Market Trends & Data
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Updated almost 2 years ago,
- Real Estate Broker
- Oregon & California Coasts
- 505
- Votes |
- 627
- Posts
Banking turmoil..is a housing credit crunch coming?
By now you might have heard that a few financial institutions in the US and beyond have run into some difficulties..
Somewhat counterintuitively the implosion of SVB bank and the downgraded risk of other regional and international banks and lending institutions led to a significant reduction in US mortgage rates. How can this be?
The temporary cause seems to be a change in sentiment regarding what long and short term interest rates will do, with many 'analysts' and 'experts' forecasting the Federal Reserve will blink and pause or slow their rate hikes for concern of causing or perpetuating other credit calamities.
The BIG questions on Wall Street and beyond are:
- Who and What are next?
- Where do we go from here?
- How bad is it going to get?
I am not a financial expert, and this is NOT financial advice but these events have a significant effect on each of us, our money and our industry, so I'll do my best to be direct and unbiased in my forecast.
TO save us all a lot of time I suggest watching this incredibly informative, educational and timely documentary released by FRONTLINE PBS.. YESTERDAY! Entitled 'Age of Easy Money' LINK TO VIDEO
In short since 2008 (when the previous/current system FAILED) we've had historically free money and arguably too much of it. This money went through banks, which have consolidated, expanded and funded the most speculative growth in human history in the form of: corporate overvaluations, stock market overvaluation, speculative SPAC's, VC's, cryptocurrency, art, real estate and wasted resources.
The scale of this 'investment' is unfathomable. The price tag for the 2008 Bailout in the form of TARP (Troubled Asset Relief Program) was initially in the $787B range. The total amount of 'liquidity' provided from 2008-2018 was in the $6T range at +/- 0-.25% all the while mortgage rates were in the 6%'s When Ben Bernanke (former FED HEAD and architect of the ultra zero rate environment) left in 2018 he was replaced by current FED President Jerome Powell. Powell almost immediately looked to enact a tightening policy and markets freaked. Then President Trump went ballistic and the FED shortly changed course and provided an additional $5-6Trillion in a variety of financial mechanisms to stabilize the markets. As quoted in the documentary..."Powell did in a weekend what took Bernanke a decade."
That's all well and dandy...until Covid hit. In March 2020 after the stock market had plummeted nearly 20% in 3 days the US announced the largest stimulus and QE in the history of the world. Flooding the markets and central banks with a $2.2Trillion package and another $5-6 Trillion in petty cash.
Where did all of this 'currency' go? It went to the banks. Some of it went to businesses and individuals (remember the $1200?) and apparently a LOT of it went to fraudsters for Lambo's and Bitcoin...The banks were so flush with cash that they parked it in low rate bonds and treasuries and lent the rest out speculatively. There was so much cash that borrowers even got low mortgage rates of 2.5-3% even though interest rates hadn't really moved at all..
Valuations of all assets went through the roof...$69k bitcoin anyone? Or $1M monkey pics? Pick an asset graph, overlay it with the dates of the stimulus and you'll see an identical peak and decline chart. Since rate hikes began roughly 12 months ago, the FED has raised rates nearly 500 basis points from near ZERO and embarked on a substantial quantitative tightening cycle essentially reducing the amount of capital available and increasing the cost of that capital.
Fast forward to this week and banks with 'solid' books a year ago, now hold investments with 1-2% returns and the prospect of drastically reduced economic activity and growth prospects to keep new funds flowing.
So how does this effect real estate lending and what happens to the RE market?
Well the smart money is on a decline in general asset prices. Money was cheap, so like everything else the values increased and surely there needs to be some type of correction to reflect the inflated prices and current costs of borrowing...right?
Maybe..and maybe not..
Real Estate is a unique asset class that generally is local and lagging. Commercial office space aside, there are so many factors influencing the price of residential real estate beyond affordability that determine the direction of the marketplace.
