There are a lot of questions and inquiries about what’s going to happen to the economy. Whether we’re actually heading towards a deeper crisis and what you can do about it. A crisis doesn’t happen overnight. A crisis is a result of a series of events, cause and effect, that get mixed up over time, leading to what we know it’s a crisis.
Usually, by the time you realize that you are in a crisis, it’s already too late for you to take action. First thing, we’re going to learn about the 2008 financial crisis, what actually led to it, and why was it so big and heavily impacted all of us. Then we’re going to understand or learn about what’s happening today.
How did we wind up in this situation, and whether it is actually a crisis or not? Then we’re going to compare the two scenarios side by side, so you can learn about the similarities, the differences, and what you can do. Then, we are going to analyze a series of takeaways and actions that you can actually do to protect yourself and to help you navigate through it.
Mortgage Crisis in 2020 and 2021: What happened before 2008?
We’re going to have two points of comparison. We’re going to compare what really happened in 2008, and what does it mean to the crisis that is happening right now in 2020-2021? In 2008, everything started all the way back in 1977.
In 1977, the Community Reinvestment Act, also known as CRA, was approved. What does the act entail? Basically, it was approved to provide opportunity for low income families to be homeowners. They wanted to give everybody an opportunity to own a home regardless of your financial background.
The goal was to increase lending, and at the same time, it was also meant to loosen up some of the regulations in the mortgage industry. Before 1977, the losses were actually very low in the mortgage industry due to the high standards. It was extremely difficult for people to qualify for mortgages because of the strict lending policies.
Lending is extremely difficult and you’re literally signing your life away every time you sign in a mortgage. It is a lot more difficult in South America than it is in the United States to obtain a mortgage. Fast forward into 1991, you will still see a low volume of mortgages in the market, but in the mortgage sector, things are starting to get, let’s say, creative. What do I mean by creative? You as the borrower, what’s usually the two main roadblocks or the main things that are preventing you from qualifying for a mortgage?
- One will be the lack of funds for the down payment–
- The other, even if you were to qualify for a mortgage, then the struggle, it’s typically, “I don’t know if I’m going to have enough to pay my mortgage on a monthly basis.”
What the mortgage sector did is that they started to look into all the possible options to see what product they can create so they can eliminate those two roadblocks, and basically just make the products, make the mortgages available for pretty much everybody. Then by 1992, the concept of “skin in the game” was slowly starting to get eliminated. If you don’t know what “skin in the game” means, it just basically means the 20% down, because when you put 20% down for the purchase of a property, it’s going to hurt you.
You’ve saved that money for a long time, versus you walking in and buying a house with no money down, it makes it a lot easier for you to just simply walk away, as opposed to having some of your savings as a way to make you feel the pain, because you were really hard to pull all that money together, so you can finally afford to buy a house.
That whole concept started to go away. In 1994, Fannie Mae announced their mortgages with only a 3% down. Fannie Mae stands for the Federal National Mortgage Association. They are the responsibles to create a secondary market for the purchase and the sale of mortgages. In a way, they facilitate the injection of cash in the mortgage industry, so that way there is always going to be liquid funds or enough money, so the banks can continue to borrow that money to everybody.
Then in 2001, something very interesting happened. That was the burst of the “Dot Com” bubble. For those who don’t really know what happened in 2001, it was just basically the fall of the internet business. At some point, everybody wanted to become a computer scientist. Everybody wanted to go into online business. There was a bubble that was created.
The Mortgage Crisis and the Federal Reserve
Then at that point in time, the bubble burst, and a lot of people, a lot of businesses actually went out of business, with the exception of a few, and Amazon included in it. If anything, Amazon became a lot stronger after 2001.
Because of all that was happening, in 2002, the Federal Reserve decided to lower the interest rates to record low. Now, for those who don’t know what the role of the Federal Reserve Bank is in the US economy, and to a certain degree worldwide, they are responsible for enforcing the dual mandate. Dual mandate is basically:
- Ensuring a good employment rate.
- Regulating interest rates, not just in the short term, but also in the long term.
Of course, because we’re having record low interest rates by the Fed, guess what’s going to happen?
We are hitting a record volume of mortgage origination. It sounds very familiar to what’s happening right now with all the lending institutions. The Fed lowers the rate, and then people go crazy trying to refinance their mortgages, or trying to apply for new mortgages because they want to take advantage of the low rate.
By 2005, the interest rates and the housing prices were on the rise, all the way up to 2008 where we saw what happened. What makes 2008 so interesting? In 2008, we didn’t only experience a real estate crisis. One in particular, May 2008, a Black Swan event. We have the banking crisis, where the government had to come in and bail Wall Street out. We also experienced the real estate crisis. There was also the fall of the US infrastructure.
For example, GM, or General Motors, having to pull out from Detroit, and basically the world, and the fall of Greece, and we also experienced massive job losses. It’s true, we all experience massive job losses in every crisis, but pay close attention to the type of jobs that were lost at that point in time in 2008. Amongst the pool of jobs that were lost, we are talking about:
- The financial district: people working in Wall Street and Lehman Brothers.
- The construction industry also experienced massive job losses.
At that point in time, there was a lot of commercial real estate, and the build, there were a lot of flippers on the market, because the goal was to supply as many houses as possible, and then 2008 hit, and everyone had to stop because everyone went out of business.
Year 2020: The pandemic hits
Eventually that just simply creates a domino effect, and retail got hit as well. Retail was not the number one marketplace. They were impacted as a result of everything that has been happening already. From 1977 to 2008, it’s been a total of 31 years. It took 31 years for this massive crisis to happen.
