We’ve all heard the familiar story about real estate. Interest rates were too low, people became overleveraged because of all the cheap money, bought a bunch of real estates, and then interest rates went higher than people were expecting; that meant they could no longer afford the future payments.
But they also could not afford to liquidate their property because they would not have enough left to pay off their loan if they did.
Their only option at that point was to default, which meant that the banks who had also become overexposed to these real estate loans were at risk of failure for having too many of these loans default.
Now, you might think that I am describing the great financial crisis to you. However, what I am describing is what is going on right now.
Timecodes
0:00 The Real Estate Story We All Know
1:13 The Great Financial Crisis and Its Causes
1:31 Adjustable-Rate Mortgages and the Housing Bubble
3:55 Current Situation: A Crisis in Commercial Real Estate
5:12 Commercial Real Estate Today: A Repeat of History
14:14 What to Expect and What to Do
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The real estate market has always been a driving force of the economy. However, the COVID-19 pandemic and the subsequent economic crisis have created a real estate crash that is causing significant damage to the industry. This crisis has impacted not just homeowners and renters, but also the banks that have lent money to the industry.
Experts predict that this real estate crash may wipe out banks, and it’s not hard to see why. The crisis is widespread, and it affects almost every aspect of the real estate industry. Homeowners are struggling to pay their mortgages, renters can’t afford to pay rent, and many businesses that depend on the industry, such as construction and real estate companies, have had to close their doors.
The domino effect that this crash is creating is causing significant financial losses for banks. Bankruptcy and foreclosures are on the rise, which means that banks are going to see a significant hit to their bottom line. Even some of the most established banks in the industry are feeling the pressure of the crisis.
One of the biggest concerns of the banking industry is the potential for a massive wave of defaults on mortgage loans. Many people who were once able to pay their mortgages are struggling due to job losses and decreases in income. This means that they will not be able to make their mortgage payments, and banks will be left with the collateral, which is often worth much less than the original loan.
The real estate crash is also impacting the market in other ways. Banks are now more cautious about lending money to the industry, which means that fewer people are able to purchase homes or start businesses related to real estate. This decrease in lending will have a ripple effect on the entire economy.
So, what can be done to prevent this real estate crash from wiping out banks? The truth is, it may be too late to prevent significant damage. The government can provide some relief to homeowners and businesses, but it may not be enough to turn the tide. It’s possible that banks will need to take more significant losses and adjust their business models to survive.
In conclusion, the real estate crash is far-reaching and has the potential to wipe out banks. The domino effect that the crisis is creating is causing significant financial losses for banks, and the potential for mortgage defaults is a significant concern. As the crisis continues, it’s unclear what the future holds for the real estate industry and the banking industry as a whole.
I suggest you offset your real estate and get into stocks, A recession as bad it can be, provides good buying opportunities in the markets if you’re careful and it can also create volatility giving great short time buy and sell opportunities too. This is not financial advise but get buying, cash isn’t king at all in this time!
Recession becomes a problem if your investment portfolio is badly damaged at the same time you are withdrawing funds to fund your life now or in retirement. Also problematic if it harms our kids or grandkids. not everything is as bad for everyone. some are smart, some are dumb and yea some are
just unlucky. my dad left me an inheritance of
around $1.5m in real real estate and some other investments in stocks & cryptocurrency. I have kept the money flowing, amassing around $120k every damn quarter, aside from my job as an engineer. not to be brash as i know everyone has their own different situations in life but it's also worth noting that a lot of people have poor money management skills and strategies.
More bailouts
That's not the ARM trap. ARM trap is in order to protect you from short term interest rate spikes we'll give you a 5/1 now. In five years when interest rates will "theoretically" be lower you can refi and capitalize. That lie is sold and bought then, when interest rates are higher or the borrower has a higher credit risk and can't refi, rates go higher and the borrower becomes fully insolvent. Saw it all through my area in 08.
Residential is crashing too, SF has dropped 37% across the market. People bought a payment, if they lose a job, they'll walk away just like investors in CRE.
