All Things Real Estate: Bank failures’ impact on lending

All Things Real Estate: Bank failures’ impact on lending

I am extremely concerned about the failure of SVB, Signature and now Credit Suisse. Who will be next? There will be smaller banks that are stressed financially with the much higher rates, that had investments in Bitcoin and other digital currencies and do not have the money to back them up.  OMG, we are in for a very tumultuous and scary time and this will have a major impact on lending and real estate purchases.

What I have been watching and waiting for are “what makes sense” opportunities.  They are coming and will be flooding the market over the next six to 36 months.  Fed Chairman Jerome Powell, who has increased rates nine times in the past 16 months, may possibly add another 1/4 to 1/2 point hike this week.  Although the inflation rate has come down to supposedly 6.5% from the 8%-plus high last June, I believe he will have to continue raising rates to quell our unrelenting inflation in order to get it down to his 2% goal.  I am not sure how many months or even years that it will take to succeed in achieving his objective.

Looking back, the Fed through “Quantitive Easing” made available over $6 trillion of digital currency to the banks and consumers, but actually only printed approximately $3 trillion — a move 99% of the population probably didn’t know about. The middle class, whatever is left of it, is in huge trouble.  Credit card debt was $972 billion in January 2023, the most ever on record, because everyone who was receiving PPP, EIDL, and unemployment insurance is now out of dollars and they are using their plastic to survive.  That is a sad and truly scary position to be in.

Who can predict when this catastrophic situation we are in will end? It’s obvious inflation is still out of control, but raising rates further will only exacerbate our fragile, yes fragile economy as layoffs will continue to shed excess employees as consumers continue to slow their spending, especially on discretionary purchases.

Layoffs will be the mainstay of our market as things continue the way they are.  I wouldn’t be surprised if we see more food pantries spring up and more families and individuals need assistance because of the lack of available money to buy food.  I already see this in Long Island at the 501C not for profit “The Interfaith Nutritional Network” Food Pantry on 100 Madison Ave. out in Hempstead, NY.  They are feeding in excess of 500 families and individuals twice a day and it will be getting much worse!

Purchasing any homes or any other type of real estate with financing will be that much more challenging and difficult as it has and will continue for many to be too costly to afford the monthly expense.  However, that will depend on one’s income as higher-income families and individuals will most likely still be better off buying as a comparison with renting, depending on the cost.  It will still be more advantageous due to the tax deductions, the potential of using part of your home as an office, as many have been doing and the stability of being your own landlord and having a fixed-lease (a mortgage) for 30 years.

Taking a seven-year fixed ARM (adjustable rate mortgage) for now might be the best approach and rates could come down within that time.  At least you won’t be throwing out your money on someone else’s property, paying his/her mortgage, providing them tax and expense deductions, reducing your wealth and giving it away each and every month as well as the security of knowing you are now in control as the landlord (homeowner) and can determine if and when you want to move.

Cash purchasers are and will be in better positions to make purchases whether it is a home or a investment property ecause “cash just might be king” in those situations when motivated sellers would rather take a sure transaction than worry about financing with an appraisal that may not be what your agreed and accepted price is.  The buyer can now come back and renegotiate the price if the sellers are not going to be reasonable. I would impress upon sellers not to lose a qualified buyer and think outside the box to make the sale work.

As more banks potentially fail, then the existing banks will become even more restrictive with their lending requirements.  This, in turn, will create a tougher environment for financing for those with mediocre credit, insufficient income and debt/income ratios or those who don’t want to pay the higher rates but are qualified.  Some sellers who really need or want to sell should consider providing either a short or longer-term mortgage to create a greater demand for their home or even investment property.

Most important for the seller is if there are substantial capital gains then providing financing will stretch out their capital gain taxes over many years and you will receive a great interest rate, than any bank, as you now become the bank.

The future is uncertain and the Fed is between a “rock and a hard place.”  We are already seeing bailouts for depositors, although they are candy coating it by saying “shoring up the banks and protecting consumer’s deposits (but not investors in those banks).  It is very obvious that taxpayers will be footing the bill in the future and I am somewhat convinced at this point in time that there will be a recession.  How bad it will be we’ll find out this year or next.

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