Where shopping mall debt ends up

A story of several traders who shorted shopping mall debt provides insights into financial workings of shopping malls:

Photo by Magda Ehlers on Pexels.com

Then, in October 2018, Sears declared bankruptcy, and they decided it was time. Here was the scheme: MP built a position against two slices—called “tranches” in Wall-Street speak—of mall debt with, they thought, a relatively low likelihood of being repaid: CMBX.6 BB and BBB-, which were filled with roughly $2 billion worth of debt, an outsized chunk of which was issued to 39 struggling shopping malls. They bought credit default swaps on the block of debt, which amount to insurance policies on the bonds. If the bonds went completely bust—similar to, say, your house burning down—they would be owed their entire value in cash. But even if the tranches decreased in value, MP’s insurance would be worth more and they could sell the swaps for a profit. In any case, it was an asymmetric bet: the downside risk was confined to what they’d have to pay to hold the insurance, but the potential payout was many multiples of that amount—theoretically in the billions…

Meanwhile, McKee was becoming known on Wall Street as “The Queen of Malls,” and other bearish hedge funds began asking her for advice on shorting CMBX.6. “All I did was talk about malls all day,” she said. This included portfolio managers working for the infamous billionaire activist investor Carl Icahn, who, by the end of 2019, had put on a $5 billion short position, arguably the largest by anyone on Wall Street. This went against conventional wisdom at the time, considering that the value of the mall debt was going up, but once word got out that Icahn had entered the ring, the trade was taken more seriously on Wall Street. “That made a lot of people stand up and say, ‘Hold on, we should look at this,’” McNamara said…

Between March and July, as businesses struggled to pay their rent, CMBS delinquencies, according to Trepp, increased by a staggering 492 percent, the value of the hotly contested CMBX.6 tranches were slashed in half, and the brick-and-mortar retail sector was on the verge of going belly-up. Large retailers like Gap stopped paying rent; Neiman Marcus, J.Crew, Brooks Brothers, Ann Taylor, Loft, Pier 1 Imports, GNC, and JCPenney (among many others) filed for bankruptcy; Victoria’s Secret was closing hundreds of stores and Lord & Taylor announced it was closing its doors for good and liquidating inventory; TJX and Macy’s recorded losses of $5 billion and $2.5 billion, respectively; foot traffic for shopping malls plummeted to basically zero; and, in April, clothing sales fell 79 percent, the largest drop on record. “The economy has declared war on your aunt’s wardrobe,” Scott Galloway, marketing professor at New York University, mused on his podcast Pivot. As for Crystal Mall, Simon Property Group, its landlord, defaulted on the mortgage and is planning on handing over the keys to their special servicer…

COVID-19 also revealed a dirty secret hidden in the crawlspace upon which many commercial mortgage-backed securities were built. A University of Texas at Austin study published in August claimed that banks knowingly inflated underwriting income for $650 billion worth of commercial real estate mortgages issued between 2013 and 2019, including by 5 percent or more for nearly a third of the roughly 40,000 loans. “A well-documented historical pattern is that fraud thrives in boom periods and is revealed in busts,” the university researchers wrote, adding that end investors were unaware of this hidden risk, a deception akin to buying a Ferrari secretly outfitted with a rusted-out Kia engine. It could be argued that CMBS had been a magic trick all along, with big banks one step ahead, luring investors to pick a card from a rigged deck. It took a global pandemic—an act of God—to reveal this financial sleight of hand.

Americans and financial institutions were bullish about single-family homes into the 2000s, until they were not and the housing market imploded. Americans liked shopping malls…and is this a repeat?

Since the story suggests those shorting shopping malls are in the minority, does this mean other investors truly believe shopping malls will successfully reinvent themselves and or redevelop enough to successfully pay their mortgages? Or, are a lot of people hoping that shopping malls make it through?

The default of shopping malls could have a broad effect, particularly on communities that will struggle to fill that space and recapture some of the tax revenue that shopping malls could bring in. More broadly, the difficulties retailers face could impact a lot of people in multiple ways.

