Situs’ Take on ‘Will They Or Won’t They’ (Raise Rates)
“The Fed finds itself in a pickle in considering when to push up short-term interest rates because of the uncertain effect it might have on the economy and financial markets in the short and long term,” says Ken Riggs, President of Situs RERC. “Further, this uncharted territory is going to create volatile consequences for the markets, and markets do not like uncertainty. However, GDP and inflation have stagnated and it is getting to the point where they have to raise rates and hope the markets are ready for the adjustment.”
Janet Yellen and Company meet Tuesday and Wednesday and the betting is that if the Fed does increase rates it will be by only a quarter-point.
Situs’ Riggs says, “There are pros and cons for commercial real estate should the Fed raise short-term interest rates. On the one hand, rising interest rates mean that the cost of capital will increase and borrowers will have to pony up more money in interest if they want to invest in CRE. On the other hand, interest-rate hikes typically signal that the economy is in better shape, which will lead to an increased demand (and subsequently higher pricing) in CRE. However, even if the Fed decides to raise interest rates, it is important to remember that rates will still be at historic lows and the availability of capital for CRE investment will be plentiful.”
It’s almost unheard of for the Fed to raise rates in an election year but Republican Presidential nominee Donald Trump claims Fed Chief Janet Yellen is instead doing what President Obama and Hillary Clinton want by keeping interest rates low.
“Yellen and central bank policymakers are very political, and Yellen should be ashamed of what she’s doing to the country,” Trump told CNBC, adding, “the Fed is not even close to being independent.”
“Open discussion on how the Fed is approaching the crisis is important,” says Situs Executive Managing Director Warren Friend. “The Fed tends to function more as a closed system, and this can tend to maintain a stalled culture. As evidence, it was Treasury Secretary Hank Paulson’s urging on the items that needed to be done that moved the Fed to “new” approaches. This is the typical ‘reaction at a precipice’ that can turn people into celebrities or goats.”
Trump said rates are being kept lower to bolster Obama’s legacy. With these low rates, Trump claims, the Fed has created a “false stock market.” “Any increase at all will be a very, very small increase because they want to keep the market up so Obama goes out and lets the new guy/girl raise interest rates … and watch what happens in the stock market.”
Situs’ Friend explains, “In the vein of what Trump meant to say, the history of the Federal reserve being able to adjust its course in anticipation of the next stages of the business cycle have been abysmal. And this is where the ‘politics’ of a decision may affect the Fed’s thinking; how many times in the past 50 years have we heard that the Fed does not want to be responsible for influencing the outcome of an election. This ‘action’ of no action still influences the economy; and the highly respected blog 538 tells us that all elections since the end of the depression have been determined based on the current economic environment.”
Hang on to your seats, we’ll have more coverage on Wednesday and Friday.
Banking Group Finds Fed Stress Tests Likely Illegal
A group that represents executives from some of the largest U.S. banks concluded in a paper that the Federal Reserve likely acted illegally in adopting central parts of its annual stress tests, the latest evidence that some in the banking industry are contemplating a potential lawsuit.
The Committee on Capital Markets Regulation, a nonprofit organization of academics and financial executives, was set to release the paper Thursday, and The Wall Street Journal reviewed a copy. The groups’ members include senior executives at big banks J.P. Morgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., and State Street Corp.
“We find that the Federal Reserve has likely not complied with the [Administrative Procedure Act’s] procedural requirements in adopting key aspects of its Comprehensive Capital Analysis and Review stress tests,” the paper says. Following those requirements “would result in better public policy outcomes and reduce the threat of a legal challenge to the Fed’s actions.”
A Fed spokesman declined to comment.
A draft reviewed by the Journal didn’t note any objections from the committee’s members. But on Wednesday evening, after the Journal contacted banks on the committee, the committee revised the paper to say Deutsche Bank AG objects to its findings. Later, a Citi spokesman said, “We have not reviewed the report and therefore cannot comment on its findings.”
The paper details the arguments banks could use if they sued the Fed over the stress tests, shedding more light on a possible legal framework to challenge a central piece of the regulatory regime adopted after the 2008 financial crisis. The Journal reported earlier this month that big banks were weighing a legal challenge to the tests.
read more: Wall St Journal
Deutsche Bank Could Pay $14 Billion to Resolve U.S. Probe Into Mortgage Securities
The U.S. Justice Department proposed that Deutsche Bank AG pay $14 billion to settle a set of high-profile mortgage-securities probes stemming from the financial crisis, according to people familiar with the matter, a number that would rank among the largest of what other banks have paid to resolve similar claims and is well above what investors have been expecting.
The figure is described by people close to the negotiations between Deutsche Bank and the government as preliminary, and they said it came up in discussions between the bank and government lawyers in recent days. It hasn’t been previously disclosed. Deutsche Bank is expected to push back strongly against it, the people said, and it is far from clear what the final outcome will be.
The Justice Department routinely opens high-stakes civil settlement talks with a tough posture, posing higher numbers than it might expect eventually to win, even from banks eager to close long-running probes, lawyers involved in current and similar negotiations say.
read more: Wall St Journal
Dollar-Hedging Costs Hit Treasurys
Yield tourism is getting expensive.
For much of the year, strong demand from Japanese and European investors seeking better returns for their money than they could get at home pushed up prices of U.S. Treasurys. Now, the rising cost of borrowing dollars overseas and investing them in the U.S. is amplifying the selloff.