Housing supply is low. Many owners have affordable payments or considerable equity and aren't inclined to move due to uncertainty or disadvantageous circumstances. Those 2020-2021 speculative buyers seem to have guessed right, and the excess inventory normally making it's way to the first time homebuyer likely ended up in someone else's portfolio.
The point is that most borrowers are presently in a comfortable liability position and unless there is a drastic slow down in economic activity and mass layoffs, many are likely to remain in those investments or homes for sometime.
So what about the big elephant in the room...inflation? Well again I'm no 'savant' but my experience with 2008 and my understanding of the reciprocal law of the universe is that what goes up must come down, or the money supply will shrink and the economy will get worse before it gets better.
In general 'we' essentially delayed the economic repercussions of the pandemic by inflating the 'economy' temporarily. The problem is the majority of this 'growth' was not real growth in terms of infrastructure, work force or hard assets. In fact it was just the opposite, speculation on digital architecture (ie: blockchain, web3, metaverse, apps) neglect and delay of public/private investment (think oil refineries) a generation or two that lost years of education and work skills practice and training and an overconsumption and misallocation of physical resources..the world created 1 Trillion masks at a cost of $400B..a few billion of which reached the oceans..https://www.foxnews.com/politi...
All of these factors are inherently inflationary. The US inflation rate is supposedly not as high as it could be because we essentially export our inflation via the exorbitant privilege of having the USD as the global reserve currency, though according to statistics we are still losing roughly .5% per month or 6% per year on our savings and buying capacity. Considering the volatility and uncertainty of the markets, I personally have never been more bullish on Real Estate. It is a historical hedge along with gold, silver and other commodities that might not offer the same upside as equities but they certainly don't share the same risk appetite either or the same levels of stress.
I do think it's fairly obvious that if mortgage rates bounce pabove 7.5-8% there will be a dramatic slow down in sales activity, beyond that and those same strong fundamentals could shift swiftly (as we've seen with some aforementioned banks.)
With reduced money supply and increased interest rates should come higher mortgage rates, however as we've seen as a flight to safety mortgage rates have responded by declining as the market prices anticipated rate cuts. I should note that the general consensus is that rates would continue to decline through the end of Q4 2023 potentially in the 5%'s.
As of the date of this writing rates on a 30 year mortgage have dropped nearly 1% in a week.
The anticipated near term effect on the housing market is a push similar to what we saw when rates dropped in February.
The anticipated effect on inflation remains to be seen. It certainly seems like the Federal Reserve and Governments worldwide are now essentially providing quantitive easing and bank bailouts but calling them by other names. France is supposedly going so far as to raising the retirement age from 62 to 64, assumedly to improve their financials?
That in layman's terms is restarting the printing press, absorbing the bad debts (that central banks enabled through historic low rates in the first place) and likely less or more conservative underwriting standards from those same banks. The projections are astounding, with JP Morgan estimating that the US Central Bank could need to provide, inject or insure up to $2T more USD. The net result on regional and smaller community banks is that there will be less of them. Big banks will continue to get bigger and leave investors and consumers with fewer banking options.
As real estate and the underlying mortgage securities and financial mechanisms are an essential component of the entire financial system (as we saw in 2008) I expect that this pivot in liquidity will inevitably have a positive effect on mortgage rates. In other words, regardless of what inflation does, eventually the FED will provide some kind of backstop to mortgage backed securities that will drive rates downward.
Clearly the future has never been more certain. Historical regulatory standards, precedence and influence was implemented in less than one week! Actually one weekend..lol The argument could be made that US Real Estate investment has never been more appealing and that availability to credit and favorable and reliable financing should continue to be available.
If access to housing credit is dramatically reduced or substantially more expensive the real estate market is likely to become more consolidated through the underwriting of mortgage debt by a more concentrated collective of major US Banks.
For better or worse I was a mortgage broker in 2005 and through 2011. I was licensed as recently as 2022. I think the most concerning component of the current banking 'crisis' (and let's call a spade a spade) is that nobody really knows what the bad debts are but sooner or later we're going to pay for them.
Hope this helps?
- AJ Wong
- 541-800-0455