Wall Street Brings Back ‘Liar’s Loans’

Male hands around house made of wooden toy. Concept of real estate market.

Talk about splashing the cash.

The Australian Financial Review reported this week that shopping centre giant Westfield plans to invest up to $5 billion dollars in the United States over the next five years.

That’s serious money. And a major capital spending decision.

According to the paper, the company wants to focus on iconic flagship stories in wealthy cities to create the world’s best real estate portfolio.

But what’s interesting for us is the rationale. The Review quotes Westfield co-chief executive Steven Lowy saying,

We always look through to longer term trends than cyclical volatility. There is clearly volatility now in the equity and the debt markets but fundamentally we see the US as very strong.

In the current environment you have strong growth in housing, very low fuel prices, an increasing employment base.’

That’s exactly what we’ve been saying over at Cycles, Trends and Forecasts.

And the latest news keeps ramming this point home…

Don’t let the oil price mislead you

Of course, everyone is looking at the decline in US stocks and getting worried as the Aussie market reacts the same way.

Two weeks ago I made a suggestion to explain the decline. That downward pressure in US shares was coming from distressed selling from the sovereign wealth funds (SWFs) of oil producing countries.

This is because a lot of the governments that turn these places can’t survive with oil under US$30.

The choice is pretty simple when you get to that point. You sell what you have or go broke.

Shares are liquid. That means they’re easy to get out of quickly when you need money fast.

This argument becomes even more compelling if you take the Financial Times report released this week into account. ‘Lyxor estimated the assets managed by state-backed investment vehicles in the Gulf region have dropped by around 300 bln in recent months.’

Not only that…

Data provider eVestment says sovereign funds withdrew at least $19 billion from external asset managers during the third quarter of 2015.

The assets from Kazakhstan’s SWF has fallen 16.8% since August 2014.

Why the US economy looks bullish

The main point is none of this selling has much to do with real domestic economy in the US.

To bring that back to Westfield’s $5 billion cash splash, we can take note of the fact Westfield sees strong growth in the demand for housing in the US.

Lowy says himself the company is looking at building thousands of apartments on the large land banks surrounding Westfield’s US shopping malls.

There should be plenty of demand. Across the entire US population, Bloomberg reported on 29 January:

The homeownership rate in the U.S. rose for a second straight quarter as job growth and loosening credit put an end to almost two years of steady declines.’

Here’s an insight into why this trend could run for years. The biggest group across the entire US population are the ‘millennials’. These are people aged 18–34.

The home ownership rate for them is at the lowest point since 1982.

Nearly a third of them live with their parents. That’s the most since the US Census began tracking this in 1968.

It’s highly likely this is the beginning of a strong trend up in this sector.

Despite the recent good news, the home ownership rate is still only just above the 48 year low it hit in 2015.

And Wall Street is agitating to make it easier to get a loan to get people on to the property ladder and the ‘American Dream’…

Bringing back the infamous ‘liar loans’

Ultra-low interest rates across the world are causing money managers to look everywhere to find assets that yield.

One of those areas is ‘Alt-A’ loans. These are mortgages given to borrowers who can’t fully document their income and have a lower credit score.

These became infamous as ‘liar loans’ in the subprime crisis.

The interest rate on these can be as high as 8%. That’s almost double a conventional mortgage.

The Wall Street Journal reported this week major investment companies are lobbying lenders make more these ‘Alt-A’ loans or even buying the companies that originate them. To quote the Journal:

By backing these loans, money managers said they would reach an underserved corner of the housing market: Borrowers who have good credit but might be self-employed or report income sporadically.

In part because more Americans work that way, some money managers expect the market could increase to hundreds of billions of dollars each year, or more than 10% of the total mortgage debt outstanding.’

Now they’ve got a long way to go before their current market share reaches the levels they hit in the previous housing boom.

But it’s notable that Wall Street wants to encroach into mortgages again after going bankrupt last time.

Of course, if you understand the US real estate cycle, this is entirely predictable.

Few people do understand this, which is why they’ll worry needlessly about a US recession this year.

If you want to know what IS coming next, and which sectors benefit, the only way is to go here.


Callum Newman

Ed Note:This article was first published in Money Morning.

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Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.

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