\n<\/p>\n
The US economy<\/strong> has survived the past few years surprisingly well. But there\u2019s one huge threat on the horizon no one is watching<\/strong>. With layoffs <\/strong>and bankruptcies <\/strong>already starting to tick up, a new wave of misfortune could hit consumers EVEN as inflation<\/a> cools, interest rates begin to drop, and asset prices hit an all-time high. What\u2019s coming for us that only the most economically inclined know about? <\/strong>We\u2019re about to break it down on this BiggerNews<\/strong>.<\/p>\n J Scott<\/strong><\/a>, investing legend and author of too many real estate books to name, is back on the show to talk about housing crashes, economic predictions, mortgage rates<\/strong>, consumer sentiment<\/a>, and the silent threat to the US economy<\/strong> that nobody is thinking about. J knows the game better than most and is the furthest thing from a bubble boy or permabull. He\u2019s got his finger on the economic pulse and uses the most up-to-date economic data<\/strong> to form his opinions.<\/p>\n On today\u2019s episode, J shares whether or not he believes another housing crash<\/strong> is coming, how America could become a \u201c<\/strong>renter nation<\/strong><\/a>\u201d <\/strong>over the next decade, whether or not home prices <\/strong>will stay high once rates drop, how low mortgage rates could go in 2024<\/strong>, and the biggest economic risk to businesses, employees, and anyone operating in the US economy.<\/p>\n Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: J: Dave: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hey, everyone. Welcome to the BiggerPockets Podcast. I\u2019m your host today, Dave Meyer, joined by one of the OG original BiggerPockets members, podcast hosts, all sorts of things. Mr. J Scott, himself. J, thank you for joining us today.<\/p>\n
Thanks for having me back. I feel like it\u2019s been a minute since I\u2019ve talked to you guys.<\/p>\n
I know it\u2019s been way too long. How far back do you go with BiggerPockets?<\/p>\n
2008. Six months before I flipped my first house, I found BiggerPockets \u2019cause I did a Google search for how to flip houses. So yeah, I think it was something like March or April of 2008.<\/p>\n
That\u2019s incredible. I bet half of our listeners right now didn\u2019t even know that BiggerPockets was around in 2008. Not to date you, J-<\/p>\n
Oh, I\u2019m old.<\/p>\n
\u2026 but just to explain that we have a lot of experience at BiggerPockets. We\u2019ve actually been around for about 20 years, which is incredible, and J has been one of the most influential investors and participants in our community. So we do have a great show that I\u2019m very excited to have J on for because we\u2019re going to be answering questions, some of our audience and some of the Internet\u2019s biggest questions about the economy, about the real estate market-<\/p>\n
Hold on. Hold on, I thought we were talking about Taylor Swift and the football game that\u2019s coming up. I\u2019m not prepared for an economic discussion.<\/p>\n
Well, we could sneak one of those questions in there. Do you have strong opinions on what\u2019s going to happen there?<\/p>\n
I don\u2019t. I don\u2019t. It just seems like that\u2019s all anybody\u2019s talking about these days. It doesn\u2019t feel like anybody\u2019s talking about economics or real estate anymore. All I hear about is football and Taylor Swift.<\/p>\n
Well, there\u2019s some escapism going on where everyone\u2019s just tired of talking about the economy or what\u2019s going on, but it is so important, we have to be talking about what\u2019s going on with the news and the housing market if we\u2019re going to make good at investing decisions. So unfortunately, J, actually, I\u2019m going to stick to the script and make you answer some real questions that are going to be useful to our audience. So let\u2019s just jump right into our first question here: housing crash. This is the number one thing being searched right now on Google about housing, about the economy, and we want to know what you think, J. Are you on the housing crash side of things? When I say housing crash, let\u2019s talk specifically about residential \u2019cause I know you invest both in residential and commercial real estate.<\/p>\n
So here\u2019s the thing. First of all, when we talk about housing crash, too many people, I think, conflate this idea of the economy and the housing market, and they\u2019re two very different things. So when I hear the question, \u201cAre we going to have a housing crash?\u201d Sometimes people actually are asking, \u201cAre we going to see an economic market crash?\u201d Because they assume it\u2019s the same thing, but historically, they\u2019re two very different things. Let me ask you a question, Dave. Going back to let\u2019s say, 1900, how many housing crashes have we seen in this country?<\/p>\n
Crashes? I want to say just one, but maybe two, \u2019cause most of the data I look at is from the \u201940s on. So I don\u2019t know if there was one during the Depression, but I\u2019m pretty confident since then there\u2019s only been one.<\/p>\n
Yeah, there wasn\u2019t one during the Depression, and the only housing crash we\u2019ve seen in this country was in 2008. We saw a little blip in the late \u201980s with this thing called the savings and loan crisis, which was another recession that was tied to real estate. But for the most part, every recession we\u2019ve had in this country, and we\u2019ve had 35 recessions over the last 160 years, every recession we\u2019ve had has been non-real estate caused. Typically speaking, when you have a recession that\u2019s not caused by some foundational issue with real estate, real estate\u2019s not affected. Now, 2008 was obviously a big exception. 2008 was a real estate crisis, and it was a real estate-caused recession, and we saw a housing crash.
