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Fed Chairman Jay Powell is on the Hill delivering the Fed’s semiannual report on monetary policy to the Senate and House. He told the House Committee the Fed is likely to raise interest rates in the coming months but at a slower pace than they have moved over the past year, weighing the risk that the combination of their 10 consecutive rate hikes and recent banking stress is more than enough to slow the economy to tame inflation (perhaps causing an deeper economic downturn than expected) against the risk that the combination of economic strength of the first two quarters and inflation staying elevated may require additional tightening. Powell pushed back on the notion that last week’s pause was indeed a pause, signaling the Fed will not hesitate to take future action on inflation.
In the absence of recent negative headlines around regional bank stress in the US, Morgan Stanley said they believe there is complacency setting in while “key data points on bank balance sheets show that things have worsened on the margin since March.” We’ve been watching this relative to its potential impact on the commercial real estate loan refinances expected in the next 12-18 months.
Green Street said commercial deals are down a “stunning” 70% year over year.” With the U.S. vacancy average at 18 percent for office properties verses 3.8 percent for industrial properties, and given a lower per-square-foot cost relative to conversion to residential brokerage firm, a Newmark report find conversions from office to industrial are on the rise. Although delinquency rates for office properties are low, with office vacancy rates on the rise, the Financial Stability Oversight Council (FSOC) said Friday that they are stepping up scrutiny of how exposed banks are to commercial real estate.
Meanwhile, a slight decline in 30-year fixed rates over the past few weeks was met with a Mortgage Bankers Association (MBA) report that purchase applications increased “driven by a 2 percent gain in conventional purchase applications and a 3 percent increase in FHA purchase activity,” according to Joel Kan, MBA vice president and deputy chief economist. (The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.73 percent from 6.77 percent, MBA said)
The American Bankers Association’s Economic Advisory Committee said they expect credit conditions to tighten the rest of the year and loan losses to rise. Still, given the low inventory, the Census Bureau and HUD jointly reported this week that privately owned housing starts in May hit a seasonally adjusted annual rate of 1,631,000, 21.7% above the revised April estimate of 1,340,000 and up 5.7% year-over-year. The May rate for units in buildings with five units or more hit 624,000. Single-family housing starts were just shy of 1 million at 997,000, or 18.5% above the revised April figure — the largest single-month jump since June 2020 which occurred as the market rebounded from the initial shock of the COVID pandemic.