Restaurant Same-Store Sales Match Declining Real Average Weekly Wage Growth Declines

First, we have the retail chain closings that adversely effected REITs and CMBS. And Columbus, Ohio’s own Limited Stores announced in January that it is closing ALL 250 of its stores. And even Victoria’s Secret and Bath and Body Works are closing in Scranton, PA’s iconoic Steamtown Mall.

Now we have restaurants falling by the wayside but we can’t blame that on Amazon or digital competitors.  The National Restaurant Association (NRA) released its same-story sales index for February and it shows continued weakening (although an improvement from August 2016).

Restaurant closings? Florida-based Bloomin’ Brands (NASDAQ: BLMN), the parent company of Outback Steakhouse, Bonefish Grill, Carrabba’s Grill, and Fleming’s Steakhouse, announced last week the company will shutter 43 of its 1,500 underperforming locations in 2017. 43 out of 1,500 stores is small relative to closing all Limited Stores. Even Appliebee’s, Chili’s, Ruby Tuesday’s, Buffalo Wild Wings and Magianno’s Little Italy restaurants are facing a bleak 2017.

While you can get delivery from many more restaurants than you used to, restaurants are not feeling the pinch like retail stores.  Still, sagging wage growth is the culprit for both retail and dining out.

CMBX, the reference security for CMBS, has generally followed the stagnating wage growth since early 2015.

So while Amazon and the digital shopping trend is partly to blame. stagnant wage growth is another factor.

With stores closing at Scranton’s Steamtown Mall and Chili’s closing stores, where will Michael Scott get his baby-back ribs?

 

 

Ratings Shopping Haunts Commercial Mortgage Bonds as Risks Rise

The retail slaughter caused by on-line shopping (Amazon effect) and sluggish wage growth since The Great Recession are taking a toll on large shopping mall stores and, as a consequence, commercial mortgage-backed securities (CMBS).

(Bloomberg) – Matt Scully and Adam Tempkin – Only a decade ago, global investors got a hard lesson about the dangers of relying on rosy bond ratings. Now they’re getting a reminder — this time in frothy corners of the $528 billion U.S. commercial-mortgage bondmarket.

As delinquencies on loans rise, some ratings firms are walking back their grades on bonds tied to properties like shopping malls and office towers, just a few years after assigning them. DBRS Inc. last month lowered the AAA ratings it had given 294 interest-only bonds after realizing it had been too lenient. Also in March, Kroll Bond Rating Agency Inc. cut some of its grades on a $1 billion bond issued in 2014, citing weakness in Texas loans exposed to energy prices.

The reversals underscore how forces that brought trouble to financial markets before are still percolating through Wall Street today. No one sees the dangers as being nearly as grave as they were during the home mortgage bust. But the same ratings business model used during that period still prevails — meaning that the banks that put together debt securities still pay for the credit grades, and they can shop around for the firm that will give them the highest ratings under the loosest criteria.

According to Trepp, retail delinquencies have risen to 6.12% as of March 17, 2016 (following only industrial loans).

And a foreclosure appeared in the WBCMT 2007-C32 CMBS deal (Rockvale Square in Lancaster, PA). Not to mention a non-performing property in teh BSCMS 2007-PW15 deal.

The WBCMT 2007-C32, a Wachovia deal, is now rated at CCC+ or lower for tranches B through D. Tranches E and F are rated as D by S&P. The H tranche, rated as C by Moody’s, has eaten $15.5 million in losses thus far. Tranches J and K are gone after sustaining losses of $56.6 million and $33,46 million, respectively. At least tranches A1, A2 and APB paid off with no losses.

And with delinquencies rising over the last year, the retail forecast is gloomy.

Parks and Recreation’s Tom Haverford may have to change his tune on “things are forever.” Particularly if shopping at Macy’s , Sears, JC Penney’s, The Limited, Abercrombie and Fitch, etc. 

Yes, Tom, you can buy things on-line. Unless your wages are slow to grow and you have accumulated significant debt. Particularly during the worst wage recovery after recession in modern history.

 

Zillow:10.5% National Negative Equity Share Declining (But Chicago And Las Vegas Have 2X National Rate)

According to Zillow (and their methodogy for calculating “underwater mortgage loans”), US negative equity hit 10.5% in Q4 2016. That is a considerable improvement of the peak of 31.4% in Q1 2012.

But more than 55 percent of all homeowners in negative equity nationwide were underwater by more than 20 percent as of the end of Q4.

Where are the negative equity “zones”? Not on the West Coast. The West Coast is home to all five major metros with the lowest rates of negative equity. As of the end of 2016, Las Vegas and Chicago had the highest rates of negative equity among the largest U.S. metros, with 16.6 and 16.5 percent of homeowners underwater, respectively.

How about EFFECTIVE negative equity rates? Even though a borrower may barely be in positive territory, brokerage fees (say 6%) on sales can push the homeowner into negative territory. The national average for EFFECTIVE negative equity still exceeds 25%.

Let’s compare Washington DC with Prince Georges County in Maryland. The share of homes with a mortgage in negative equity is almost double in PG County compared with DC. The same holds true for the shares in EFFECT negative equity (that is exactly double the rate of Washington DC).

To show how much Phoenix AZ has improved in terms of negative equity, Phoenix now has the same negative equity share as Washington DC: 10.5% and the US. But Maricopa County has a larger EFFECTIVE negative equity share of 27.3%.

