The Zhitong Finance App learned that the performance of US large and medium-sized bank stocks on Wednesday was far lower than the US stock market S&P 500 index. The S&P 500 bank stock index closed down 2.0% on Wednesday, while the S&P 500 index fell only 0.6%. The main logic behind this is that bank stock investors' concerns about US commercial real estate loans are growing.
After financial institution executives such as Wells Fargo CEO Charlie Scharf (Charlie Scharf) and Kuroishi Group President Jonathan Gray (Jonathan Gray) delivered speeches at the Sanford C Bernstein investor conference, investors feared that the US banking industry might suffer huge losses due to commercial real estate loans such as office buildings.
Wells Fargo CEO Schaf said on Wednesday that there will be losses in the office loan sector and that the bank is actively managing its portfolio. At the same time, he wants to reassure investors that the business in this sector is not “excessively concentrated.”
President Grey of Kuroishi spoke of an “unprecedented weakening” in the usage of old office buildings. At the same time, he pointed out that this field currently accounts for less than 2% of the company's real estate stock portfolio.
“The vacancy rate is over 20%, rental prices are falling, and corporate customers are clearly considering their space needs now given remote work and the future economic environment. Lenders are unwilling to be exposed to office buildings, buyers are unwilling to spend money, and valuations are declining.” Gray said during the Sanford C Bernstein conference.
However, Gray is still optimistic. He said, “The office building business is expected to account for about 3% of the US banking system, so the scale of potential losses is quite different from the pessimistic situation that occurred in the real estate market 15 years ago.”
Rick Meckler, a partner at New Jersey family investment firm Cherry Lane Investments, said quoting Wells Fargo's comments on Wednesday: “Investors' continued concerns about office market loan business have caused widespread damage to bank stocks.”
“This means that even if the scope of business in the US banking industry is sufficiently diversified, some groups will be impacted.” Meckler said.
Investors are concerned that commercial real estate is in crisis, and Bank of America stocks are “suffering” across the board
By the close of the US stock market on Wednesday, the stock prices of major commercial banks on Wall Street had declined across the board. Wells Fargo Bank (WFC.US) fell 2.9% at the close, Morgan Stanley (MS.US) fell 2%, and Bank of America (BAC.US) fell 1.7%. Goldman Sachs (GS.US) and J.P. Morgan (JPM.US) shares fell 1.3%, Citigroup (C.US) shares fell 0.9%, and Blackstone (BX.US) shares fell 0.9%. The KBW Bank Index, which covers these large commercial banks, fell 2.47%.
Investors in US regional bank stocks are once again under intense pressure following the bankruptcy of the Bank of Silicon Valley and First Republic Bank. KeyCorp (KEY.US) fell 5.9%, becoming the bank stock with the biggest decline in the S&P 500 bank sector index, followed by ZION.US (ZION.US), which fell 5.6%, and Citizens Financial (CFG.US), which fell 5%.
Also on Wednesday, the US Federal Deposit Insurance Corporation (FDIC) said that total deposits in the US banking sector fell by a record 2.5% in the first quarter.
Furthermore, unexpectedly strong job market job vacancy data strengthened the market's bets on further interest rate increases by the Federal Reserve, further dragging down the US stock market and the banking sector.
According to the US Department of Labor's JOLTS survey released on Wednesday local time, the number of job vacancies in April unexpectedly surged to the highest level in three months, reaching 10.1 million, which proves that the imbalance in the labor market continues. According to JOLTS data, the ratio of unemployed people to vacant jobs — a ratio closely watched by the Federal Reserve — rose to 1.8 in April, the highest level in three months. In a stable labor market before the COVID-19 outbreak, this ratio was around 1.2.
Musk, the richest man in the world, has issued repeated warnings: commercial real estate is rapidly collapsing
Tesla CEO Elon Musk, who has just taken back the “richest man in the world” title, recently tweeted that he is pessimistic about the US commercial real estate market and believes that the real estate market is facing a crisis that could collapse.
According to information, David Sacks, the former chief operating officer of PayPal, retweeted a tweet about the Los Angeles commercial real estate crisis on Monday. The tweet wrote, “The average office building in Los Angeles owes $230 per foot, and the only building sold this year was sold at $154 per foot. I lost a lot of money. Los Angeles' biggest landlord, Canadian giant Brookfield, has defaulted on loans worth more than $1 billion this year.”
Sacks commented, “The Los Angeles office building sold for less than the debt it was burdened with. The same goes for San Francisco and other big cities.”
In response to Sacks's tweet, Musk said, “Commercial real estate is rapidly collapsing, followed by (residential) housing prices.”
In fact, this isn't the first time Musk has expressed such pessimism. On May 13, Musk posted a tweet in response to and endorsed Chen Fang, chief operating officer of the US digital asset custody and security company BitGo, on Twitter about a possible collapse in the US real estate market.
At the time, Fang's tweet was in response to several previous tweets involving the high cost of buying homes in many markets in the US.
In his tweet, Fang said, “People who own a house can't sell it now — people who rent a house can't afford it. We were in this predicament until the job market crashed. We were in this predicament until the job market crashed and existing homeowners were forced to default on their mortgages, sending the real estate market into the next death spiral.”
After seeing Fang's tweet, Musk directly responded, “Very accurate.”
Admittedly, it remains to be seen whether this pessimistic scenario will happen. However, there is no doubt that the US real estate market is currently facing some serious challenges. According to the Federal Reserve, housing prices are currently at historically high levels, inventories are still low, and mortgage interest rates have more than doubled in the past few years.
A new analysis by the American Association of Mortgage Bankers (MBA) also found that independent mortgage banks and mortgage subsidiaries of chartered banks lost an average of $301 per mortgage loan completed. This is a huge shift compared to the year before, when the average profit on loans was $2,339. The 2022 loss was also the first loss since the MBA began reporting on this indicator in 2008.
On the other hand, this year's banking crisis has exacerbated this problem. According to related reports, many experts and investors expect that there may be more banks going out of business in the US; “stock god” Buffett is one of those with similar views. Also, one side effect of the US banking crisis on the commercial real estate market is that financial institutions have tightened loan standards, which will make it more difficult for companies to obtain mortgages.
Musk himself expressed his views on the crisis as early as March, and Sacks, a venture capitalist, previously warned that the interest rate hike being carried out by the Federal Reserve could impact banks, commercial real estate, and government debt. Musk responded, “Agree.”