Never let a crisis go unutilized; in every crisis there is opportunity.
Three failed banks this week, including the number 2 and 3 largest banks in the country. Silicon Valley Bank failed due to funding volatile high tech start-ups and the falling value of bonds, purchased when interest rates were near zero.
Bond values have been diminishing due to the Federal Reserve’s rapid and aggressive raising of the prime interest rate to combat inflation, but which causes devaluation of bond values held as assets (all banks invest in bonds since bonds tend to be conservative investments not subject to the volatility of the stock markets).
According to the Federal Deposit Insurance Corporation (FDIC), it is estimated that across all banks in America there is currently $620 billion in unrealized losses due to bond devaluation by rising interest rates.
Signature Bank and Silvergate Bank failed because they got away from solid, conservative lending practices and got heavy into cryptocurrency which was viewed as an opportunity, but cryptocurrency has no country currency affiliation or government protections, so cryptocurrency is viewed as a risky investment fad which has proven its vulnerability with its own liquidity crisis last year.
In view of these failures, many economic sector professionals wonder if the Federal Reserve will abate the practice of aggressively raising interest rates or even dropping interest rates to prevent more bank failures due to bond investment devaluation.
Per an article by Sunil Dhawan in the 15 March edition of the Financial Express, “…the Federal Reserve made two major mistakes in the recent past which are now coming back to haunt them.” “Interest rates were kept low too long even when evidence of inflation was visible, and since it takes 18 months for the effects of monetary policy to manifest, it is argued that the rapid and aggressive interest rate hikes haven’t had time for the effects to manifest.”
There is much concern that if the Federal Reserve continues to push higher rates, the U.S. economy will stop growing and we will slide headlong into deeper recession (arguably we are already in a recession). The next Federal Reserve meeting is March 22 which, by the time this article publishes, is just around the corner.
Don’t rush out and remove your funds from banks; however, if everyone did that, it would create a banking crisis. Banks typically hold 15-20% liquidity of their deposits, so if there was a panic run on banks where the masses withdrew their cash, there could be a real crisis since banks would lack the liquidity to cover all the withdrawal demands.
Bank deposits are insured up to $250,000, so if you have more than that amount in cash, open bank accounts at different banks. Maximum insurance is $250,000 per institution, not per individual accounts. Credit union deposits are insured as well but not by FDIC, rather by the National Credit Union Administration (NDUA), an independent government agency. Investors and employees are not protected but depositors are up to $250,000.
Okay, with all that nastiness discussed, where are the opportunities you ask?
Due to the banking crisis mortgage interest rates dropped ½ point last week since mortgage interest rates closely mirror the 10-year Treasury Bill. The opportunity for buyers is that they will increase their purchasing power. If the cost of money is reduced, then buyers can afford more houses (or can afford a house as many frustrated buyers have been locked out of the real estate market). This should increase the depth of the buyer pool which is good for sellers.
In the Fallbrook market and around North San Diego County, there is a real estate inventory shortage, homes are still flying into escrow often above list price which represents an opportunity for sellers, with the proviso that properly priced properties sell. If there are more buyers competing for few available properties that will keep the market firmed up and reduce downward pressure on prices.
The value of proposition 19 (previously discussed) where homeowners can transfer their lower tax base means concern about selling then buying a smaller home (downsizing) is remediated since real estate taxes are a function of purchase price.
So, Mom and Dad can downsize which will increase the amount of inventory and the real estate market gets healthy again, a win-win for both buyers and sellers. Timing is everything though; how long will prices remain at current levels? If we do slide headlong into recession since inflation is still rising, then the above opportunities might no longer exist.
Opportunity has a limited life span before it’s not an opportunity any longer. If there is a thought that there could be a real estate transaction in your future, then the time to pull the trigger might be approaching to make it happen.