The Small Balance Intersection Update - August 18, 2024

Stats of The Day:

• California and New York lead US states?in producing college graduates, but growth in degree-holding residents has been fastest in Sun Belt states like Texas and Florida.

• ?Between 2012 and 2022, Austin saw the most significant increase in degree-holding residents, nearly doubling its total (+91%), followed by Jacksonville (+75%) and Salt Lake City (+69%).
• A record 8.5% of American homes are now worth $1 million or more, doubling the pre-pandemic percentage and rising from 7.6% a year ago, according to Redfin.

Resilience Avenue

Retail Sales Surge Defies Consumer Caution

In July 2024, U.S. retail sales surged by $6.8 billion, a 1.0% increase that far exceeded expectations, driven largely by a 3.6% rebound in auto sales. Gains were broad-based, contradicting reports of cautious consumer behavior and indicating stronger goods spending than anticipated. Control group sales, a key predictor of PCE in GDP, rose by 0.3%, further signaling economic resilience. This surge in retail activity contrasts with recent labor market weakness and positions the economy for solid third-quarter growth. Auto sales were particularly robust, supported by attractive financing and incentives, despite a year-over-year decline in auto prices. However, some retail categories, like clothing and sporting goods, saw declines, reflecting selective consumer behavior. The strong sales figures suggest less urgency for an aggressive Fed pivot, though upcoming personal income and spending reports will be crucial for gauging overall consumer strength. The July data underscores the enduring resilience of the U.S. consumer, even amid economic uncertainty.

Read the full report here – Credit: Wells Fargo Economics.

Inflation Lane

Small Businesses Grapple with Rising Rent Amid Inflation Pressures

In August 2024, Bank of America's Small Business Checkpoint report highlighted the ongoing challenge of inflation for small businesses, particularly with rising rent costs. Rent payments per small business client increased by 11% year-over-year in July, which is twice the rate of rent inflation in the Consumer Price Index (CPI). This rent surge is particularly impacting small businesses with revenues under $500K, where the inflow-to-outflow ratio—a proxy for profitability—has been declining. The retail sector has experienced the greatest increase in the share of rent within total payments, with businesses in the South paying 25% more in rent compared to 2019 levels. The report notes that small businesses in the South are feeling the brunt of this pressure, likely due to domestic migration trends increasing demand for commercial spaces. While some small businesses may see this as an expansion opportunity, the majority report that now is not an ideal time for growth, reflecting broader economic uncertainty. Despite the rent challenges, overall small business payments grew by 7.3% year-over-year in July, rebounding from a dip in June.

Read the full report here – Bank of America Institute.

Construction Crossing

Residential Construction Slows as High Interest Rates Weigh Heavily

Residential construction continues to struggle under the weight of high interest rates, with July seeing a 6.8% decline in housing starts, primarily driven by a sharp 14.1% drop in single-family starts. Despite a recent dip in mortgage rates to 6.6%, the market has yet to show significant signs of recovery, as mortgage applications for purchases remain sluggish and the NAHB Housing Market Index dropped to 39 in August. Single-family permits also declined slightly, indicating that the sector might face further near-term challenges. Multifamily construction, however, saw a 14.5% increase in starts for the second consecutive month, although a drop in permits and a 13.2% reduction in units under construction reflect ongoing weakness in the sector. The expectation of future Federal Reserve rate cuts could eventually provide some relief, but the current macroeconomic conditions are compounding the difficulties posed by high interest rates. Overall, the residential sector's muted response to easing mortgage rates underscores the broader economic headwinds at play.

Read the full report here – Wells Fargo Economics.

Fraud Lane

Don't Do The Crime If You Can't Do The Time

Prime Capital Ventures, a commercial loan brokerage founded by Kris Roglieri, collapsed amid federal investigations into allegations of massive financial misconduct. The firm reportedly has up to $50 million in outstanding loans, which could potentially be collected to repay creditors. Roglieri is accused of embezzling over $100 million in client funds that were meant to secure large lines of credit for real estate and business projects. Among the affected clients is Gregory Richter, an entrepreneur in the cannabis industry, who claims he never received the promised $7.8 million loan despite paying a $1.5 million cash deposit. Richter sought financing from Prime Capital Ventures due to the difficulties in securing loans from traditional banks, which are hesitant to fund cannabis-related ventures. He asserts that his company does not owe the $7.8 million listed as an outstanding loan because the funds were never disbursed.

Roglieri, now jailed on federal wire fraud charges, allegedly used client deposits to fund a lavish lifestyle, including luxury cars, private jets, and expensive watches, rather than fulfilling loan agreements. Some companies, such as Caruso Home Builders and Indigo Pharmaceutical, did receive partial loans, but the recovery of funds from Prime Capital Ventures remains uncertain. Efforts to push the company into bankruptcy have so far failed, complicating the process of repaying defrauded clients. The case underscores the significant risks faced by businesses, particularly in high-risk industries like cannabis, when dealing with non-traditional lenders.

Read the full report here – Times Union.

Caution: More Fraud Ahead

Fraud Scheme to Seize Graceland Foiled by Authorities

Federal authorities have arrested Lisa Jeanine Findley, a 53-year-old woman from Missouri, for allegedly attempting to defraud Elvis Presley's family of millions and steal their ownership interest in Graceland. Findley reportedly posed as three different individuals from a fake private lender, Naussany Investments, claiming that Lisa Marie Presley borrowed $3.8 million against Graceland as collateral in 2018. She then demanded $2.85 million from the Presley family to settle the supposed debt, even publishing a foreclosure notice and planning to auction Graceland. Riley Keough, Elvis’s granddaughter and trustee of Graceland, intervened, leading a court to halt the auction. After the scheme garnered media attention, Findley attempted to blame an identity thief from Nigeria, but federal authorities have charged her with mail fraud and aggravated identity theft. If convicted, she faces up to 22 years in prison.

Read more here.