Back in November 2019, we heard of the first case in China. Then, in December 2019, the world finds out. By January 2020, we hear about the first cases in Italy and the USA. This is expanding rather quickly. Rather than taking years to expand, we’re talking about months.
By February 2020, Trump approved $1.25 billion in preparedness funds to address everything that’s been happening worldwide. By March 2020, that’s when pretty much the madness took place. We had the Fed lowering the interest rates, to now new record lows. We have the stock market crashing. State of emergency was actually declared in the US, and lastly, Congress passed the CARES Act to provide economic assistance to individuals and small businesses.
If you have heard about the $1,200 stimulus and you want to know more about it, click here.
We have the hospitality and tourism industry, because travel has been banned to or from certain countries in order to prevent physical contact, or physical interaction with one another. Same thing happened to the entertainment industry. Theaters, restaurants and bars are being closed down, in a way to prevent this massive pandemic to continue to expand.
A lot of people were applying for EIDL or PPP loans in order to get assistance, so that way they could keep their businesses up and running, and therefore, provide jobs to Americans.
Mortgage Crisis in 2020 and 2021: The Job Market
Let’s analyze what’s happening in the job market. In order for an economy to continue to grow, the US has to add at least 150,000 jobs every single month in order for the economy to expand. Now, if we take a look at October, and where 185,000 jobs have been added. Then in November, 261,000 jobs were added. At that point, we were doing pretty good.
We have seen a job expansion happening in several months during 2020 and 2021. We’re adding more than the minimum of 150,000 jobs. In March 2020, everything dropped all of a sudden, and that’s as of March 12. So that means a lot more jobs had been lost. They’re just simply not captured at this point in time.
In 2008, we had an event that was caused by an internal factor. Something that happened back in 1977, with the act that was approved in order to provide access to low income families, the opportunity to become homeowners, and that internal factor was cooking for over 31 years. The bubble that was cooking over time was the real estate bubble.
By the time of the real estate bubble burst, we had an excessive inventory of properties. We had lots and lots of properties, and no one with the money, or the capability to buy them because of the job losses, because of what happened with the mortgage industry.
Mortgage Crisis: Black Swan events
Once again, we had what we call the Black Swan event, and where multiple events took place at the same time. The government had no other choice to come in and rescue Wall Street, which it caused a lot of anger at the time because Main Street was sort of left out and forgotten about. They couldn’t really understand why the government had to come in to bail out Wall Street.
If the Fed hadn’t come in to rescue Wall Street, we would have experienced something a lot bigger than the recession, where we’ll probably hit a depression at that point in time, because the economy of the entire world would have collapsed because of that.
A lot of students were actually defaulting already in their payment because it became too much. A lot of students were graduating with a high amount of debt, and the jobs that they were getting was not sufficient for them to cover that massive debt that they got themselves into, but because of everything that has been happening, and thanks to the CARES Act, a lot of that repayment was actually put in hold.
Now the students who graduated with that massive debt, they don’t have to worry about repaying it, until further notice. Because of everything that’s happening with the pandemic.
We are experiencing a low inventory of properties. At the same time, because of what just happened with the Fed, we are at a new record low in terms of interest rates, and because of that, the properties are certainly not going to go up in prices.
In this case, rather than experiencing a bunch of events altogether, we’re experiencing one massive event that is impacting the entire world. But this time around, the government decided to rescue Main Street, the people. Meaning, small businesses, individuals like you and me, and the US infrastructure as well, because this country cannot afford to completely shut down.
Because of all of these factors, because the government is rescuing Main Street, the demand for housing is going to continue to exist, and jobs are still standing, and therefore, there will still be funds for people, or families to pay for rent.
The bank is not in the business of Real Estate. The bank is in the business of making money. They’re not going to take the home away from your landlord and keep it and continue to manage that. No, they’re going to make you move out because that’s not their expertise. They’re not here to be landlords. So if your landlord is losing his or her property or their property, that means you will be left, as a renter, without a home. Therefore, why would you put your family through that?
This is a situation in which we’re all losing at the end. What does that mean for you as a real estate investor? That means that within six to 12 months, lots of properties will be in foreclosure, and that there will be a high, but very high chance for property prices to go down, unless the government decides to take actions, to rescue the real estate market.
Banks are only making a 1% gain on the loans they are offering through the SBA. They no longer want to issue more loans because there’s a very high probability that they will have a big inventory or foreclose houses to deal with. They don’t want to go ahead and issue more loans because their hands are pretty much tied.
They are busy dealing with all the small businesses, trying to apply for SBA loans, and probably will even be busier trying to deal with the big inventory of foreclosed houses in their queue.
What is the take away of all of this?
- The first takeaway is that the real estate crisis will get here fast if the government doesn’t do anything.
- The second takeaway is that if you are a real estate investor looking to get funding from the bank, you need to invest right now. Why? Because the banks are slowly closing their doors to new mortgages.
- The third takeaway is that if you are a real estate investor who does not need the banks to invest because you either have liquid funds or know of creative ways to invest, then the best moment for you to invest in properties at a bargain will be within six to 12 months.
Supply and Demand are important when banks are taking new measures because they always follow this rule. The more dollars are printed, the lower the value of the dollar. The more supply is available in the market, the lower the price, because there’s too much of it. You need to do something to protect your investment and to make sure it continues to run the proper way.
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