But the problem there is that I think there\u2019s something called recency bias that where a lot of us are falling prey to. It\u2019s the last big recession we remember, and so we assume that the next recession and the one after that and the one after that are going to be similar to the one we remember the best, which was the last one. But the reality is 2008 was very out of the ordinary. It was the only time we\u2019ve seen housing crash in the last 120 years. So I think the likelihood of a housing crash anytime soon, and it\u2019s not just because of historical reasons, and we can talk about other reasons, I think it\u2019s very unlikely that regardless of what the economy does over the next couple of years, I think it\u2019s very unlikely we see a housing crash or even a major housing softening.<\/p>\n
Well, see, J, this is why we bring you on here. You have so many good stats and an excellent opinion on this, and I completely agree with you about this. I was calling it a year or two ago this housing market trauma that I think my generation, I\u2019m a millennial, had and a lot of people around my age grew up during this era when the housing market was a disaster for most people, and they feel like that that might happen again. Of course, there\u2019s always a chance. But as J has provided us with some really helpful context, that is not the normal situation in a broader economic downturn. I am curious what you think about this, \u2019cause part of me thinks there\u2019s this recency bias, but there\u2019s also this desire for the housing market to crash by a lot of people. For people who might not be investors are own property currently, I think a lot of people look at prices now and the relative unaffordability and are hoping or rooting for a housing market crash, even though it sounds like you think that might not be likely.<\/p>\n
Yeah. There are a lot of people in this country that are really unhappy with the direction of the economy and their personal finances. I think inflation at 9% a year-and-a-half ago really threw people and put people in a pretty bad situation. We talk a lot about the wealth gap in this country. There\u2019s a big gap between those who have money, those who have hard assets, real estate and stocks. 10% of this country are millionaires, but the other 90% are struggling, and there\u2019s a big gap between the two. Those who are struggling, they don\u2019t want to be struggling. They remember 10 years ago when there was a crash after 2008, and all the people that had lots of money started buying up houses and buying up stocks and buying up all the hard assets, and they want to go back to that time.
They want to have a chance to participate in that. Unfortunately, I don\u2019t think we\u2019re going to see that type of opportunity again anytime soon. Yeah, there\u2019s a lot of frustration out there. It\u2019s also, I\u2019ve talked a lot about this over the last couple of weeks, there\u2019s a big disconnect between economic data. The economy is looking really good purely from a data standpoint, but economic sentiment or public sentiment is just the opposite. There are a lot of people who don\u2019t feel like things are good. People don\u2019t feel like the economy\u2019s moving in the right direction. They don\u2019t feel like their personal finances are moving in the right direction. So there\u2019s this big disconnect between what the data\u2019s telling us and how people are feeling. So yeah, it\u2019s a tough time out there right now.<\/p>\n
Okay, so I do want to dig into that disconnect that you just mentioned a second ago, and we\u2019re going to get right into that after the break, along with some of the other hottest questions in real estate like, when will mortgage rates come down? Will affordability ever improve, and what is the single biggest economic risk right now? Stay tuned. Welcome back to BiggerNews. I\u2019m here with J Scott hashing out some of the most debated economic questions in real estate right now. If you remember, right before the break, J pointed out that there\u2019s a big disconnect between what the economic data is telling us versus how people, the American people actually feel. So let\u2019s dig into that. That\u2019s a great topic. Let\u2019s jump into that a little bit because I see the same thing.
