A lack of liquidity has widened the gap between investors buying and selling Treasuries, creating big swings in bond yields.
That shift means more volatility, with rate-sensitive growth stocks being vulnerable as borrowing costs rise after a series of recent Federal Reserve (Fed) rate hikes. But the CEO of a Washington, D.C.-based financial tech company operating an online investment platform says liquidity issues are affecting the economy far beyond bonds.
Ben Miller, who oversees the real estate crowdfunding platform Fundrise, believes that the U.S. economy is headed for a potentially catastrophic liquidity crisis. Banks making real estate loans cannot cover interest rates that have doubled, he said.
“The natural instinct is to look at the borrower as the source of defaults, but there are circumstances where the borrower doesn’t default, but intermediary lenders who have taken the loans and levered them up and up will eventually default,” Miller said.
Miller also believes that lenders who borrow against their own loans won’t be able to withstand the skyrocketing interest rates and will be especially susceptible to liquidity issues.
On his Fundrise podcast “Onward,” Miller laid out what he believes is the cause of what will be a national liquidity problem. Among his observations:
$5 trillion of asset-backed lending now exists outside of banks with a lot more debt and a lot less liquidity than there used to be. Corporate borrowers have 300% more debt than before the 2008 financial crisis.
Any companies with a real estate loan due in the next few years have “a lot more debt in the system than people realized.”
Many unregulated nonbank lenders, mortgage real estate investment trusts, private equity funds, commercial mortgage-backed securities, residential mortgage-backed securities and collateralized loan obligations are involved in making loans banks can’t cover.
“I met with some of the biggest banks in the world who told me they don’t have any liquidity” because of rising interest rates, Miller said. “This is going to play out. The question is, how bad will it be?”
Small businesses are going to have a problem with all types of loans, including consumer, auto, corporate and real estate. The biggest borrower of them all is this hidden borrower, which is actually the lender.
Retail and office property will hit a wall. Offices used to be the most-favored institutional asset class. “What’s going to happen, I believe, is that office and retail will become unfinanceable, and when a loan comes due, there will be no money for it,” Miller said. “Working from home made a lot of office space obsolete.”
Miller’s observations are not all doom and gloom. He noted that banks “hate” the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted after the recession in 2010 but said he believes will “save them by limiting the amount of leverage they can provide.”
He also states that the big difference between today and the recession of 2008 was there were a lot of bad loans. Now, however, there are mostly good loans, especially in the regulated part of the market.
“There’s not a credit problem like last time,” Miller said.
For investors, Miller points to residential and rental real estate — especially in the Sun Belt — as well as industrial real estate as being resilient to a downturn.
“I think housing will be a bright spot and will fall some but much less than predicted,” Miller said. “The doom-and-gloom predictions (for residential real estate) are overblown. It’s not like 2008 when we had a lot of short-term ARMs (adjustable-rate mortgages) and bridge products with individual borrowers.”
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