Percentage of delinquent FHA loans keeps rising

The economic and social consequences of COVID-19 might be just beginning. A new report suggests a number of FHA mortgage holders are behind in payments:

More than 17% of the Federal Housing Administration’s almost 8 million home loans nationwide were delinquent in August, according to a new study from the American Enterprise Institute.

“Rising FHA delinquency rates threaten homeowners and neighborhoods in numerous other metro areas across the country,” American Enterprise Institute researchers said in the just released report. “It would be expected that these delinquency percentages will increase over time…

The increase in late FHA loan payments is even greater than the rise in the number of overall mortgage delinquencies since the start of the pandemic…

A new study by the Federal Reserve Bank of Dallas warns that highly indebted FHA borrowers are at risk of losing their homes when payment forbearance programs end.

More people falling significantly behind on their mortgages – plus other issues related to housing – could have ripple effects on a number of actors:

  1. Americans who need housing. If you cannot afford your mortgage or rent, what viable options do you have?
  2. Mortgage providers. If a lot of mortgages go into default or foreclosure, what does this mean for these large financial actors?
  3. Local governments and communities. With larger numbers of people without housing and limited housing, what happens? What happens to local tax revenues?
  4. Housing investors and people with resources. Does this mean they can take advantage of opportunities?

The memory of the burst housing bubble just over ten years ago lingers. While few predicted a worldwide pandemic and the resulting impact on housing, we could know within a few months whether this will lead to another housing crisis.

Reminder: “Americans have no comparable safety net for housing”

Americans generally have limited options in obtaining with housing from the government:

With food and health care, we recognize that some number of people will have trouble paying for the basics, so our government provides a minimum standard of access through the Supplemental Nutrition Assistance Program (for food) and Medicaid (for health care). These programs are designed to expand and contract based on need (setting aside current politics).

Americans have no comparable safety net for housing. While the federal Section 8 program does provide rental assistance to low-income families, inadequate public funding means that fewer than half of eligible households actually receive a voucher. The inadequacy of our response has led to a variety of injustices: growing homelessness, overcrowding in small or substandard apartments, and housing costs that squeeze families’ ability to pay for child care, transportation, and other essential needs. Policymakers and housing advocates, especially some of the great ones we have in Massachusetts, have worked hard to cobble together different low-income housing programs and subsidies that help many of these needy families. But it’s a patchwork approach that leaves far too many behind.

And then those who compete in the “free market” may also have few options:

There’s also a second crisis, which affects middle-income families headed by people such as teachers, salespeople, nurses, and retirees living on fixed incomes. This crisis is more directly tied to housing cost. If our private market was functioning properly and producing diverse, family-friendly housing, these families would be able to afford decent housing options without needing public subsidy. But they increasingly struggle to do so. This problem is especially pronounced in Boston’s suburbs, many of which have a long history of banning the construction of townhomes, duplexes, triple-deckers, and modest apartment buildings that would serve these middle-class families. Thanks to these extreme prohibitions, many of our region’s suburbs have instead seen a trend towards larger, and pricier, McMansion-style homes.

Addressing housing may the toughest issue to address in the United States. Still, ousing is a basic human need and not having adequate or consistent housing has detrimental effects on residents. Providing food, health care, and other necessities can help but may not mean as much without a good home.

As an earlier post noted, Americans have supported/subsidized mortgages for single-family homes but this has not benefited all. The system is not really a free market; it helps some people make money, some residents to benefit from long-term property value increases (and then pass on this wealth to future generations), and others to struggle to get into the system. The federal government – and the American people in general – have had little appetite for big government housing programs. Not even a burst housing bubble in the late 2000s truly altered the rules of the American housing game.

Given the number of people affected, perhaps this will eventually grow into an issue that cannot be ignored. But, given the lack of attention this gets during this election season, I am not hopeful with will be adequately addressed soon.