When you look at traditional measures of the economy, things like GDP, it grew in Q4, and it actually started to accelerate at the end of Q4. We also see labor market has been up and down a little bit the last few months, but generally, it\u2019s just unemployment rate is very low in a historical context. There are many different ways to measure the labor market, but many of them point to strength. So when you look at these old school or traditional ways of looking at the economy, it looks great, but you see people are frustrated. They have a lot of pessimism about the economy. I\u2019m curious, do you think it\u2019s because that gap in wealth that you mentioned? Because when you look at GDP, that\u2019s basically a measurement of how big the pie is growing, but it doesn\u2019t really tell you anything about how that pie is being divided up between people in the United States.<\/p>\n
Well, this is a weird thing because yes, we have really poor public sentiment right now. People feeling stressed and strapped and not happy with their personal finances, but at the same time, they\u2019re spending money. You look at holiday shopping, we were up 14% year-over-year for holiday shopping this year. People are spending money. Despite the fact that college loan repayments restarted, so people you would think would be more strapped there. The cost to rent right now, 52% more expensive to rent than own right now, so you would think people are feeling strapped paying their rent. Food costs have obviously gone through the roof. Even though inflation has come down, we\u2019re still seeing higher than typical food inflation. So that thing, when people go to the grocery store once or twice a week, they\u2019re getting hit pretty hard.
So you would think it would impact people\u2019s spending habits, but the fact that we saw GDP grow at 3.9%, the fact that we saw year-over-year holiday spending up 14%, that tells me that people aren\u2019t really feeling it. I\u2019m thinking that part of the issue, or part of the reason for that is number one, we are seeing that credit cards are getting maxed out. Savings is at the lowest rate in history right now, so people are running out of money. But at the same time, the average homeowner has $200,000 worth of equity in their home that they can tap, not even including that 20% that the lender requires them to keep in. So people can tap home equity if they need to.
The stock market is at all time highs. So anybody that owns stock has the ability to cash out some of their stock holdings, and they have access to cash. Anybody that holds Bitcoin or gold or other hard assets, those things are going through the roof, so people can sell their assets. They have access to cash and they can just keep this gravy train rolling. So I think as long as the economy is moving along and asset prices are going up, people are going to find access to cash one way or the other, and they\u2019re going to keep spending. So it\u2019s just a question of is this musical chairs as the music going to stop at some point, and we\u2019re going to see everything come crashing down?<\/p>\n
I\u2019ve been surprised personally, J, with some of the things that you mentioned. Back in September when student loans resumed, I was like, \u201cOkay, things have to start slowing down,\u201d or you periodically get these reports from the Fed or other sources that say that all the excess savings from the pandemic from stimulus checks, that has all been depleted, but it keeps going. Obviously the credit card stuff is concerning, but I personally felt like the writing was on the wall six months ago. But it continues to go on, and I continue to be surprised.
So I think that is one of the things I\u2019m going to keep a close eye on throughout this year is just what is going on with consumer spending, because that makes up 70% of the U.S. economy. So as long as people keep spending, as J said, that bodes well, at least for the traditional ways of measuring the economy like GDP. Now, I do want to get back to the housing market a little bit. You mentioned that you don\u2019t think the housing market is going to crash. Can you just talk to us a little bit about some of the fundamentals of the housing market and why you think the housing market is poised to at least remain relatively stable in the coming years?<\/p>\n
Yeah. So it all boils down to supply and demand. Just like everything else in the economy, if you look at supply and demand trends and supply and demand pressures, you get an idea of where prices are likely to head. It shouldn\u2019t surprise anybody that we in the single-family world are seeing high demand and low supply right now. Anytime you have high demand and low supply, prices tend to go up or at least they stabilize. So historically, we generally see about 1.6 million properties on the market at any given time in this country. We\u2019re at about half that right now, so there aren\u2019t a lot of properties out there to buy. Supply is low. At the same time, heading out of the Great Recession, 10 years ago we were at about 5 million units underserved. There was demand for about 5 million more housing units than we had.
