Last week, we received the inflation data showing that the consumer price index (CPI) rose 0.3% in January month-over-month, according to Jeff Cox of CNBC. The year-over-year inflation rate was 3.1%, a decrease from the rate of 3.4% in December. The shelter prices played a significant role in the rise, increasing by 0.6% monthly and accounting for over two-thirds of the overall increase. On a 12-month basis, the cost of shelter increased by 6%.

Source: CNBC (February 2023)

Lucia Mutikani of Reuters reports that rent prices are a major reason for elevated inflation levels and that January is typically a strong month for inflation. Core CPI was boosted by a 0.6% jump in shelter after gaining another 0.4% in December. Owners’ equivalent rent (OER)—the amount homeowners would pay to rent—also increased by 0.6%, the largest jump in nine months. Despite this, Mutikani reports that this will not reduce the likelihood of rate cuts in 2024.

JPMorgan Chase comments on the current inflation picture:

“The persistent inflation in housing, services and food underscores the ongoing challenges facing the economy in achieving the Federal Reserve’s inflation targets. As a result, the Federal Reserve’s monetary policy path appears to be one of caution, with future adjustments heavily dependent on a lagged drop in housing costs over the course of this year. While the peak inflationary pressures of 2022 have subsided, the journey towards economic stabilization and price stability remains complex and contingent on careful policy navigation.”

Andrea Shalal of Reuters reports that Janet Yellen says that inflation is decreasing: “I think it is a tremendous mistake to focus on minor fluctuations and to have failed to see the longer-term and bigger trends. And the trend here is that inflation is moving decisively down.”

Sarah Marx of HousingWire reports on mortgage rates, which increased by 13 basis points due to a robust inflation reading. The average 30-year and 15-year fixed rates have gone up to 6.77% and 6.12%, respectively. Further, the average 30-year fixed rate for conventional loans increased to 7.09% this week from last week’s rate of 6.91%.

Foreclosures and distress

ATTOM Data Solutions recently released its U.S. Foreclosure Market Report for January 2024. According to the report, 33,270 properties in the U.S. had foreclosure filings, which include default notices, scheduled auctions, or bank repossessions. This shows a 5% increase compared to the number of properties in the same period last year and a 10% increase compared to the prior month.

Source: ATTOM Data Solutions (February 2023)

Rob Barber, CEO at ATTOM, commented on the data:

“We observed a slight uptick in foreclosure filings, which may be partially attributed to the typical post-holiday progression of filings through the legal system…However, other external factors may be at play such as escalating interest rates, inflation, employment shifts and other market dynamics. We remain vigilant in monitoring these trends to understand their full impact on foreclosure activity.”

Sarah Marx of HousingWire reports on the ATTOM report, noting that in January, 19 states reported an increase in completed foreclosures, with Michigan, Minnesota, California, Pennsylvania, and Missouri witnessing the largest monthly spikes. Lenders initiated the foreclosure process on 21,770 properties, up 6% from December and 5% from the previous year. California, Texas, Florida, New York, and Illinois had the highest number of foreclosure starts last month. At the same time, New York, Houston, Los Angeles, Miami, and Chicago recorded the most significant number of foreclosure starts in January 2024.

There’s also increasing distress in the commercial market as well, according to Ryan Wangman of Bisnow. Reportedly, one-fifth of outstanding commercial real estate debt is due to mature in 2024, a total of $929B in debt obligations requiring a refinance or sale amidst higher rates and lower valuations. 

For instance, according to Jennifer Sor of Business Insider, Morgan Stanley expects a 30% drop in office property prices this year. The bank is looking beyond 2024, where another almost $1T in debt obligations will be due in 2025.

Regional banks

Speaking of distress, Paul Bubny of ConnectCRE reports on the Federal Government weighing closer scrutiny on regional banks due to the over-exposure to distressed commercial debt. 

“Twenty-two regional banks across the U.S. had portfolios of commercial real estate loans in late 2023 that federal regulators indicated would merit greater scrutiny, a sign more lenders may face pressure from authorities to bolster reserves.”

Maddy McCarty of Bisnow reports on the issue, noting that several regional banks including New York Community Bancorp, Japan’s Aozora Bank, and Deutsche Pfandbriefbank are causing concern among investors due to their commercial real estate debt exposure. 

McCarty continues that some lenders such as OceanFirst Bank and Valley National Bank are under scrutiny for having CRE exposure above regulatory guidelines. Borrowing costs and decreased property values are stressing loans in all industry sectors. More than $3T of commercial debt is set to mature in the next five years, and nearly 70% of all bank-held commercial real estate loans outstanding come from small banks.

Neil Callanan of Bloomberg reports on smaller bank exposure to downside risk, highlighting that “CRE credit makes up more than 40% of some lenders’ loan books and the Fed is working with community and regional banks with concentrated exposures to commercial property. That includes coming up with a plan to work through expected losses.”

Source: Bloomberg (February 2023)