A lack of liquidity has widened the gap between investors buying and selling Treasuries, creating wild swings in bond yields.
This change means more volatility, with rate-sensitive growth stocks vulnerable as borrowing costs rise after a series of recent rate hikes by the Federal Reserve (Fed). But the CEO of a Washington, DC-based fintech company that operates an online investing platform says liquidity issues are affecting the economy far beyond bonds.
Ben Miller, who oversees the real estate crowdfunding platform Fund raising, estimates that the US economy is heading for a potentially catastrophic liquidity crisis. Banks that provide home loans cannot cover interest rates that have doubled, he said.
“The natural instinct is to see the borrower as the source of defaults, but there are circumstances where the borrower doesn’t default, but the intermediary lenders who took out the loans and raised them will eventually do default,” Miller said.
Miller also believes that lenders who borrow against their own loans will not be able to withstand soaring interest rates and will be especially susceptible to liquidity issues.
On his Fundrise “Onward” podcast, Miller explained what he thinks is the cause of what will be a national liquidity problem. Among his observations:
- $5 trillion in asset-backed loans now exist outside banks with far more debt and far less liquidity than before. Corporate borrowers are 300% more indebted than before the 2008 financial crisis.
- All companies with a home loan due in the next few years have “a lot more debt in the system than people thought.”
- Many unregulated non-bank lenders, mortgage real estate investment trusts, private equity funds, commercial mortgage-backed securities, residential mortgage-backed securities and secured loan obligations are involved in making loans that banks do not can’t cover.
- “I have met with some of the biggest banks in the world who have told me they have no cash” due to rising interest rates, Miller said. “It will play out. The question is, how bad will it be? »
- Small businesses are going to have a problem with all types of loans, including consumer loans, auto loans, business loans, and home loans. The biggest borrower of all is this hidden borrower, who is actually the lender.
- Retail businesses and offices will hit a wall. Offices were the most popular institutional asset class. “What’s going to happen, I believe, is that office and retail will become unfinanceable, and when a loan comes due, there won’t be any money left for it,” Miller said. “Working from home has made a lot of office space obsolete.”
Miller’s observations are not all catastrophic. He noted that banks “hated” the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted after the 2010 recession, but said he believed it would “save them by limiting the amount of the leverage they can provide”.
He also states that the big difference between now and the 2008 recession was that there were a lot of bad debts. Now, however, there are mostly good loans, especially in the regulated part of the market.
“There’s no credit problem like last time,” Miller said.
For investors, Miller says residential and rental real estate — particularly in the Sun Belt — as well as industrial real estate are resisting a downturn.
“I think housing will be a beacon of hope and will fall a bit but a lot less than expected,” Miller said. “Doomsday predictions (for residential real estate) are overblown. It’s not like 2008 when we had a lot of short-term ARMs (adjustable rate mortgages) and bridging products with individual borrowers.”
Learn more about Benzinga real estate investment
Browse passive real estate investment opportunities with Benzinga real estate offer filter.
Picture by Marcus Steidle of Pixabay
Comments are closed.