Well, we\u2019ve been building units at about the same rate as demand has been increasing for units. So based on that, we can assume that we\u2019re still about 5 million units short in this country on housing. New homes, we completed what, 700,000 last year I think it was, or maybe we sold 700,000? So that\u2019s still like seven years worth of inventory that we need to sell to catch up to the demand in new housing. So long story short, low supply, high demand, not enough building basically means that prices are going to be propped up. Case-Shiller data for November just came out a couple of days ago, and that data is always a few months behind. But data for November basically indicated that we saw a 5% year-over-year increase in housing prices, and housing prices are once again at all time highs. So things aren\u2019t slowing down yet.
I suspect they will at some point, but again, I don\u2019t think there\u2019s going to be a crash because I think that this low supply and what\u2019s driving low supply, people might ask. Well, it\u2019s the fact that millions of homeowners, 85% of homeowners or something like that, maybe it was 87% have fixed-rate mortgages at under 5%. Something like seventy-something percent have under 4%. So homeowners aren\u2019t going to sell their houses right now and get rid of these great mortgages just to go out and buy something else that\u2019s overpriced and have to get a mortgage at 6 or 7%. So I think this low supply is likely to persist. I think the demand both from people who are paying 50% more to rent and now want to buy, investors who want to buy more property, large institutions like BlackRock and others, hedge funds that want to buy, there\u2019s going to be a lot of demand out there. So I don\u2019t see prices coming down anytime soon, even if we do see a softening economy.<\/p>\n
That\u2019s a great way of framing it. I think for our listeners, it\u2019s really important to remember that housing crashes don\u2019t happen in a bubble. It really does come down to supply and demand, and you can analyze each side of those. As J said, when you talk about supply, it\u2019s very, very low right now. So if you think that there\u2019s going to be a housing crash or you want to know if there\u2019s going to be a housing crash, you have to ask yourself where would supply come from? Where is it going to materialize from? And I don\u2019t see it. Construction is actually doing decently right now, but it would take years at this decent clip to eliminate the shortage you talked about.
You mentioned the lock-in effect, and that\u2019s constraining supply. It\u2019s also worth mentioning that inventory was already going down even before the pandemic because people have been staying in their homes longer. Lastly, I know a lot of people, especially on YouTube, talk about foreclosures coming in and starting to add supply, but there\u2019s just no evidence of that. You might see a headline that it\u2019s up double from where it was in 2021, great. It\u2019s still about 1\/3 of where it was before the pandemic and it\u2019s at 1\/9 of what it was during the great financial crisis. So I don\u2019t see it. I hope I\u2019m wrong because I do think it would help the housing market if there was more inventory, but I just don\u2019t see where it\u2019s coming from.<\/p>\n
At this point, it looks like there\u2019s only one thing that\u2019s going to drive more supply, more inventory, and that\u2019s mortgage rates coming down, interest rates coming down, because at that point, people feel more comfortable selling their houses and buying something else because they know they can trade their 4% mortgage for a 5% mortgage or a 5 1\/2% or a 4 1\/2% mortgage. So people are going to be more comfortable doing that. But what\u2019s the other thing that happens, if interest rates come down?<\/p>\n
Demand goes up.<\/p>\n
Demand\u2019s going to go up. So even if we fix the supply problem, the way we fix it is likely going to create more demand. So I\u2019m not saying that nothing could impact the market, but I think it would take some major economic shock. It would take a black swan event or it would take some major economic softening, the labor market imploding and unemployment spiking, something like that before we really saw any major increase in supply. There\u2019s no indication that we\u2019re anywhere near that. So I think we\u2019re going to see prices about where they are for the next several years.<\/p>\n
That\u2019s really important to note that there\u2019s always a possibility of what\u2019s, quote, unquote called, \u201cblack swan events.\u201d Basically, it\u2019s something J and I and no one out there can really predict. These are things like the Russian invasion of Ukraine or COVID, things that just come out of nowhere and no pundits or people who are informed about the economy can really forecast those types of things, so of course, those are always there. But just reading the data on the supply side, I totally agree with you. Just to play devil\u2019s advocate for a minute here, even if you couldn\u2019t increase supply, you could change supply and dynamics in the market if demand really fell, if people just didn\u2019t want to buy homes in the same way. I do feel like you hear these things that if housing affordability is at 40-year lows, and so do you have any fear or thoughts that maybe we see a real drop-off in the number of people who want to buy homes, and maybe that would change the dynamics of the market a bit?<\/p>\n