The culprit is the cost of hedging against foreign-exchange swings in markets for cross-currency basis swaps and foreign-exchange forwards. The additional cost has all but erased the extra income Japanese investors could gain from buying Treasurys instead of lower-yielding assets at home.
Japanese investors this week would earn a minus-0.02% yield on a 10-year Treasury—after hedging their currency risk—even though the note was yielding 1.71%, according to Deutsche Bank AG. That is hardly better than the minus-0.04% the 10-year Japanese government bond yielded Thursday. At the beginning of the year, Japanese investors could have earned as much as 0.66 percentage point more with the same trade.
“That really removes the incentive for Japanese investors to buy 10-year Treasurys,” said Dominic Konstam, global head of interest-rates research at Deutsche Bank.
The yield on the 10-year U.S. Treasury note has risen 0.34 percentage point from its record low in July and is up five of the past six trading days. A continued rise in that rate, which serves as a benchmark for mortgages and other borrowing, could threaten a 2016 surge in refinancing that has been a boon to U.S. homeowners and banks.
read more: WSJ
Saudi Billionaire Closes on NYC’s Highest Pad for $88M
The buyer of 432 Park Avenue’s highest and priciest penthouse has closed on the unit for $87.7 million, property records show. The deal marks the sale of the city’s highest residence and the biggest closed sale in New York so far this year. But the purchase stands out for another reason: CIM Group, the property’s co-developer, provided the buyer a loan for nearly two-thirds of the purchase price.
The buyer, who according to sources is Saudi retail magnate Fawaz Al Hokair, closed on the apartment on Sept. 9 for a whopping $10,623 per square foot, property records filed with the city Thursday show. On a per-square-foot basis, that appears to be one of the priciest-ever done deals in the city.
The 8,255-square-foot full-floor penthouse was asking $95 million, or just over $11,500 per square foot. Al Hokair went into contract on the property in 2013, according to multiple news reports. The apartment features a wood-burning fireplace, heated bathroom floors and the building’s signature 10-foot-by-10-foot windows.
In a rather unusual move for a project sponsor, CIM provided the buyer with a $56 million loan to acquire the unit, records filed with the city on Thursday show. It was not immediately clear why the Los Angeles-based firm provided the purchase money mortgage. A spokesperson for CIM did not immediately comment on the financing.
read more: Real Deal
Rent’s Still Too Damn High
Rental costs remained high in August, continuing to pressure the budgets of most ordinary Americans.
Rent was 3.8% higher than a year ago for the fourth month in a row, the Labor Department said Friday. That compares to the 2.4% growth in average hourly earnings.
The booming cost of rent is concerning. It points to a market in which supply isn’t keeping up with surging demand and a reminder that Americans are uneasy about, or locked out of, home ownership.
And the effects are just as troubling as the causes. Options and mobility are limited, and other expenses get squeezed out.
The trend in higher rents has been consistent throughout the economic recovery, but monthly data can be choppy. Census data released earlier this week showed a more healthy economic picture than previously expected. Incomes rose 5.2% between 2014 and 2015 and poverty slid.
Census also released some data from its 2015 American Community Survey this week. One promising trend in that data was regional income convergence, Trulia economist Ralph McLaughlin wrote in a research note. Convergence is when income growth in lower income areas is larger than in high income areas.
Incomes in the lowest-income metros grew 5.3%, faster than incomes in all others. They also grew substantially faster than housing prices, which were up 3.1%.
Incomes in the highest-income metros also grew faster than home prices. But in the middle-income brackets, metro home prices grew much more quickly. McLaughlin’s data used home prices, but he told MarketWatch the cost of rent would tell the same story.
read more: Market Watch
Connecticut’s Great Island Seeks Record $175 Million
A Connecticut island going on the market for the first time in over a century is shooting for the moon: If it sells for anywhere near its asking price of $175 million, it could set a new record for most expensive residential property in the country, real estate veterans said.
The 63-acre estate on Long Island Sound, located about 50 miles outside New York City in the affluent suburb of Darien, is one of the priciest residential properties on the market, according to listing agent David Ogilvy of David Ogilvy & Associates Realtors. The record is currently held by the 2014 sale of a $147 million home in New York’s Hamptons, according to real estate appraiser Jonathan Miller.
Known as Great Island, the property is accessed via man-made land bridges. Built in the early 1900s, the main house has six bedrooms plus wings for staff and guests. The stone structure has views of the Sound from nearly every room, though the new owner will likely want to renovate the house, Mr. Ogilvy said. There are several additional homes on the property, one of which was built around 1850 but has been restored and expanded. With a private beach and a dock, the grounds also contain a boat house and small waterfront cottages.
The property has extensive equestrian facilities, including a 20-stall granite stable built at around the same time as the main house with an arched Guastavino tile ceiling similar to the one in Grand Central Terminal, Mr. Ogilvy said. There is also a Grand Prix jumping/riding arena, an exercise track, a sand dressage ring and bridle trails.
The estate is owned by the descendants of industrialist William Ziegler, who bought the property around 1900 and used it as a summer home after making his fortune in baking powder. His granddaughter Helen married Olympic show jumper William Steinkraus and became an equestrian herself before her death in 2012. The family decided to sell Great Island because the “next generation has moved to other places,” Mr. Ogilvy said.
read more: Wall St Journal