By Justin Spittler
Wall Street is sitting on a pile of toxic assets…again.
A decade ago, the U.S. housing market was a complete mess.
Housing prices were falling. Americans were falling behind on their mortgages at an alarming rate. Banks were foreclosing on homes left and right.
In 2008, the crisis came to a head.
The U.S. housing market imploded. But it didn’t stop there.
Eventually, it hit the banking system…the insurance industry…and the stock market.
• Now, I didn’t write this issue to give you a history lesson…
I wrote it because I think we’re on the verge of another major real estate crisis.
Before I explain why, you have to understand why the last housing crisis in the United States turned into a global financial crisis almost overnight.
For one, the housing market was built on a sea of debt. When the market turned, this debt acted like dynamite.
Investors were also wildly optimistic back then. They thought housing prices would never fall. This led to excessive risk-taking.
Wall Street also played a huge role in this crisis. They packaged mortgages into instruments known as mortgage-backed securities (MBS). These securities derive their value from mortgage payments.
When the housing market was strong, banks made a killing off MBS. But the exotic instruments quickly turned to toxic sludge when people stopped paying their mortgages.
• I’m telling you this because the MBS market is about to crack again…
When it does, Americans could see the worst real estate crisis since the last housing crash.
There’s just one thing you have to understand about this coming crisis. It won’t begin in the housing market. It will start with shopping malls.
Regular readers know where I’m going with this. After all, I’ve been pounding the table on this retail crisis for weeks.
If you’re new to the Dispatch, here’s what you need to know:
Americans aren’t spending money like they did in the old days. They’re visiting malls less and doing more shopping online. This is killing brick-and-mortar stores.
Traditional retailers are shutting down stores in droves. The industry already plans to close more than 3,500 stores this year.
U.S. shopping malls are going dark. According to real estate research firm Green Street Advisors, one-third of America’s malls are now at “high risk” of shutting down.
In short, the retail crisis has already hit the real estate market.
Next up is the banking sector.
In a minute, I’ll show you three easy ways to protect yourself from this crisis. But let’s first take a closer look at the commercial mortgage market.
• The commercial mortgage market is where commercial property owners borrow money…
It’s a $3 trillion market. And about $1 trillion of those mortgages have been packaged and resold as commercial mortgage-backed securities (CMBS).
If the commercial market were doing well, this wouldn’t worry me. But it’s not. In fact, it’s starting to unravel…just like the residential mortgage market a decade ago.
Bloomberg Markets reported in January:
The delinquency rate for commercial mortgages that have been packaged into bonds is forecast to climb by as much as 2.4 percentage points to 5.75 percent in 2017, reversing several years of declines…
Meanwhile, credit rating agency Standard & Poor’s recently warned that the default rate for real estate loans could hit 13% this year. That’s nearly double what the default rate has been the last two years.
• To make matters worse, credit is getting tight…
Borrowing costs are on the rise. And banks are getting more selective about the loans they make.
This is a big deal.
You see, about $100 billion worth of commercial mortgages are set to mature this year.
In the past, companies could refinance their old debts by borrowing money. This bought struggling companies time. But that’s not going to be an option for many companies this year.
• Without access to cheap money, the commercial property market could crumble…
Commercial mortgage delinquencies and defaults could skyrocket. Bondholders could take heavy losses.
I’m not the only analyst who thinks this, either.
Morningstar recently issued the same warning. Bloomberg Business reported in February:
“Big mall loans have outsize losses for investors,” said Morningstar analyst Edward Dittmer. “We expect the stores like Sears, Macy’s and Penney to close more stores later this year and next year, and as they close, there will be knock-on effects that lead to other mall tenants leaving. This can start the cycle of blight.”
According to Morningstar, $48 billion worth of commercial mortgages could soon be “impaired” by failing malls.
That’s a lot of bad loans. But a lot of analysts will say that’s not enough to trigger another financial crisis.
In a way, they’re right.
But here’s something most people don’t realize.
The United States isn’t just in a shopping mall bubble right now. It’s in an “everything bubble.”
We have too many commercial mortgages…too much credit card debt…too much auto debt…and too many student loans.
I could go on and on.
The point is that the commercial mortgage market may be the first pillar in the financial system to give way. But it certainly won’t be the last.
• If you haven’t already, I encourage you to “crisis proof” your wealth immediately…
Here’s how to get started…
Take a good look at your portfolio. Lighten up on any positions directly linked to the retail crisis. This includes traditional retailers and mall real estate investment trusts (REITs), which own and operate shopping malls.
Hold more cash than usual. Setting aside cash will help avoid big losses should the retail crisis spread. This will also put you in a position to buy stocks when they get cheaper.
Own physical gold. Gold is the ultimate safe-haven asset. If the retail crisis spreads to other parts of the economy, the price of gold should skyrocket.
To be clear, I’m not saying that the stock market will crash tomorrow or even in the next couple months. But I do think that the U.S. financial system is starting to crack…and now is the time to take precautions.
Delray Beach, Florida
March 27, 2017
We want to hear from you.
If you have a question or comment, please send it to [email protected]. We read every email that comes in, and we'll publish comments, questions, and answers that we think other readers will find useful.