I suspect that we will see that trend, but I think that\u2019s a 5, 10, 15-year trend. I don\u2019t think that\u2019s something that\u2019s going to hit us in the next year or two or three because, again, really, it\u2019s pretty simple. Right now, it costs 50% more to rent than to own, and nobody in their right mind is going to trade their 3% mortgage to pay rent at 50% more. So I do see this becoming a, quote, unquote, \u201crenter nation\u201d over the next 10 years, but again, I don\u2019t see that being a short-term thing. I think that\u2019s going to be a consequence of the market fixing itself. I don\u2019t think that\u2019s going to be a driver of the market fixing itself.<\/p>\n
So the one thing you mentioned that could change the market, and I think it\u2019s really important to mention that when we say, quote, unquote, \u201cthe market,\u201d most people think we\u2019re only talking about prices, and that is a very important part of any market. But when you look at an economic market, there\u2019s also quantity, the amount of homes that are sold. That\u2019s super low right now, just so everyone knows, we\u2019re at, I think, 40, 50% below where we were during the peak during COVID, so that\u2019s come down a lot. One of the things that you mentioned could potentially change, in my mind at least, both sides of the market, both the number of sales and where prices go is if mortgage rates come down. So J, I can\u2019t let you get out of here without a forecast or at least some prognosticating on what is going to happen with mortgage rates in the next year. So what are your thoughts?<\/p>\n
So I think they\u2019ll come down. It doesn\u2019t take a genius to make that prediction. I think most people are predicting that. The reason for that is as of December, the Federal Reserve, the Fed basically reverse course said, \u201cWe are done, our hiking cycle for interest rates for the federal funds rate.\u201d At this point, the next move will probably be down. When the government starts to lower that federal funds rate, that core short-term interest rate, that\u2019s going to have an impact on other markets like the mortgage market and mortgage interest rates. So the market is pricing in that core federal funds rate could likely drop from where is it? It\u2019s at like 5 to 5 1\/4 right now to somewhere between 3.75 and 4% by December.
So 40% of investors are betting their money that the federal fund rate\u2019s going to be down around 4% by the end of this year. So that\u2019s about a point-and-a-half less than where it is now. Does that mean we\u2019re going to see a point-and-a-half less in mortgage rates? Probably not, because that\u2019s spread between the federal funds rate and mortgage rates right now is smaller than normal, so that spread will probably expand a little bit. But I think a point-and-a quarter drop in federal funds rate will likely translate to about 3\/4 of a point in a drop in mortgage rates. So if we\u2019re right now at about 6.6, 6.7, 6.8%, 3\/4 of a point puts us around 6%.
So if I had to bet, I would guess that by the end of this year we\u2019re somewhere between 5 3\/4 and 6% mortgage rates, which is a decent drop, but it still doesn\u2019t put us anywhere close to that 2, 3, 4% that we were seeing a couple of years ago. It will open up the market a little bit. There will be some people selling. You mentioned foreclosures increasing. It turns out that the bulk of the foreclosures that we\u2019re seeing are houses that were bought in the last two years. So there\u2019ll be an opportunity for people that bought in the last couple of years who are struggling to get out. So yeah, I do see mortgage rates coming down, but if I had to bet, I would say 5 3\/4 to 6% by the end of the year.<\/p>\n
I hope you\u2019re right, and I do think that\u2019s general consensus. I think for most of the year, it will probably be in the sixes, and it will trend to downwards over time. I do think personally that it\u2019s not going to be a linear thing. You see that it\u2019s relatively volatile right now. It went down in December, it\u2019s back up in January, but I think the long-term trend is going to be downward, and that is beneficial. You mentioned it\u2019s going to open things up a little bit. How do you see this playing out in the residential housing market throughout 2024, just given your belief that rates will come down relatively slowly?<\/p>\n
I think it\u2019s going to have probably pretty close to the same effect on demand as it does on supply. So I think rates coming down is going to encourage some people to sell, and it\u2019s going to encourage some people to buy, and I think those forces will pretty much even each other out. In some markets, we may see prices continue to rise a little bit. In some markets we may see prices start to fall a little bit. But I think across the country we\u2019re going to see that same average, what\u2019s 3% per year is the average of home price appreciation over the last 100 and something years. So I think we\u2019ll be in that 3 to 5% appreciation range for much of the country if I had to guess. Here\u2019s the other thing to keep in mind. You mentioned that this isn\u2019t going to be linear. This is going to be an interesting year.
