Some time ago, I mentioned that the real estate industry in the United States is also not doing well. According to foreign media exposure, the current U.S. real estate and related banking industries have already shown signs of crisis, and may be on the verge of a major collapse.
Is the U.S. real estate market about to collapse due to the Federal Reserve's interest rate hikes?
According to leaks, the bad debts in real estate held by the six major U.S. commercial banks have exceeded their reserves. This means that the non-performing loans related to real estate in U.S. commercial banks have risen sharply, even surpassing a certain threshold. As the saying goes, out of 10 financial crises, 8 are led by the real estate sector.
So, how is the crisis in the U.S. real estate and banking industries progressing now? What is the actual situation? And how does this affect the global economy and China? Today, let's discuss this topic.
U.S. Real Estate Crisis? Imminent Bad Debt Explosion.
Since 2020, the U.S. real estate market has not been in good shape.
At the beginning, the pandemic led to a continuous increase in the vacancy rate of office spaces across the United States, with major companies starting to consider reducing office space and adopting remote work models. This led to the first pressure on the U.S. real estate industry.
The vacancy rate of U.S. commercial real estate soared, basically reaching 25%.
The real crisis actually began in March 2022, when the Federal Reserve, in response to the terrifying inflation crisis, chose to adopt an epic interest rate hike approach. Although this successfully curbed inflation within just one year, the side effects were also very obvious, especially for the U.S. real estate industry, it was a huge crisis.
This is because, after the Federal Reserve raised interest rates, funds deposited in U.S. banks could enjoy interest rates as high as around 5%, with some products even higher.Similarly, if one were to purchase a home in the United States, it would mean taking on a mortgage interest rate that could be as high as 7% to 8% annually. Such a high interest rate is unacceptable for Americans who were enjoying loan interest rates of around 1% to 2% just a few years ago.
As a result, we can see that by the end of last year, the vacancy rate for office buildings in the United States had reached as high as 25%, and this is in major cities like Houston and Los Angeles. If we consider smaller cities, the vacancy rate for office buildings could be even higher.
The downturn in the real estate market leads to a continuous decrease in the number of people buying homes. This will cause the price of real estate in the United States to keep falling. Since the Federal Reserve started raising interest rates, the price of commercial real estate in the United States has already fallen by 11%.
The decline in commercial real estate prices in the United States places a huge burden on American banks.
The drop in commercial real estate prices also means that there have been a series of issues with property valuations, which is the "commercial real estate crisis" in the United States.
As we all know, the American financial system is actually inseparable from the real estate industry. Many financial crises before 2008 were caused by the real estate sector collapsing first and then affecting the American financial system. The current situation is similar.
According to data, by the end of next year, the total amount of commercial real estate loans in the United States will reach as high as $1 trillion, and by 2027 it will reach $2.2 trillion.
With the massive loans come even more non-performing loans.
At the beginning of the article, we mentioned that the Financial Times disclosed the sharp increase in non-performing loans in American commercial real estate. Even the safest American commercial banks, such as JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley, have seen their loan non-performing assets exceed their loss reserves.
This means that American commercial banks have been dragged down by real estate projects. There are serious non-performing loans. The IMF also warns that the price of commercial real estate in the United States is experiencing the most severe collapse in half a century.U.S. commercial real estate prices are experiencing the steepest plunge in 50 years!
So, who will fill the gap? In fact, no one can take responsibility proactively, but the bad debts have been disclosed. If the U.S. banking industry cannot underwrite this, then a financial crisis will emerge.
Can U.S. commercial banks withstand this crisis?
Overall, the ultimate responsibility still depends on whether U.S. commercial banks can survive this crisis, and the current U.S. banking industry is also struggling to protect itself.
About six days ago, the Federal Reserve announced the fourth "stress test" scenario for the U.S. banking industry. This test is another one after the U.S. banking industry crisis in March last year and the collapse of Silicon Valley Bank.
The U.S. banking industry will undergo an annual stress test, with hypothetical scenarios set more severe than ever before.
The Federal Reserve's intention is to see if the U.S. banking industry has enough funds to lend to American households and businesses under extreme conditions of unemployment rates at 6.5% and 10% peaks.
In such extreme scenarios, it is assumed that U.S. housing prices will fall by 36%, and commercial real estate prices will drop by 40%. It can be said that the Federal Reserve's concern is necessary because the current inflation crisis in the United States has not ended, and domestic CPI and PPI indices have even shown an increase on a month-over-month basis.
Therefore, not only investment institutions and financial markets have generally postponed the interest rate reduction cycle, which was originally scheduled to start in March, to June, but some economists have even suggested that the Federal Reserve should continue to raise interest rates to first reduce domestic inflation.
Maintaining high interest rates is actually disadvantageous to large financial institutions like U.S. banks. On the one hand, it will lead to the continued collapse of the U.S. real estate industry. On the other hand, a large number of banks have purchased a lot of government bonds and commercial real estate loans during the low-interest-rate period. Now, with the continuation of high interest rates, these assets will devalue and provision for bad debt losses, thereby threatening the liquidity of banks.The U.S. financial system, already lacking liquidity, is now facing issues with liquidity.
Previously, the U.S. financial system was supported by overnight reverse repurchase agreements with up to $2 trillion in liquidity funds. However, as the Federal Reserve continuously reduces its balance sheet, this portion of funds has decreased to below $500 billion and continues to trend downward.
Although the Federal Reserve paused interest rate hikes since the middle of last year, the U.S. federal funds rate remains at a high level of 5.25%-5.5%. This implies that U.S. liquidity is continuously being drained.
The U.S. liquidity crisis requires vigilance from China as well.
Although interest rate hikes can effectively curb inflation, the situation over the past six months indicates that the side effects of interest rate hikes are continuously emerging, brewing one crisis after another within the U.S. economic system.
The U.S. real estate market has collapsed due to interest rate hikes, with commercial real estate loans becoming insolvent and non-performing loans soaring; meanwhile, the liquidity of the U.S. financial market is being continuously "bled" by the Federal Reserve's balance sheet reduction, which severely threatens the capital security of U.S. banks. Even though the U.S. stock market appears to be very booming, there are also hidden concerns due to insufficient liquidity.
The Federal Reserve's balance sheet reduction indeed leads to a lack of liquidity in the U.S.
Compared to the Chinese financial system, the U.S. financial market is undoubtedly more tightly integrated, which is an excellent system during normal times. However, if there is a problem in one place, it will transmit a crisis. At this time, it must be resolved with "massive liquidity injection."
For China, although the U.S. is very far away from us, the impact of the financial system still exists. Just like the 2008 financial crisis, if the U.S. encounters a crisis, it will inevitably be accompanied by massive liquidity injections and other impacts on our country's financial market.So for China, it is very important to raise awareness of disaster prevention and preparedness, and our real estate industry is also in a downward trend due to economic cycles and other reasons. Therefore, we also need more favorable policies to help the industry recover and warm up.
Lower interest rates or raise interest rates? Powell is going to have a headache again.
In general, for American banks, is it correct to continue to tighten liquidity when the financial system lacks liquidity? Should we lower interest rates more quickly, or should we first solve the inflation problem and put aside the liquidity crisis, banking crisis, and real estate crisis?