a record 4 million people quit their jobs in April alone, according to the Labor Department.
Harvard Business Review argued that Working from Home is corroding trust within companies.
About a third of the employees of a regional bank have returned to working onsite, and the president holds a weekly all-staff town hall meeting by videoconference. Employees are encouraged to submit anonymous questions for him or other senior leaders to answer. For the past six weeks, an increasing number of people have asked, “How do we know if the people who are still working from home are actually working?” Some employees have even suggested specific technology-based monitoring approaches to track remote workers’ onscreen time and activities.
Each week, the president assures his employees that the business is on track and that measures of productivity (like the number of loans taken out) are above expectations. “But it’s exasperating,” he said. “No matter how much I try to convince them or even use numbers and other kinds of evidence, it’s not sinking in. You’d think that if I can trust people, surely they can trust each other, right? But no.”
The crisis of trust this bank is facing is increasingly common as the strains of remote working wear down company culture and people’s goodwill.
If you have high-performing employees that are performing effectively remotely, how do you let them go if they won’t come back to the office? And, if you make exceptions, does that harm your overall culture? This is such a delicate issue and companies have to balance numerous competing interests. How organizations deal with this topic will be critical to their futures.
Record Stock Sales from Unprofitable Firms
Many unprofitable companies are leveraging the surging stock market to sell shares in their companies.
Since the end of March, almost 100 unprofitable companies, including GameStop Corp. and AMC Entertainment Holdings Inc., have raised money through secondary offerings, twice as many as coming from profitable firms, according to data compiled by Bloomberg.
Granted, troubled companies are tapping into buoyant demand during a 16-month rally to beef up their balance sheets. And it’s further evidence that the capital market functions as smoothly as it’s supposed to. Yet some warn that the flood of shares coming from money losers is becoming extreme.
During the past 12 months, almost 750 money-losing firms have sold shares in the secondary market, exceeding those that make profits by the biggest margin since at least 1982, data compiled by Sundial Capital Research show. “That perhaps points to companies getting greedy,” said Mike Bailey, director of research at FBB Capital Partners. “Anytime you have a bunch of selling by desperate companies,
“That perhaps points to companies getting greedy,” said Mike Bailey, director of research at FBB Capital Partners. “Anytime you have a bunch of selling by desperate companies, that could be a signal we’re closer to a top than a cyclical bottom.” In fact, the previous two periods in which unprofitable firms dominated the pool of equity offerings, the S&P 500 Index was either at the start of a bear
In fact, the previous two periods in which unprofitable firms dominated the pool of equity offerings, the S&P 500 Index was either at the start of a bear market, or already in one.
Well, bankers always tell unprofitable companies that they need more equity, not less debt. So, it’s certainly better that these firms are improving their balance sheets, thus allowing them to ride out a period of unprofitability. But it certainly could be a sign that the market is overheated, especially if companies with poor current and future prospects are able to tap strong equity markets.
The collapse of the Champlain Towers South building in Surfside, Florida, has already claimed 18 confirmed lives and is likely to be significantly higher as 145 people are still missing. This tragedy has important implications for condominium and rental buildings everywhere, as the costs to repair structural problems can be exorbitant. The WSJ had a visual analysis of the problems with the building.
A 2018 engineering report on the south tower released by the town alleged the building had a flaw that inhibited proper drainage, allowing water to pool near its base.
“The main issue with this building structure is that the entrance drive/pool deck/planter waterproofing is laid on a flat structure. Since the reinforced concrete slab is not sloped to drain, the water sits on the waterproofing until it evaporates. This is a major error,” Morabito Consultants, which has offices in Florida and Maryland, wrote. “The failed waterproofing is causing major structural damage to the concrete structural slab below these areas. Failure to replace the waterproofing in the near future will cause the extent of the concrete deterioration to expand exponentially.”
Condominium owners were set to begin making special assessment payments a week after the building’s collapse.
The Champlain Towers South condo association approved a $15 million assessment in April to complete repairs required under the county’s 40-year recertification process, according to documents obtained by CNN.
The documents show that more than two years after association members received a report about “major structural damage” in the building, they began the assessment process to pay for necessary repairs.
Owners would have to pay assessments ranging from $80,190 for one-bedroom units to $336,135 for the owner of the building’s four-bedroom penthouse, a document sent to the building’s residents said. The deadline to pay upfront or choose paying a monthly fee lasting 15 years was July 1.
Condominium associations are notorious for dragging their feet to complete needed repairs because no one wants a special assessment. Local governments are going to increase building inspections and enforcements, thus forcing buildings to take action sooner. But will every building have the resources to make these repairs? There will be buildings that need repairs, but the condominium owners may not have the resources, potentially creating unsafe zombie buildings. In Florida, Hurricane Andrew in 1992 led to much tougher building codes, so buildings constructed earlier are especially vulnerable to structural issues and exorbitant repair costs.
NCAA Opens Up College Athletes
Late last month, the US Supreme Court ruled against the NCAA for violating antitrust law by limiting academic benefits for student-athletes. The NCAA then voted this week to allow student-athletes to make money of their brands, thus setting up a frenzy of activity between brands and athletes.
Companies that sell everything from fast food to protein powders are preparing to court student-athletes after the National Collegiate Athletic Association moved to transform the world of college sports and players’ ability to make money.
The NCAA voted on Wednesday to allow student-athletes to exploit their names, images and likenesses — a move that will let players profit from autographs, social-media posts and commercials. With the landscape set to change after decades of strict rules, brands such as Six Star Pro Nutrition are looking to lock in deals with newly eligible athletes.
The potential for partnerships goes beyond just promoting brands and products and could result in big payouts for autographs. Fanatics Inc., a sports-licensing giant with partnerships across the college landscape, expects to connect with student-athletes to make merchandise and collectibles.
“We look forward to doing this the right way and build long-term value for the student-athletes and our campus partners,” said Derek Eiler, an executive vice president for Fanatics’ college division. “This is an evolutionary day in college athletics.”
Jim Walter, a sports agent, and CEO of YSK Agency, gave us some context on what this all means.
“It is arguably the biggest day in college sports, perhaps all sports, since Title IX was passed in 1972.
Today’s college student athletes are resilient. They are hometown heroes and have an acute understanding of social media and personal branding on a national scale. These young men and women are exceptional at leveraging their NIL for unique influence. It is incredible that they now have the ability to defray and diminish the cost of living and support their families.
The floodgates are now open, and the student athletes are no longer deprived of the Hallmark of American business — simply the opportunity and chance to turn their brand into their own business.
There is a lot of uncertainty from all parties. However, it is truly refreshing to hear first-hand how respectful and ready both the student athletes and national brands are to partner together to change the collegiate landscape. The rules and governance are being written right before our eyes. Today is truly evolutionary.”
The 9MM Midwest CRA Portfolio
Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The 9MM Midwest CRA Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:
- A total outstanding balance of $8,981,900 comprised of three loans to two borrower relationships
- The loans are secured by first mortgages on 7 multi-family buildings, located in Chicago, IL and Dayton, OH
- This newly originated portfolio has a weighted average coupon of 5.822%, a weighted average LTV of 69.7%, and all loans have prepayment penalties
- All loans include full personal guarantees with a weighted average FICO of 731
- All of the properties are located in low- and moderate income geographies, thus helping institutions meet Community Reinvestment Act (“CRA”) requirements
- Sale announcement: July 1, 2021
- Due diligence materials available online: Tuesday, July 6, 2021
- Indicative Bid Date: Tuesday, July 27, 2021
- Closing Date: Thursday, August 19, 2021