We have an election coming up in November, and historically the Fed does not like to make moves right around the election. They don\u2019t want to be perceived as being partisan and trying to help one candidate or another, and so I think it\u2019s very unlikely. In fact, I think there\u2019s only two times in modern history where the Fed has moved interest rates within a couple of months of the election. So I think it\u2019s very unlikely that we\u2019ll see any interest rate movement between July and November, which is a significant portion of the year when you consider that we\u2019re unlikely to see any movement between now and March. So that basically gives us March, April, May, June, and then December. So we have about half the year where we could see interest rate movements. So if we do see any movements, it\u2019ll probably be big movements in that small period of time as opposed to linearly over the entire year.<\/p>\n
That\u2019s really interesting. I had not heard that before. It makes sense that the Fed doesn\u2019t want to be perceived as partisan, so that\u2019s definitely something to keep an eye out for. It makes you wonder if there\u2019s going to be a frenzy of\u2026 it\u2019s already the busy time for home buying, what did you say, April through June, basically? So that\u2019s the busiest peak of home buying activity and might be the most significant movement in interest rates. So we might see a frenzy in Q2 then.<\/p>\n
Yeah, and we can take that one step further. While the Fed doesn\u2019t like to seem partisan leading up to an election, there is evidence that they tend to be in favor of supporting the incumbent, regardless of whether it\u2019s a Democrat or a Republican. They like to see that the economy is doing well in an election year. So what we\u2019ve seen historically, again, not right before the election, but typically, the few months prior to an election or the few months prior to prior to the election, we see the Fed make moves that tend to favor the economy and to favor the incumbent.
So I wouldn\u2019t be surprised if we see a drop in rates in the March, April, May timeframe, even if the economy isn\u2019t necessarily indicating that\u2019s necessary. I think that\u2019s something that Jerome Powell was preparing us for in December when he came out and said, \u201cHey, we\u2019re open to dropping interest rates if we need to.\u201d After two years of basically saying, \u201cWe\u2019re going to keep rates higher for longer,\u201d he suddenly reversed course and prepared everybody for us to start considering dropping rates. So I think that that just could be just a signal that they\u2019re going to be a little bit more dovish in the first half of this year than they otherwise would be.<\/p>\n
Okay. So we are getting into some of the good stuff here, and we are about to cover a recent economic change that will impact lending and the biggest economic risk to investors right after the break. Welcome back, everyone. J Scott and I are in the thick of it talking about the most pressing issues in real estate right now. Before the break, we got J\u2019s predictions on interest rates and what we can expect from the Fed in 2024. While we\u2019re on the topic of the Fed, and man, I pray for the day we don\u2019t follow the Fed as closely as we\u2019ve had to the last couple of years, but they recently made an announcement in a different part of their directive here and announced that the Bank Term Funding Program is ending on March 11th. J, can you just tell us a little bit about what this program is and what this means for the financial system?<\/p>\n
Yeah, so last March, there was this big regional bank called Silicon Valley Bank. Anybody that wasn\u2019t paying attention, basically-<\/p>\n
It feels so long ago-<\/p>\n
Right.<\/p>\n
\u2026 there\u2019s so much has happened since then. I can\u2019t believe that was only a year ago.<\/p>\n
It was less than a year ago. Crazy.<\/p>\n
Yeah.<\/p>\n
But basically, this bank, they bought a whole lot of Treasury bonds and based on the movement of those Treasury bonds, the value of those bonds fell considerably. The bank was in a bad financial situation or it was looking like they could be. So a lot of, not investors, but depositors in that bank started to take their money out. A lot of those depositors were venture capitalists and startup tech firms that had literally millions of dollars in the bank. So some ridiculous amount of money closer to $50 billion was at risk of flowing out of that bank over a couple of days, and the bank essentially became insolvent.
