Top of the Street: Tax plan tags top homeowners, online hurricane still blowing away malls, CMBS refi stress and more

Last week’s tax proposals would put a pinch on high-priced, high-tax real estate, and the plan has a 65% chance of passing. Low supply lifts housing. Malls struggle. Stress in CMBS. A Powell Fed. LIBOR substitutes. Contributions from Amherst, DB, GS, JPM, NAR, S&P and Milepost.

Markets/economy: Tax plan tags top homeowners
Pricing on the most expensive homes would get hurt and borrowers would have new incentives to stay in their homes longer under the tax plan proposed by the House last week, according to Amherst Pierpont Securities analyst Chris Helwig. The proposal lowers the cap for deducting mortgage interest from $1 million to the first $500,000 of principal for any loan made after Nov 2. Existing loans up to $1 million could still refinance current balances and deduct all interest. The lower cap should cut the value of the roughly 10% of US housing valued above $500,000. The proposal also caps property tax deductions at $10,000. And homeowners would need to stay put for five years, up from the current two years, before selling and getting a tax exemption on any gain-on-sale. The proposal would likely slow the rate of US housing turnover, especially in areas with expensive housing and high taxes. Other features of the bill could help turnover in the lower end of the housing market. Overall demand for mortgages could drop. But since investors could still deduct interest expense, the single-family rental market could grow. See Amherst, Tax Cuts and Jobs Act – Potential Implications for Home Prices and MBS, 3 Nov 2017. See also Goldman Sachs, The Mortgage Trader: House tax reform proposal would likely be negative for house prices, 3 Nov 2017. See also JPMorgan, US Fixed Income Markets Weekly: Agency MBS, 3 Nov 2017. (APS, GS, JPM, Milepost).

Markets/economy: A 65% chance for new tax law
Tax plans have a 65% chance to become law by 1Q18, according to Goldman Sachs. The White House and congressional Republicans already broadly agree on a tax cut, and most lawmakers believe Republicans need a big legislative win before 2018 elections. Tax law also can pass the Senate with only 51 votes instead of the usual 60 because it goes through budget reconciliation, and both House and Senate have already approved tax cut resolutions. The risks come from lawmakers opposing specific provisions like limits on deducting state and local taxes. Senators McCain (R-AZ) and Corker (R-TN) have expressed broader reservations. And some analysts view a tax cut now as inflationary since unemployment already is low. Provisions and odds of passage will likely change as the tax proposals get closer scrutiny. You can follow the odds of a corporate tax cut here. See Goldman Sachs, US Economics Analyst: Tax Reform: Now Comes the Hard Part, 5 Nov 2017. (GS, Milepost).

Markets/economy: Housing supply down, prices up
Low housing inventory across the US has muted sales and fueled price increases, according to the National Association of Realtors latest quarterly report. The median price on an existing single-family US home came in at $254,00 in the third quarter, up 5.3% YoY. Of the 177 metropolitan statistical areas (MSAs) studied, 92% recorded higher home prices. Double-digit gains came in 11% of MSAs, compared to 13% of MSAs in the quarter prior. There were 1.9 million existing homes for sale at the end of third quarter, a 4.2 months supply, down 6.4% from a year ago. (NAR, S&P, Milepost).

Markets: Online hurricane still blowing away malls
Operators of distressed malls are attracting few buyers and little financing, according to Deutsche Bank, driving pricing down sharply. Of the largely mid-tier malls looking for a rescue, market value since the mid-2000s has dropped an average of 83%. Few of these malls actually disappear. Many just replace national retailers with mom-and-pop stores and some lease to data centers, churches, community colleges and other businesses. Deutsche also notes that of the 75 retailers with the most stores in malls, the average rating is BB- and most still focus on women’s and teen clothing, shoes and jewelry. The online hurricane is still blowing through retail malls. See Deutsche Bank, The Outlook on MBS and Securitized Products, 31 Oct 2017. (DB, Milepost).

Markets: Refi stress in CMBS
Refinancing old commercial real estate loans is looking tough these days, according to JPMorgan. Of the 10-year loans in CMBS scheduled to refinance in 1Q18, only seven of 15 look likely to find a new lender. Of the ones likely to fall short, five look likely to liquidate, one likely to get modified and the balance look unpredictable. It’s an old story: property price down, mortgage balance not. See JPMorgan, US Fixed Income Markets Weekly: CMBS, 3 Nov 2017. (JPM, Milepost).

Markets: Steady expectations for a Powell Fed
A continuation of current policy, more concern with financial conditions and stability, more openness to new ways of thinking about inflation and employment, good consensus management and more direct communication. These are the things that Peter Hooper at Deutsche Bank expects from a Powell Fed, and few people have followed the Fed from a better seat or longer than Hooper. Hooper worked at the Fed for 26 years before leaving for the Street in 1999, and still regularly trades views with Fed economists, governors and occasionally Fed chairs. He sees Powell as a good choice. “From what we know of Jay Powell,” he writes, “he will put what is best for the Fed and the country before all else.” See Deutsche Bank, What to expect from a Powell chairmanship, 3 Nov 2017. (DB, Milepost).

Markets: Fed starts thinking about LIBOR substitutes
The wheels have started turning on substitutes for LIBOR if it disappears in the next few years. The Alternative Rates Reference Committee or ARRC held a roundtable at the NY Fed last Thursday to discuss adopting a Secured Overnight Funding Rate or SOFR as a new interest rate benchmark. The roundtable reviewed a transition plan with likely dates and milestones, discussed solutions for interest rate swaps and for loans, bonds and securitized products. Bloomberg has archived the 4-hour session on LIVE <Go> on 11/02 “Fed’s Powell Speaks at ARRC Roundtable. See JPMorgan, US Fixed Income Markets Weekly: Short-Term Fixed Income, 3 Nov 2017. (JPM, Milepost).