The same thing that caused the 2008 financial crisis is making a major comeback
The real estate market might just be in some serious trouble.
Back in 2008, Wall Street was bundling riskier and riskier mortgages into investments called Mortgage-backed securities (MBS) and collateralized loan obligations (CLS). And people were buying them like hotcakes. The idea was if you put enough of the risky investments together, they can’t all possibly fail, right?
We saw how well that worked…
Well, big-time borrowers are struggling to repay commercial loans. And these MBSs and CLSs are stepping in to provide a helping hand once again. Distressed commercial real estate ventures entering into these arrangements have increased by 480% since last February.
But here’s the issue, right now 8.6% of these big commercial borrowers that are entering into these deals are about to go belly up. That’s over $80 billion in half-completed apartment complexes, strip malls, and shopping centers that are about to throw in the towel.
Here’s where this leaves us:
This comes amid a larger falloff in the $20 trillion commercial real estate space. In December, an office building in prime downtown LA sold for 45% less than its purchase price a decade ago.
The FDIC just took a 40% discount on $15 billion in loans it sold that were backed by New York City apartment buildings. In Manhattan, brokers have started marketing debt backed by a Blackstone Inc. office building at a 50% discount.
This turbulence in the commercial real estate market has nearly brought down New York Community Bancorp and has even garnered warnings from FED chair Jerome Powell and Treasury Secretary Janet Yellen.
Banks Are Getting Scared
Banks are stashing away cash in droves in an attempt to insulate themselves from a potential real estate collapse. Wells Fargo set aside $3.9 billion at the end of last year for potential commercial property losses. Meanwhile, U.S. Bancorp, the largest regional bank by assets, increased its expectations for commercial real estate losses by 28% or $111 million for their fourth quarter.
Experts are seeing the writing on the wall, with the commercial real estate market continually getting riskier and shakier.
Which presents us traders with some fortunate investments opportunities as this trend plays out over the next year.
As we go through this period, I will likely hedge against my overall portfolio with shorts focused on the real estate market. In other words, if the market goes up I will rely on my portfolio of strong stocks to take advantage. If the market goes down, I will rely on shorting the weakest sectors to take advantage.
And in the situation where certain sectors remain bullish like energy and other commodities, while banks and real estate struggle, I should be in a phenomenal position.
Be sure you are in my Telegram as I will definitely be posting some specific real estate short plays in the coming months.
— Nate Tucci
P.S. This week is arguably the most important week of my career…
I am revealing something called “Automated Options” which is designed to target about $1250 a week based on a $2500 stake in all kinds of different markets. But it’s really unique in the way it works.
That’s what I want to show you when I sit down with Graham this Wednesday, April 22nd @ 1pm Eastern.
Make sure you’re registered here.