The state of California basically took the bank into receivership, and the federal government said, \u201cWe need to make sure that this isn\u2019t a broader issue that contaminates other parts of the banking sector.\u201d So they set up this thing called the Bank Term Funding Program, where they told banks, \u201cIf you\u2019re in this situation where you bought too many Treasury bonds and movement in bonds has caused you to lose a lot of money, come to us and we\u2019ll give you a loan against those bonds to ensure that you have lots of cash on hand, and you\u2019re not facing this crisis.\u201d They set up this thing called the Bank Term Funding Program, which was a way of loaning money to these banks that said they needed it. Between March of last year and June of last year, banks basically went to the fund and said, \u201cWe need a $100 billion.\u201d<\/p>\n
Oh, just that?<\/p>\n
Yep, 100 billion. A lot of it was in the first couple weeks, but over the first three months, 100 billion was borrowed from this fund. For the next six months through November, December, essentially nothing was borrowed. Basically, banks indicated that they were in a pretty good position, they didn\u2019t need to borrow money from the government, and they were very favorable loan terms, by the way. But banks basically indicated, \u201cWe don\u2019t need to borrow.\u201d Then in December, the Fed started talking about, or the Treasury started talking about getting rid of this program. It was supposed to be a one-year term, which means the program would end in March. Right around the time they started talking about getting rid of the program, suddenly banks started borrowing again. Banks went back to the program and said, \u201cI need money. I need money, I need money,\u201d and it went from 100 billion borrowed to 170 billion over the course of about a month.
The most likely scenario here was that banks realized that they were getting near the end of having the ability to borrow cheap money from the government, and so not because they needed the money. If they needed the money, they probably would\u2019ve gone and gotten it sooner, but because they saw an opportunity to get this cheap money, they went and they took another 70 billion. So a lot of people are looking and saying, \u201cWell, obviously this program is still needed because another 70 billion was borrowed over the last two months. Banks are still in need.\u201d But the more likely scenario is that banks were just taking advantage of this cheap money, and that\u2019s the reason they borrowed, and there haven\u2019t really been any banks that have needed the money since last June.
So I don\u2019t see them phasing out this program as of March to be a big deal. The Fed has also said that anybody that\u2019s borrowed money doesn\u2019t need to pay it back right away, they can pay it back over years, so there\u2019s no risk to the banks that have already borrowed. More importantly, even if they were to get rid of this program on March 11th, I think the date is, if on March 12th there was a bank that was in trouble, I have a feeling the Fed would step in and say, \u201cOkay, we\u2019re going to bail you out.\u201d So I don\u2019t think there\u2019s a lot of risk here. I think it\u2019s something that\u2019s going to be talked about over the next two months a good bit. But I think at the end of the day, it\u2019s going to be a non-event. The government\u2019s already indicated they\u2019re going to bail out anybody that\u2019s in trouble, so anybody big enough that\u2019s in trouble. So I don\u2019t see this being any real issue anywhere.<\/p>\n
In a way, you can see it as a sign of strength. If the Fed is feeling confident enough, as you said, they\u2019ll bail out people who need it. If they\u2019re saying basically people don\u2019t need it, hopefully, that means that the acute issues with the financial system last year with Silicon Valley Bank and a couple of the follow-ons after that is alleviated, and now there\u2019s a little bit more confidence in the banking system. So that\u2019s great news.<\/p>\n
Yeah, and those banks that had trouble last year, they were in a very specific sector. They were in the tech sector. Their profile of borrower and depositor was very different than the typical bank, and that led to a lot of the issues, not so much an issue with the underlying banking system.<\/p>\n
All right, J, last question before we let you get out of here. Is there one economic issue or risk that\u2019s keeping you up at night, or what are you most worried about are going to be following the most closely this year?<\/p>\n
I\u2019ve been saying this for a good six or nine months now, but I think the biggest risk to our economy is the cost of debt for small and medium-sized businesses. There are a lot of businesses out there that need debt to run. They rely on bank loans or SBA loans, or maybe they need equity. They get money from venture capitalists if they\u2019re in the tech space, and a lot of businesses are running negative. They don\u2019t make a profit. They rely on this debt to grow and get them to the point where they become profitable, but they aren\u2019t profitable yet. A few years ago, they were able to borrow this money at 3%, 4%. In the case of venture capital, they were able to get investment money whenever they needed it. Typically, these loans or these investments are on a two to three year runway, meaning that in two to three years, they either need to be refinanced or recapitalized or companies need to go out and get new investment because they\u2019re going to run out of money.