Black homeownership down to nearly 41% – and housing values down

The two largest minority groups in the United States are headed in different directions regarding homeownership:

While Hispanic homeownership rate is on the rise, the black homeownership rate has fallen 8.6 percentage points since its peak in 2004, hitting its lowest level on record in the first quarter of this year, according to census data.

This divergence marks the first time in more than two decades that Hispanics and blacks, the two largest racial or ethnic minorities in the U.S., are no longer following the same path when it comes to owning homes.

Analysts say black communities have struggled to recover financially since the housing crisis, which has kept homeownership out of reach. A decades long legacy of housing segregation has also made many would-be black buyers wary of returning to the market after losing their homes…

Homes in neighborhoods with a high concentration of white borrowers on average have seen their homes appreciate 3% from 2006 through 2017, according to the study. However, homes in neighborhoods with a concentration of black borrowers on average are worth 6% less than they were in 2006. High-income black borrowers have concentrated in neighborhoods where homes have lost 2% of their value, compared with white borrowers, who have concentrated in neighborhoods where homes have appreciated 5%.

According to the first quarter homeownership rates reported by the Census Bureau: whites have a rate of 73.2%, Hispanics are at 47.4%, and blacks are at 41.1%. These are off from peaks of 76.0% for whites in 2006, 50.1% for Hispanics, and 48.6% for blacks in 2006.

This is a contributor to inequality that gets relatively little attention. If homeownership rates are low for a particular group, not only does that mean a different present experience (renting versus owning), it has significant long-term consequences for building wealth. When whole neighborhoods have relatively low homeownership rates plus the properties there do not appreciate much, the effects can last decades.

Where are the 2020 presidential candidates in discussing homeownership as an issue Americans care about?

Consequences of suburbs growing, back to city movement declining

Willing Frey at The Brookings Institution sums up recent trends in growth rates among cities and suburbs:

As we approach the end of the 2010s, the biggest cities in the United States are experiencing slower growth or population losses, according to new census estimates. The combination of city growth declines and higher suburban growth suggests that the “back to the city” trend seen at the beginning of the decade has reversed.

These trends are consistent with previous census releases for counties and metropolitan areas that point to a greater dispersion of the U.S. population as the economy and housing market pick back up, perhaps propelled by young adult millennials who may be finally departing dense urban cores as they make a delayed entrance into marriage and the housing market…

Primary cities vs. suburbs growth rates

In both regions, city growth exceeded suburban growth in the early years of this decade, where Sun Belt growth in both cities and suburbs exceeded Snow Belt growth. As the decade wore on, city growth declined in both mega-regions while suburban growth remained higher. This is evident when looking at the individual metro areas in each region (download Table C). In 2011-2012, city growth exceeded suburb growth in 19 of the 34 Sun Belt metros, and in eight of the 19 Snow Belt metros. However, in 2017-18 the city growth advantage appeared in just nine Sun Belt metros and two Snow Belt metros. Among these 11 areas that still registered city growth advantages are: Los Angeles, Washington, D.C., San Francisco, Denver, and Boston.

It is helpful to see the longer trends in the data, particularly when lots of media outlets want to jump on one-year estimates (such as Chicago’s recent population loss).

While it is helpful to compare cities and suburbs (and these changes do matter for a lot of reasons, including perceptions), I wonder how much this covers up larger changes across metropolitan regions or feeds narratives that cities and suburbs are locked in mortal competition. All of the above data could be true while Sun Belt regions continue to grow at a strong rates. Regions could think about policies as a whole that would enhance conditions for many more people than just those in cities or suburbs.

Finally, I’ve written before about how it would likely take decades to unseat the primacy of suburban life in the United States. Was the back to city movement or great inversion just a blip on the radar screen? Or, will it cycle back at closer and closer frequencies? The global economic system may have something to do with this – what happens with the next major downturn? – yet overcoming decades of expressed preference for suburbs will not be easy.

