👋👋 Good morning real estate watchers! Today, we are going to talk about how Zions Bank lost a billion dollars in a single day because someone backed $60M in loans with collateral that didn't exist. Which is incredible, because I've been rejected for a car loan because I once returned a DVD two days late. Apparently, the secret to borrowing millions is to not have anything backing it up. It's like financial Tinder…just lie about everything and hope nobody checks.

But first, here’s what we’ve been paying attention to this week…

1️⃣ Finally, Some Chill: Home prices grew just 1.51% annually in August—the slowest rate in over two years and half the pace of inflation; marking a dramatic cooldown from early 2024's 6.5% growth. New York led major metros at 6.08% while Tampa crashed hardest at -3.34%. (NAHB)

2️⃣ New Homes Losing Ground: Newly built homes now comprise just 26.8% of for-sale inventory—the lowest in four years, as existing home supply rebounds with more listings and longer market times. While that's still well above pre-pandemic levels of 15-20%, builders are putting the brakes on new projects to clear current inventory. (Redfin)

3️⃣ Renters Want Cash: 58% of renters received concessions advertised upfront, while 25% successfully negotiated their own perks. When asked which concession is "best," 27% chose reduced rent, while a measly 1% picked having the broker's fee paid. (Zillow)

4️⃣ Meow: CoStar's Andy Florance spent his Q3 earnings call trashing Zillow as "under siege" from lawsuits (including CoStar's own copyright claim over 46,000 allegedly stolen images), calling out "antitrust violations, widespread copyright theft and blatant consumer deception." Apparently, when your competitor is drowning, the professional move is to stand on the dock and provide colorful commentary about each individual wave. (TRD)

5️⃣ More BPS Pls: The Fed cut rates by 25 basis points on Wednesday, dropping the benchmark to 3.75%-4% (lowest in three years) with another cut likely in December as inflation cools and the labor market softens. Nothing says "housing market recovery" like making it slightly less expensive to borrow half a million dollars. (HW)

TOP STORY

On October 16th, executives at Zions Bank had what one might charitably call a very bad day. In the space of 24 hours, their stock plummeted from $54.03 to $46.93, erasing $1 billion in market value faster than you can say "due diligence." The culprit? A borrower named Cantor Group had apparently backed $60 million in loans with collateral that didn't actually exist, executing what industry insiders might describe as financial sleight-of-hand, and what prosecutors would probably call fraud.

Zions only discovered the scheme because Cantor had already tried the same trick on Western Alliance Bank, which was busy suing them. As Jamie Dimon, CEO of JPMorgan, ominously warned investors, "When you see one cockroach, there are probably more."

Which is a terrifying thing for a bank CEO to say. That's not financial analysis; that's the beginning of a health code violation. But…He's right.

Welcome to what some call the new banking crisis. Although calling it "new" might be generous, considering it's just a sequel to 2023's regional banking collapse; a spiritual successor to 2008's financial crisis. This time, however, the villain isn't subprime mortgages or Treasury bonds. It's commercial real estate, and the damage is concentrated precisely where you'd least want it: smaller regional banks that lack the "too big to fail" safety net.

According to CNN, U.S. banks currently have approximately $2.7 trillion in commercial real estate loans. That's trillion with a T. To put that in perspective, that's roughly equivalent to the entire GDP of France.

And here's the kicker: approximately 80% of those loans live on the balance sheets of smaller regional banks.

Morgan Stanley estimates that commercial property values could fall by as much as 40%…the same magnitude as the 2008 financial crisis. Many regional banks now have 30-50% of their balance sheets tied to commercial real estate, creating a concentration risk that would burst any risk management textbook.

The math is brutal and unavoidable. When interest rates sat near zero during the pandemic, borrowing money at 1-2% to buy a building yielding 3-4% looked like printing money. Property values soared 10-30% depending on asset type. However, commercial real estate loans typically reset after 3-7 years, and according to data firm Trepp, more than $2.2 trillion in commercial real estate debt will come due between now and the end of 2027.

Consider a simple example: A $1 million building earning $60,000 annually provides a 6% return. When interest rates dropped to 1%, that same building might have sold for $1.5 million. But with rates now at 6%, that building's fair value crashes to roughly $666,000. Investors demand higher yields to compensate for expensive borrowing costs, and suddenly, the collateral backing all those bank loans isn't worth nearly what everyone thought it was.