Here we are two to three years after interest rates started to go up, and a lot of these small and medium-sized businesses are now facing a situation where they need to refinance their debt or they need to get new debt, or they need to get new investment. It turns out the cost of capital right now, for obvious reasons, because interest rates have gone up 5%, the cost of that debt has gone up tremendously. So small businesses that were borrowing at 3 or 4% three years ago now need to borrow at 6 or 7%, and business owners can\u2019t afford this. So to borrow at those rates, they need to cut costs, they need to lay people off, they need to scale down their operations. What we\u2019ve seen is that bankruptcies have gone through the roof over the last year, and on the horizon, there are a whole lot more bankruptcies looming. So I think this risk to small businesses is probably the biggest risk to the economy over the next 12 to 24 months until interest rates start to come down.<\/p>\n
This is a really under reported issue it feels like, \u2019cause you hear these huge things where it\u2019s like, \u201cOh, tech, UPS yesterday laid off 12,000 people.\u201d That\u2019s a huge deal. But when you look at who is employed and where, most people work for small businesses, you see these high-profile things. But the American economy in so many ways is based off of small business. So if as you say, a lot of these companies are facing bankruptcy or challenges that is maybe going to keep me up more at night than it has been over the last couple of months.<\/p>\n
Yeah, and it\u2019s not just the small and medium-sized businesses, I think they\u2019re the ones that are most at risk. But even companies like Target and Walmart, they finance their operations by issuing bonds. They raise money by issuing bonds. A couple of years ago, they could raise a billion dollars by issuing bonds at 3%. Well, nobody\u2019s going to buy bonds at 3% anymore because you can get U.S. bonds at four and 5% these days. So if Walmart or Target wanted to go out and raise a bunch of money to finance their operations and to continue to grow, they\u2019re going to have to issue bonds at 6 or 7%. That\u2019s a huge difference in their bottom line how much they\u2019re paying an interest.
So if they can\u2019t expand operations as quickly as they were, as much as they were, that\u2019s going to impact their business. That\u2019s going to impact GDP. That\u2019s going to impact their hiring. That\u2019s going to impact how much they can pay in additional wages, and that\u2019s going to reverberate through the economy. So it\u2019s not just small and medium-sized businesses that are going to struggle. I think they\u2019re the ones at biggest risk, but I think even big businesses, we\u2019re going to start to see wage growth slowing. I think we\u2019re going to start to see more layoffs. I think we\u2019re going to see less growth over the next year or two, again, until interest rates start to come down.<\/p>\n
Well, J, thank you so much for being here. I really appreciate your time. If you guys didn\u2019t know this, J and I actually wrote a book together. It\u2019s called Real Estate By the Numbers. It teaches you how to be an expert at deal analysis. If you want to learn more from J and myself, you can check that out on the BiggerPockets website. Otherwise, J, where can people connect with you?<\/p>\n
Yeah, jscott.com. So go there and that links out to everything you might want to know about me.<\/p>\n
All right. Well, thank you all so much for listening to this episode of BiggerNews. We hope this discussion and insight into what\u2019s going on in the housing market and the economy helps you make informed decisions about your real estate investing portfolio and really what you do with your money generally speaking. If this is helpful to you, we appreciate your feedback and a positive review. We always love knowing what types of episodes you like most here on the BiggerPockets Podcast. Thanks again for listening, and we will see you very soon for the next episode of the podcast.<\/p>\n