The late 2000s “global economic meltdown” and values of McMansions

One columnist connects the economic crisis of the late 2000s and McMansion values:

Perhaps you thought the last decade’s global economic meltdown, which crushed stock prices and McMansion values, would most hurt the wealthy. Nope. The gap between rich and poor in the U.S. expanded in the aftermath of the Great Recession. The (sarcastic) good news: America’s wealth gap expanded less than Bulgaria’s between 2010 and 2017.

Three quick thoughts:

  1. McMansions are often cited as a symptom of the problems that led to the economic crisis and housing bubble of the late 2000s. The spirit of consumption in the United States with lenders providing more and more risky loans (and not recognizing the problematic loans and then selling and buying them as if they were good investments) plus decisions by consumers to purchase more and acquire debt all contributed to the larger issues. If you needed one symbol of excessive consumption from the early 2000s, commentators often go for the McMansion or the SUV.
  2. While the McMansion became an important symbol, housing prices almost across the board declined precipitously. Not just McMansions were affected. And since most American single-family homes are not McMansions, it seems a bit odd to single them out here. Many Americans who would not or could not purchase McMansions felt the effect of declining property values.
  3. Housing construction declined during and stayed depressed for a number of years after the economic crisis. Even during this down time, builders continued to construct McMansions. And once the economy started to pick up, more McMansions appeared. While the economic trends certainly affect how many McMansions go up, the style of home has some staying power. Even if such homes helped contribute to the economic crisis, some Americans still want to build and buy them. The value of such homes may not be the only reason people build and buy them.

New American homes continue to get smaller

Data from 2018 shows new homes in the United States are getting smaller:

NAHB data shows the average size of new houses fell for the third straight year in 2018. Median square footage of single-family houses decreased to 2,320 last year after peaking at more than 2,500 square feet in 2015.

Although still above the sub-2,200-square-foot medians hit during the Great Recession, the numbers suggest that entry-level buyers and those looking for starter homes might finally have more options in the coming years. It’s also good news for those who have had problems getting a mortgage because of credit issues.

Robert Dietz, NAHB’s chief economist, said the data probably indicates that home builders are turning toward middle-class housing after spending much of the current economic growth period focused on the high-end development.

In the aftermath of the housing bubble and the economic crisis, builders focused on higher-end buyers. With money to be made there and the limited ability of those with fewer resources to purchase new homes, bigger homes were the primary focus.

So what has changed? Lower class and middle class buyers may now again have the resources to purchase new homes. With a steady economic recovery (stock market up, unemployment down, wages relatively flat), homeownership may be attainable again for more people. The homeownership rate has been down during the last decade though up a little recently.

Just one reminder: the decreased median may not mean that fewer large homes are under construction – Americans do seem to want big homes – but rather that more smaller new homes were built.

Consequences of an auto loan bubble

With more financing options available for purchasing cars, American driving is up:

By increasing access to cars, lax financing standards also appear to be contributing to a national rise in driving, and with it, declining public transit ridership. In the latest edition of its biennial survey of who’s riding buses and trains in U.S. cities, Transit Center, a public transportation research and advocacy group out of New York, notes that the share of households without vehicles fell 30 percent between 2000 and 2015, with foreign-born residents, who are more likely to earn lower incomes and ride transit, posting even sharper declines.

In the survey, respondents who reported decreasing their bus and train use overwhelmingly replaced transit with private cars. And almost half of respondents who said they’d purchased a car over the past two years received a loan to finance it. Of those, 56 percent said that getting a loan “was easier than they had expected.”

Of course, improved car access among lower-income groups might look to be a positive trend on its face, since a personal vehicle can equate opportunity. So strong is the historic link between car ownership and household income that a trio of transportation equity scholars recently called for subsidizing access to wheels for poor Americans. But fewer rides made by public transportation and more by private automobile is a trend with consequences that transcend the U.S. economy: It feeds the planet’s existential problem of rising carbon emissions, especially since SUV and truck sales have become particularly popular during this auto-loan boom. “The rise in auto debt is evidence that we’re dependent on cars in an unsustainable way,” said Cross.