But how about Chicago, home of the World Series Champion Chicago Cubs? Negative equity in Chicago is even worse than it is in Prince Georges County in Maryland!

How about Lackawanna County, PA, the home of Scranton and the Dunder-Miflin regional sales office? Even worse negative equity problems than Chicago!!

The WORST negative equity county in the US? Pulaski County in Missouri, home of the US Army’s Fort Leonard Wood with a 47.4% share of negative equity mortgages and  76.1% share of EFFECTIVE negative equity mortgages.

Despite the improvement of negative equity in the US, a number of counties (many rural) are still struggling which is an impediment to both mortgage refinancing and mortgage purchase lending despite near-record low mortgage rates.

Jurassic Banking: Shadow Banking Is Getting Bigger Without Getting Better

There is an interesting article on Bloomberg entitled “Shadow Banking Is Getting Bigger Without Getting Better” 

Taxi companies that compete with Uber and media companies that are up against Facebook know it: In a rivalry between regulated and unregulated firms, the latter have an unfair advantage. It also applies to banks, which spent the past ten years losing market share to companies that regulators ignored.

In a fresh working paper, Greg Buchak and Gregor Matvos of the University of Chicago, Tomasz Piskorski of Columbia Business School and Stanford’s Amit Seru calculated that between 2007 and 2015, so-called shadow banks have increased their share of the U.S. Federal Housing Administration mortgage market sevenfold to 75 percent. That’s the market where the less creditworthy borrowers get their loans. In the U.S. mortgage market as a whole, shadow banks held a 38 percent share in 2015, compared with 14 percent in 2007.

This is not really surprising since non-depository financial institutions have risen in force thanks in part to Washington DC’s penchant for trying to regulate anything that moves (Dodd-Frank, Consumer Financial Protection Bureau, etc.) But the growth of “shadow banks” is also linked to a growth in more risky FHA-insured loans.

And with FHA-insured loans having 4 times the serious delinquency rate than loans purchased by GSEs Fannie Mae and Freddie Mac, this is represents a dramatic shift in banking and risk taking.

As Gerald Hanweck and I showed in a recent paper, bank failures following the housing bubble and financial crisis boomed in  2009 and 2010. Most of these bank failures were small banks. This resulted in bank aggregation into progressively larger banks. These were failures of depository institutions and shadow banks (non-depository institutions like Quicken Loans) have stepped in with riskier loan profiles.

The result? The rise of the mega-banks.

As Professor Ian Malcolm said in the movie Jurassic Park, life will find a way. Including subprime lending. Welcome to Jurassic Park, where Senator Elizabeth Warren and CFPB Director Richard Cordray still believe that they can control the banking system.

 

Freddie Mac Serious Delinquencies Fall To Lowest Since June 2008 As Home Prices Grow At 5.87% YoY Clip

Freddie Mac reported that the Single-Family serious delinquency rate in February was at 0.98%, down from 0.99% in January.  Freddie’s rate is down from 1.26% in February 2016.  That is the lowest reading since June 2008.

Notice how tame serious delinquencies were during the housing/credit bubble. The US seems to be repeating the housing bubble in terms of house price growth and low serious delinquencies, but without the higher levels of mortgage originations to borrowers with credit scores less than 620.

Bear in mind, the Case-Shiller reading is for January and it is almost April. Be that as it may, home price growth is at 5.73% YoY versus wage growth at 2.3% YoY, over 2x. And yes, Seattle, Portland and Denver lead the nation in YoY growth in home prices. The slowest growing cities? New York City and Cleveland (the Shooting Guards JR Smith/Iman Shumpert effect having been traded from the Knicks to the Cavaliers).

It says here that when home prices are growing at two times wage growth it would mean we have a housing bubble … again.

 

 

 

US 1-Unit Housing Starts Increase 6.47% In Febuary, Back To 1993 Levels (Despite 25% Increase In Population Since 1993)

According to the US Census Bureau, housing starts rose 2.96% in February.

However, 1-unit (detached) housing starts rose 6.47%, finally getting back to 1993 levels. However, the US population rose 25% from 1993 to 2015.

Of course, there is also multifamily housing which fell -7.69% in February. But the general trend in multifamily starts has been higher in recent years than before the financial crisis and housing bubble.

Housing starts in the West rose 35.71% in February while other regions were down. Authorizations (permits) showed the same pattern except for the Midwest which rose 25.38% with all other regions declining.

After all, with the Cleveland Cavaliers as the reigning NBA champions and the Cleveland Indians making it to the World Series (before losing to the Chicago Cubs), it is not surprising that housing permits are up in Ohio.

Oh wait. I forgot about the Cleveland Browns that won only one game last year. Perhaps they should change their name to the Cleveland Gremlins. 

 

 

Size Does Matter! Can You Spot The Financial Crisis? (Chart of US Bank Failures)

Here is a chart of US bank failures from 2000-2017. Can you spot the financial crisis?

What is particularly notable is that there were 3,002 financial institutions that have failed since 1970 and 586 that have received assistance. Of the 15 FIs that have $19 billion or more in total assets, all received assistance except three. The vast majority of FIs with total assets below $19 billion were allowed to fail.

Bank Failures_1970_2017abs

So, size DOES matter!