Large commercial investors historically preferred working with smaller regional banks because these lenders know their local markets intimately. They're more flexible, relationship-driven, and willing to underwrite deals based on personal knowledge rather than spreadsheets and algorithms. That personal touch works beautifully in boom times. In bust times, you're the one explaining to shareholders why office buildings back 40% of your balance sheet nobody wants anymore.

The contrast with national banks is stark. Chase, Wells Fargo, and Bank of America have been stress-tested to withstand a 33% drop in commercial real estate prices. They maintain diversified portfolios and directly access Federal Reserve liquidity if things deteriorate. Regional banks have no such luxury.

The KBW bank index—a basket of banking stocks closely watched by investors—dropped 7% in October alone. The last time this index fell so sharply was when Silicon Valley Bank, Signature, and First Republic collapsed rapidly in 2023. Those failures stemmed from a similar dynamic: banks had parked deposits in long-term Treasuries that plummeted in value when the Fed hiked rates. When depositors rushed to withdraw funds, those banks couldn't liquidate bonds fast enough without taking catastrophic losses.

Here's where things get interesting in a "may you live in interesting times" sort of way. After 2008, regulators implemented strict rules to prevent banks from making risky loans. Banks responded by discovering a loophole spacious enough to drive a truck through: if they lent money to non-bank financial firms, who then made the actual loans, the originating banks technically weren't on the hook.

This created an entirely new "shadow banking" industry that has exploded to over $1 trillion in loans, often made without traditional collateral or oversight. One industry analyst remarked about the Zions situation: "I didn't know it was so easy for a bank to think they had $50 million in collateral and find out they had zero."

When Jefferies Bank admitted it might face millions in losses from fraud by the now-bankrupt Auto Parts company, the pattern became impossible to ignore. Several banks tapped into overnight liquidity for the second consecutive day, something not seen since the 2020 pandemic.

The immediate impact is already visible: regional banks are tightening lending standards, scrutinizing borrowers more intensely, and operating with far more caution. The party is over for commercial real estate investors accustomed to relatively easy access to capital. Refinancing will become significantly more difficult and expensive, particularly for properties in struggling sectors like office buildings.

More than $1 trillion in commercial real estate debt matures by the end of 2025. Many borrowers simply won't be able to refinance at current rates. Defaults have already begun, and more are inevitable. The resulting distressed sales will further depress commercial property values, creating a downward spiral that could take years to resolve.

For residential real estate, the effects are more indirect but still meaningful. Regional banks also provide significant residential mortgage lending, particularly for non-conforming loans. Tighter lending standards and reduced liquidity in the regional banking sector will likely translate to fewer mortgage options and more stringent qualification requirements for homebuyers.

Moody's recently attempted to calm nerves by stating that "the banking system and private credit markets are sound" and that "one cockroach does not make a trend." Default rates on high-yield debt currently sit under 5%, compared to double digits during the 2008 financial crisis.

The good news is that as interest rates eventually fall, the unrealized losses on bank balance sheets should naturally shrink. National banks appear well-positioned to weather the storm. The bad news is that "eventually" is doing a lot of heavy lifting in that sentence, and regional banks may face a painful reckoning.

The playbook is straightforward for depositors: don't keep more than $250,000 in any single account (that's the FDIC insurance limit), spread cash across multiple reputable institutions, and maintain a reasonable emergency fund outside your main brokerage. Not a single FDIC-insured depositor has lost money, and that streak will almost certainly continue.

For real estate investors and commercial property owners facing loan maturities in the next few years, the advice is less comforting: prepare for difficult refinancing conversations, consider selling before you're forced to, and hope interest rates fall faster than property values.

Whether this qualifies as a genuine crisis depends on your definition. If by crisis you mean systemic collapse threatening the entire financial system, probably not. If you mean a painful, multi-year adjustment period featuring selective bank failures, distressed real estate sales, and significant wealth destruction in commercial property, the crisis is already here. It's just being distributed very unevenly.

The following 12-18 months will reveal whether Jamie Dimon's cockroach analogy was prescient or merely pessimistic. Either way, anyone with significant exposure to commercial real estate or regional banking stocks should keep the lights on and watch where they step.