top of page

The BAN Report: Rate Cuts Coming? / FDIC Quarterly Banking Profile / Student Loan Borrowers Flee US / Too Many Big Homes / New York's Vanishing Diners-6/7/19

Rate Cuts Coming?

It’s been a wild ride for interest rates. Speculation last year was for 2-3 rate increase in 2019, now the market is predicting rate cuts, perhaps as soon as July.

The Federal Reserve is just about done being patient. That was the view of traders in short-term interest rate futures Friday, after a government report showed U.S. employers sharply slowed hiring in May.

Traders jumped on the report as a sign of a cooling labor market that would force the Fed to start cutting its policy rate in July and reduce it twice more by the end of the year.

Bets for two rate cuts had been priced into the market, mostly in reaction to mounting trade tensions that are expected to slow economic growth.

Traders now see a 65% chance that short-term interest rates will end the year at between 1.5% and 1.75%, down from 2.25% to 2.5% now, according to a Reuters analysis of the rate contracts.

Today’s week job’s report adds fuel to rate cutting. The US economy added only 75,000 jobs in May, versus the expected 180,000 jobs.

FDIC Quarterly Banking Profile

Last week, the FDIC released its Quarterly Banking Profile, the most comprehensive report on the health of the banking industry.    A few highlights:

  • Wider net interest margins (up to 3.42% in Q1) are boosting bank earnings, especially for the largest banks who are growing deposits faster than anyone else.    Of course, rate cuts will likely shrink these margins in the future.

  • Net income was up 8.7% from a year ago with an average return on assets of 1.35%

  • Banks, especially the largest banks, increased loan-loss provisions in the first quarter by 11.8% from a year earlier.     Commercial loan provisioning increased the greatest.

  • Net charge-offs increased 5.5% from a year ago, although they are still low by historical standards.   Additionally, the noncurrent loan rate remains below 1%, although total noncurrent loan balances did grow by 0.5% from the prior quarter.

  • Loan growth was slightly negative in the first quarter, which is not unusual.

  • Banks are having a more difficult time finding noninterest-bearing deposits, which declined by 3.2% from the prior quarter – the largest quarterly decline since this report.   Deposits still rose, so it appears banks are paying more to attract deposits.


Overall, the banking industry continues to perform well, but there are some headwinds ahead, most notably higher rates, slightly increases in credit losses, and more expensive funding.

Student Loan Borrowers Flee US

As more people are having difficulty paying their student loans, some borrowers are fleeing the country to avoid collection.

Some student loan borrowers are packing their bags and fleeing from the U.S. to other countries, where the cost of living is often lower and debt collectors wield less power over them. Although there is no national data on how many people have left the United States because of student debt, borrowers tell their stories of doing so in Facebook groups and Reddit channels and how-to advice is offered on personal finance websites.

“It may be an issue we see an uptick in if the trends keep up,” said Barmak Nassirian, director of federal relations at the American Association of State Colleges and Universities.

Outstanding student debt in the U.S. has tripled over the last decade and is projected to swell to $2 trillion by 2022. Average debt at graduation is currently around $30,000, up from an inflation-adjusted $16,000 in the early 1990s. Meanwhile, salaries for new bachelor degree recipients, also accounting for inflation, have remained almost flat over the last few decades.

Moving to another country to escape student debt is risky, experts say. If the person wants or needs to return to the United States, they’ll find their loan balance has only grown while they were gone, thanks to compound interest, collection charges and late fees.

Although the Education Department typically can’t garnish someone’s wages if they’re working for a company outside of the United States, it can take up to 15 percent of their Social Security benefits when they start collecting.

This isn’t shocking at all as some of these borrowers have debt that will take decades to repay.

Too Many Big Homes

In many cities downtown revivals have been at the expense of the suburbs. Sellers of suburban McMansions are sitting on the market without attracting much interest. In the Chicago metro-area, many of the booming suburbs in the 90s are now struggling to attract residents.

 "For most of the 1990s, if you looked at the geographic center of jobs in the Chicago area, it was moving steadily northwest, out from the city toward Schaumburg," homebuilding consultant Tracy Cross says. Like the corporate campuses that popped up in that era, the houses were often built big.

A generation later, tastes for both have faded: Corporations have shifted their offices to downtown Chicago in unprecedented numbers, and once-stylish suburban luxury homes are derided as McMansions. Affluent people now show a well-documented preference for living in or near the city, a preference that's fueling the vigor in the high-rise condo market downtown as well as in Bucktown and in Wilmette, among other places.

In the past six years, at least 19 companies, including McDonald's, Motorola Solutions, Mead Johnson, GE Healthcare and Kraft Heinz, have moved their offices from the suburbs to downtown Chicago, and Ferrara Candy announced in December it will be the next to do it. Other companies from outside the area, such as Archer Daniels Midland and Conagra Brands, bypassed the suburbs and went straight downtown for their headquarters. All of these moves effectively lengthen the commute for residents of the outer-ring suburbs looking for executive-level jobs.

"All those jobs moving back downtown has put a lot of downward pressure on the suburban luxury home market," says Diana Peterson, CEO of AW Properties Global, a real estate brokerage and auction firm based in Northbrook.

Many of these suburbs have everything people previously wanted: great school districts, parks, and safe streets.     Lake Forest, IL, for example, has over a twelve month supply of homes on the market. Meanwhile, LA is building too many Megamansions, as the pool of foreign billionaires is drying up.

A review of the Los Angeles multiple listings service shows close to 100 homes on the market asking over $20 million in Los Angeles County, at least 35 of which could be classified as spec homes, and more are under construction. And those are just the listed ones: Appraiser Jonathan Miller says more than a third of homes in that price category are never entered in the MLS. Some of the city’s most expensive are notably absent.

A developer is about to list a single-family home for $500 million shortly in LA, even though the record price for an LA-area home is $110 million. So far, these homes have been selling, but one wonders if the music is about to stop.

New York’s Vanishing Diners

Rising rents aren’t always a good thing, as many businesses can’t be profitable at higher rates.   In New York, many of its legendary diners are closing.

While their disappearance has been lamented for years, diners along the margins of Manhattan and in parts of other boroughs previously thought impervious to redevelopment are closing because of increasing rents and enticing offers that are hard to pass up. While Mr. Gritsipis’s diner is in a four-story building, many are the lone tenants in single-story buildings. The land and unused development rights above them are lucrative, as a developer can use those rights to gain more height or bulk for new towers, many of them luxury apartments.

Since 2014, 15 diners, many in stand-alone buildings, have been sold in New York, according to an analysis by Ariel Property Advisors, a commercial real estate brokerage. There were six sales in Queens, six in Brooklyn, two in the Bronx and one in Staten Island. There were no sales in Manhattan.

But that does not account for the diners whose owners lost their leases. Riley Arthur, a photographer who has visited nearly every diner in the five boroughs, estimated that there are 419 left in New York City. In the three years since Ms. Arthur began photographing them for her Instagram page, 39 have closed — an average of 13 a year.

In many cases, they didn’t close because of dwindling customers. “It’s just the other factors” — like rising rents and shrinking profit margins — that “are insurmountable,” she said. “You just can’t make up that difference selling eggs.”

What a shame to see.  Fortunately, most New York suburban towns have at least one 24-hour diner, although some are closing in the suburbs as well. Downtown Huntington, NY, for example, always had two diners, but now just one is left. The ability to have a gyro, lobster, or an omelet 24/7 is worth preserving!

bottom of page