What is that loud “sucking sound”? That deafening WHOOSH? That is the sound of credit being sucked out of the economy… and watch out to make sure that you are not sucked out along with it.
Real estate markets are about to see their tide flow out….and then, to paraphrase the famous Warren Buffet, some real estate “bathers” will be shown to be vulnerable with no swimsuit.
Here are our Top 3 Tips for how to make sure to be safe and even profit from this. We at Diggifi are here to help.
First things, first: Understand what’s really going on. We explain below, in the second half of this blogpost.
There are important and dangerous things going on beneath the surface of the banking system now – and before you make a move as a real-estate-investor, you need a road-map to understand what’s going on, as it will have big impacts on the real estate market in general, and your loans (both current and future), in particular.
Second, build borrowing relationships now with private, non-bank lenders. We strongly recommend you have a borrowing strategy centered on debt funds and other private lenders, and Diggifi can help you get that set up now – click HERE to “book a consult” with an expert Diggifi agent.
Third, make sure your assets are secured, so you’re hero and not zero – both your bank deposits and your real estate holdings (and their rental incomes). Why (other than the obvious)? Real estate markets are about to shake, for 3 core reasons. First, you want to be certain your cash is safe somewhere strong, so you’re positioned to jump on opportunities. Second, high interest rates deflate asset bubbles – meaning there will be opportunities, as prices are going to come down. Third, if a recession hits full-force, a whole lot of investors/homebuyers/borrowers are going to be faced with a wall of hurt…and banks are not motivated to be terribly borrower-friendly now. Explanations below.
So, to bring it all home – Why do private lenders make sense now? The banking system is very fragile now, especially those banks that take deposits. By contrast, private lenders have a real advantage in these conditions, as they are non-depository financial institutions,. They don’t have (borrowed) deposits as their source of funding. Rather, they get their money from other sources – like family offices that have set up a lending arm, built around the family’s wealth. They are not subject to an outflow of deposits and are able to stand behind their loans.
Let’s make this tactical, and help it come alive – what do you do about it? Your scenario might be any of the following – and they all call for similar approaches:
- If you have a loan/mortgage coming due – get financing options in place, especially from private lenders.
- If you have a new investment or construction project coming up – same.
- If you spot new opportunities that show up as troubled mortgages from their current owners or banks selling off homes – ditto.
….in any of these events, you need a reliable source of funding, and ideally you’d prefer to have several, to build competition and get the best terms in a fragile environment. That’s where Diggifi can help you — click HERE to “book a consult” with an expert Diggifi agent.
So, what’s going on behind the scenes? The banking system is in a state of real fragility now. Further, the interests of fragile banks and their borrowers are very much mis-matched. That means banks are weak, and any mis-step by a real estate borrower can lead the bank to strengthen their position at the borrower’s expense.
Why?
All of those borrowers that stretched a year ago want to buy the house of their dreams, under intensely competitive buying conditions – and so possibly over-paying – desperately want to hold onto their 2.5% mortgages.
But that exact mortgage is what the banks see as a problem, as that’s THEIR investment….and it’s only paying 2.5%….FOR THE NEXT 30 YEARS! So, if a recession sets in, driven by credit tightening, and homeowners start losing jobs, banks may be looking to reset their interest rates even if they let the owner stay in the house.
Again, why?
Tightened credit conditions are actually the Fed’s point/goal. The failing banks we’re starting to see around us are not some roadkill or “unintended consequence” –and that’s not to say that the Fed wants to knock out a few banks (they don’t). However, they do want to bring down prices and, heck, if a few banks fall by the wayside…they were just in the wrong place at the wrong time.
Some contrarians even feel the banks deserved it. Why? Not easy to explain in a blog-length post, but banks make money by borrowing money (often, from depositors) and then investing it (often, in the form of loans, but also in market-rate investing, in bonds). When interest rates were near-zero, it was cheap to borrow, and any investment – even a 2% mortgage for 30 years, made good sense and good profit.
But some banks out there made mistakes – essentially they overborrowed too many deposits, and then invested these in the wrong, low-paying long-term securities that (due to interest rates of a year ago) paid out lower interest rates than today.
But wait! Wasn’t the whole banking system was faced with identical conditions? In some ways, yes, but it comes down to how they each loaded up on deposits and where they chose to invest them. Certainly, all shared the same low interest rates of the last few years, the same pandemic-fueled easy money and massive deposit availability, and then followed by rapidly rising interest rates this year that lead depositors to demand higher rates or move their money out.
Walk it through – inflation is high, interest rates rises are meant to cool it, by making it more expensive to borrow…so there’s less borrowing, which gives people less borrowed-money to spend Banks are fragile, their borrowers may become even more fragile if there’s a recession…and mortgages will suffer. The answer for you? Book a consult HERE with Diggifi’s loan experts.