The new high-water line of defaulted auto loans also suggests that personal vehicles aren’t always golden tickets. Instead, for Americans living paycheck to paycheck, they’re a catch-22: If you don’t have the money and can’t buy a car, you’ll struggle to make ends meet. And if you don’t have the money, but still buy a car, you’re liable to fall even further behind. Vehicles may be the table stakes for playing in the U.S. economy, but in so many ways, it’s getting harder to win.

As noted by many, just as homeownership came within the reach of more people in the 2000s due to creative lending options and subprime options, the same is true of the auto industry. Does this mean that a burst bubble in car loans – due to many people being behind on their vehicle payments – would cause Americans to rethink driving and the reliance on personal vehicles?

I would guess no. At this point in American history, the country is too far in on its dependence on driving. It is not just about driving to work; driving offers opportunities to access cheaper housing, independence for drivers compared to utilizing mass transit which works on consistent schedules and requires being around other people, and a host of consumer and recreational opportunities primarily accessible through driving (think big box stores, shopping malls, fast food places, road trips, etc.). This list does not even account for the auto industry and the construction industry which have huge stakes in more driving.

At the same time, while Americans have resisted public housing, would they be more amenable toward government help in obtaining or paying for cars? Few communities or government agencies have provided cars or money towards cars but it may be necessary in a society heavily dependent on getting around via a car.

 

Housing bubble fallout: lost jobs in land subdivision

The long-lasting consequences of the housing crisis of the late 2000s continues: an analysis of the American industries losing the most jobs by percentage includes the land subdivision sector.

9. Land subdivision

• Employment change 2008-17: -49.3%
• Employment total: 40,207
• Wage growth 2008-17: +35.5%
• Avg. annual wage: $71,744

The U.S. housing market is beginning to return to normal following the Great Recession and housing market crash. Housing starts in 2017 were similar to 2007 levels, before the crash. The land subdivision industry, which divides land into parcels for housing and other purposes, suffered as a result of the market’s struggles. As of 2017, industry employment is just about half of what it was a decade before.

This was never a large sector but a drop in jobs of nearly 50% is substantial.

Since I know little about what land subdivision requires on a daily basis, I wonder if this decrease is primarily because of a slowdown in housing starts or are there other significant changes in the industry such as new efficiencies and approaches?

If “Ninety percent or so of renters still want to become homeowners,” what could this lead to?

Financial pressures might have pushed more Americans toward renting and lower rates of homeownership but that does not mean attitudes have shifted away from homeownership. From an overview of housing ten years after the burst housing bubble:

“There’s a remarkably high preference for homeownership that shows up in every survey of renters,” says Chris Herbert, managing director of the Joint Center for Housing Studies of Harvard University. “Ninety percent or so of renters still want to become homeowners. Certainly, young people are moving into homeownership more slowly, but that’s because of a host of reasons such as marrying and having children later, a reduced ability to save since the recession and that it’s harder to get a loan. It’s not because of a fundamental change in attitude.”

Let’s assume this desire for owning a home continues for at least a few years – and this is a consistent desire across multiple decades already. What might this lead to? Two different paths:

  1. The economy improves to the point where those who want to buy a home are able to. This may be difficult to imagine given the availability of high-paying jobs plus the return of housing prices to 2000s levels. Yet, homeownership has been higher in the past and might be again in the future as this is what Americans want. Historically, the federal government has helped Americans reach this goal.
  2. A changing economy plus high housing prices mean relatively few of those who want to own a home will be able to. Younger adults become frustrated by their inability to purchase a home, particularly compared to previous generations. They take out that frustration in various ways, perhaps including higher levels of stress or taking it to the polls (though I argue it will be difficult to have a national conversation about housing and proposals to address housing are often unpopular).

The homeownership rate will be very interesting to watch in the next ten to twenty years. While Americans promoted homeownership for over a century now, there is no guarantee it has to continue into the future if conditions make it very difficult for average residents to buy a house.