Great video! it is challenging to make precise predictions for the market as it is still uncertain how swiftly or to what extent the Federal Reserve can decrease inflation and borrowing expenses without causing a significant drop in demand from buyers for everything from houses to automobiles."
We are truly doomed – everything is imploding at once.
Good insights. Curious if you think this could also impact corporate residential landlords.
Chicken little. Nothing ever happens
My ex-gf's cap rate was very high
credit standards have been better with the lowest rates and consumers have the least excess cash at the end of month minus the cost of live i find that so interesting ….
Right now the textbook that is most commonly used in our school systems in economics is a book written by Paul Samuelson and in that book here's what he says regarding the purpose of the Fed: "The Federal Reserve sprang from the panic of 1907 with its alarming epidemic of bank failures. The country was fed-up once and for all with the anarchy of unstable private banking." That's what the students are learning.
Let's let that go for the moment and say ok if that is the purpose of the Fed, let's give it a report card and see how well it has done in stabilizing the economy. Since it was created in 1913 the Federal Reserve System has presided over the crashes of 1921 and 1929, the Great Depression of 1929 1939, recessions in the years 1953, 1957, 1969, 1975 and 1981, and a stock market Black Monday in 1987. We all know that corporate debt is soaring, personal debt is greater than ever before, both business and personal bankruptcies are at an all-time high, banks and savings and loan associations have failed in greater numbers than ever before in our history, interest on the national debt now consumes half of all of our tax dollars, heavy industry has all but been replaced by overseas competition, we're facing an international trade deficit for the first time in our history, 75% of downtown Los Angeles and other metropolitan areas are now owned by foreigners and over half of the nation now officially is in a state of recession.
Home owners in other countries like the United Kingdom, cannot lock in their mortgage rates for 30 years. Rate increases are causing mayhem right now, as homeowners come out of their fixed deals – usually fixed for 2 or 5 years max in other countries.
Pave the way for fednow
The option strategy doesn't make sense. There is no way to sell a spread with 50ct risk and $4.50 reward. If he is shorting VNQ with a (credit) call spread, means that he is selling calls, therefore, your max profit is the premium you sold it for.
Joe do you have any opinion on this? Cap rates are going up, but they are still about a percentage point lower than they were 10 years ago, meaning investors are still getting better returns than expected (PE firms and investors usually assume exit cap rates of 50-100 bps higher than going-in rates). This means we still have a long way to go before these deals are underwater, probably not for another 5 or 6 years when they are selling properties bought when cap rates were super low.
The first few small bank failures have already wiped out the FDIC, and the worst has yet to come.
As a beginner lvl investor, would your options course be for me?
Great video. Learned about Commercial Real Estate what I had no clue about. You made it clear how next banking default will occur provided no otherworldly incidents don't start it first. Since so much commercial space is vacant the only option I see is converting much of it into apartments for rent or lease so it will be used and increases properties current market value.
Most loans granted by commercial banks have variable rates. SBA 504 loans always come with a fixed interest rate,
@HeresyFinancial Have you done Deep Dive/Due Diligence on iTrustCapital?
Black rock will buy all the homes and commercial real estate for cash for 1/3 below the market rate. Rentals will be big business for them.
I closed on my refinance at a fixed 2.99% three months before interest rates rose… I know some ppl got a better rate than this, but I'm happy!
I always thought credit scores are bs. A high credit score doesn’t mean someone is going to pay during hard times or if their financial situation changes nor does a low credit score mean someone is going to default. As a former landlord, renting units whether residential or commercial is nothing but a f’n headache.
WeWork was a sneak preview.
Regarding 2008, most MBSes apparently didn't even have losses in the end, but the panic made then illiquid and impossible for banks to finance anyway, so it didn't matter whether they were good assets or not.
I used to enjoy this channel. I'll unsubscribe. It's just become another sales job.
In 2008 the banks were calling in their loans and throwing everyone outt in the streets. So NOW, if everyone defaults on their loans, the banks go out of business??? Good!! Turnabout is fairplay! I hope everyone stops paying on their mortgages. Throw those Rosensteins (Treasury sec known as the king of evictions in 2008) out on their a$ses.