History tells us that out of every 10 financial crises, 8 start in the real estate sector. Recently, the U.S. real estate market has been experiencing the worst decline in half a century.

Real estate crisis, the Federal Reserve refuses to cut interest rates.

According to data, after the Federal Reserve raised interest rates in March 2022, the U.S. real estate industry suffered a significant blow due to the continuously rising market interest rates; especially in July last year, when the Federal Reserve directly pulled the interest rate to an epic level of 5.25%-5.5%, the demand for real estate in the United States completely collapsed.

So, what is the current situation of the U.S. real estate industry? Will the real estate crisis lead to a financial crisis? What are the underlying reasons and impacts?

The worst U.S. real estate in half a century

In recent years, China's real estate has not been performing well, but the U.S. real estate is not much better.

According to a report by the International Monetary Fund (IMF), U.S. commercial real estate is facing the largest historical decline in the past 50 years, and the current decline even exceeds the decline during previous interest rate hiking cycles.

The IMF stated that U.S. commercial real estate is facing the largest decline in 50 years.

If we look at the data, commercial real estate prices have fallen by 11% in less than 2 years, and have wiped out the increase in the previous 2 years. Therefore, U.S. housing prices and asset values have fallen significantly.

However, what is different between the United States and China is that the U.S. financial system非常喜欢 packaging real estate, adding leverage to it to create a series of "derivatives," and profiting from it. The financial crisis in 2008 was the so-called "subprime loan crisis." The root cause was still the sharp decline in U.S. housing prices, leading to the collapse of loan financial derivatives.And this time? Although the financial crisis in 2008 led to the U.S. banking and other financial systems patching up real estate-related derivatives and implementing a series of restrictions, the problems remain very serious.

Lehman Brothers went bankrupt, is the financial crisis still around us?

For example, after the Federal Reserve raised interest rates, interest rates in the United States began to soar, especially mortgage rates and commercial mortgage-backed securities (CMBS). The market value of these financial derivatives is enormous. High interest rates have made these financial derivatives difficult to sell.

In general, high interest rates have led to a significant drop in the value of U.S. commercial real estate, and the financial derivatives market has also been affected by high interest rates, impacting the efficiency of financing.

This has led to problems in both the U.S. real estate entity and real estate financial products. If not handled properly, it is easy to lead to "defaults" or even "explosions"; more importantly, this is not an exaggeration, but a fact that has already occurred.

Is the outlook for real estate credit deteriorating, leading to another explosion in the U.S. banking industry?

Just recently, the financial report of the U.S. "New York Community Bank" has encountered problems. The fourth-quarter report unexpectedly showed a large loss, with the stock price plummeting by 38%, and the highest drop during the trading day reaching 45%, resulting in a severe explosion.

The fundamental reason for the bank's explosion is still the problems with its real estate credit, leading to huge losses in loan business.

Why does real estate credit have problems? The reason is what I mentioned earlier, the value loss of real estate financial loans leads to additional "provisions" in the financial statements, and the credit outlook has also deteriorated.We must pay attention to the fact that it's not just New York Community Bank that has real estate credit. Most American banks actually have related businesses. Therefore, it's not just the lending business of New York Community Bank that may face a blowout; other credit businesses will also encounter more or less problems, thereby affecting their profits.

Wall Street financiers have also realized this issue. As a result, the stock price of New York Community Bank continued to decline on Thursday, with a daily drop of 11%, setting a historical record for the largest drop.

Some American bank stocks are weakening.

Also on Thursday, Germany's largest bank, Deutsche Bank, set aside a loss of 123 million euros, which is to prepare for losses in American commercial real estate. This amount is about four times that of the same period.

It is clear that in the next month, more and more banks will announce provisions for losses brought by American commercial real estate, and these losses will far exceed market expectations. If some small and medium-sized banks can't withstand it, they will follow the footsteps of New York Community Bank and experience a collapse in stock prices.

At this point, many investors with keen senses have started to "vote with their feet", and related real estate and bank stocks have begun to be sold off. For example, on Thursday, American bank stocks continued to plummet, with the KBW regional bank index falling by 2.3%. This means that financial risks are spreading in the American banking system.

At present, this risk is not too great, but it has already affected the entire American bank sector. However, if the risk appears to be a spiraling decline, with a stampede, it will be very dangerous, especially as it is now the end of the American interest rate hike cycle, and market liquidity is not as abundant as we think. The probability of such risks will become greater.

Powell hinted that there will be no interest rate cuts in March.

According to expert statistics, there will be $560 billion in bank real estate debt maturing in the next two years. Compared with listed banks in New York and Wall Street, regional banks and various small banks that are ubiquitous in the United States are the ones that need to be most worried about the financial crisis in real estate. Because their ability to withstand risks will be weaker.

The Fed's temporary suspension of interest rate hikes, the threat is far from over.Some argue that since the threat to the U.S. real estate and commercial property markets lies with the Federal Reserve, could lowering interest rates by the Fed resolve the issue? The answer is not wrong, but the Fed will not only fail to lower interest rates as expected in March, it will also postpone the timing of any rate cuts. The earliest and most probable time for a rate cut at present is May.

The Fed believes that the U.S. economy in the fourth quarter of last year was "very good," so there is no need for the Fed to rush into lowering interest rates. The Fed should continue to focus on the inflation crisis. It will only announce a rate cut when inflation falls below 2%.

However, the seemingly robust U.S. economy is actually the result of a mountain of debt. With the current U.S. debt at a staggering $34 trillion, the recent increase of $1 trillion was accumulated in just three and a half months, meaning that the U.S. government's debt for the fourth quarter alone increased by $1 trillion.

The scale of U.S. debt is soaring at an increasingly rapid pace.

This leads to the fact that while the U.S. GDP growth rate is indeed high, there is a significant disconnect when looking at specific sectors such as manufacturing. The financial sector is doing well, consumption is strong, and the service industry is also performing well. However, the sub-sectors related to the physical economy are in a mess.

Therefore, the current U.S. economy is complex and chaotic. It is characterized by a series of inevitabilities brought about by economic cycles and operations, as well as a series of hidden concerns caused by the Federal Reserve and the Treasury Department raising interest rates for political reasons to combat inflation. Among these, the $34 trillion U.S. debt is a focal point, and the crises in sub-sectors such as real estate, banking, and other industries are manifestations of the U.S. crisis.

This means that as long as the Fed does not lower interest rates, the crisis in U.S. real estate and commercial property will not end, and the U.S. banking industry will still have to bear and digest the bitter consequences of this real estate derivative.

It can also be said that as long as the $34 trillion U.S. debt crisis is not resolved, more and more side effects will emerge, ultimately backfiring and devouring the U.S. economy!