The chief executive of a top Wall Street company sounded the alarm Wednesday over the U.S. real estate market, saying that hundreds of billions of loans could default in the coming months.
Cantor Fitzgerald CEO Howard Lutnick told Fox Business that a generational shift in the real estate market is on the horizon as he warned about a large default in loan sales.
“I think $700 billion could default … the lenders are going to have to do things with them. They’re going to be selling. It’s going to be a generational change in real estate coming, end of 2024 and all of 2025,” he told the outlet. “We will be talking about real estate being just a massive change, $700 billion to $1 trillion in defaults coming.”
With all those factors involved, “it’s going to be a very, very ugly market in owning real estate over the next, you know, 18 months, two years,” he stressed, adding that high interest rates meant to offset decades-high inflation may also cause commercial real estate loans to be “wiped out.”
“I think what’s going to happen is loan sales, which no one talks about, are going to become a huge business,” Mr. Lutnick said. “Because when mortgages on commercial buildings come to a trillion coming due in the next two and a half years at these high rates, you’re not going to get proceeds.”
He added that if “you have $120 million loan on a building and somebody says, ‘I’ll give you $90 million at a much higher rate,' you throw the keys back to the lenders ... real estate equity rates are going to be in trouble.”
Over the past weekend, a Federal Reserve official struck an optimistic tone and said that the fight against inflation seems to have been nearly won. Christopher Waller, an influential member of the Fed’s Board of Governors, noted that inflation is slowing even as growth and hiring remain solid, or a combination that he called “almost as good as it gets.”
Other senior Fed officials have signaled that the U.S. central bank remains on track to begin cutting its benchmark short-term interest rate, likely by midyear. In December, the policymakers collectively forecast that they would cut their rate three times this year. Wall Street investors and many economists expect the first cut in March.
“The progress I have noted on inflation, combined with the data in hand on economic and financial conditions and my outlook has made me more confident than I have been since 2021 that inflation is on a path to 2 percent,” Mr. Waller said in written remarks to the Brookings Institution. The Fed prefers for inflation to be about 2 percent, which it sees as having little negative effect on the economy.
But Mr. Lutnick said that some officials are “overly optimistic” about the Fed’s plans to cut rates. It’s likely that the central bank keeps rates around the same, or about 5.25–5.5 percent.
“I think rates are going to stay sort of steady,” he said, adding that talks of cutting 1.75 percent is “just way too much.” Instead, it could be 0.5 to 0.75 percentage points, “but that’s it,” he added.
“So I just think it’s overdone. People are overly optimistic for rates. I think we’re going to stay around here. But that’s okay. The world is ready for steady,” Mr. Lutnick told Fox, speaking from the sidelines of a World Economic Forum meeting in Davos, Switzerland.
But Mr. Waller said in his comments that he’s “feeling more confident that the economy can continue along its current trajectory,” although he did not provide any details about when the Fed rate cuts will occur.
The timing and pace of the cuts, he said, would have to align with the path of inflation and other U.S. economic data.
It comes after John Williams, the president of the Federal Reserve Bank of New York, said in early January that he, too, believes that inflation slowing.
“The data indicate that we are clearly moving in the right direction,” Mr. Williams said. “I expect inflation to continue to slow to about [2.25 percent] this year, before reaching our 2 percent longer-run goal next year.”
