Seemingly every financial implosion time period of the past one hundred (100) + years here in the USA was due to the combination of a “boom” economic time period, subsequently followed by an economic “bust” time period. During the “boom” or prosperous economic time periods such as “The Roaring 20s”, the availability of capital was much more flexible as related to easier real estate, stock margin, or business loan options at the time.
The availability of capital is typically the number one driving force behind a “boom” or “bust” time period as it relates to real estate cycles. “Easy Money” time periods such as “The Roaring 20s” and “The Sub-Prime / “EZ Doc” Mortgage Era” (2002 to 2007, approximately) were both prime examples of economic “boom” eras, which preceded economic “busts” such as The Great Depression (1929 – 1939), and the ongoing “Credit Crisis” (www.thecreditcrisis.net).
From Boom to Bust…….
What is typically the catalyst for the transition from an economic “boom” time period to a “bust” time period? One of the best answers may be tied to the figurative “slamming of the brakes” related to Americans’ access to capital or money. When a borrower has more flexible access to capital (i.e., loans, equity money, margin loans, etc.), then this same borrower may have more options for investments, business expansion, or earlier retirement options.
On the other hand, if money is tight or more challenging to qualify for like in recent years, then a prospective borrower or investor may not be able to expand their investment or business options, as much as they had hoped to at the time. Since money does not literally “grow on trees”, then one must find better access to capital in locations other than one’s backyard or under their mattresses.
“It takes money to make money” is one of the truer statements as it pertains to investment opportunities. Yet, hard work, persistence, and good luck also may figuratively “open doors” to various new opportunities as well. If more real estate buyers and sellers have better access to capital or cheaper and / or more flexible mortgage loans, then there may be more opportunities for home purchases or sales, partly since most buyers of real estate need third party loans to complete their purchases.
Virtual Money and Debt
According to some financial and economic sources, upwards of 97% of all forms of money created here in the USA may originate by way of a computer keyboard. If true, then only 3% of all forms of American money may be created as coins or dollar bills. The combination of the Federal Reserve and the U.S. Treasury may create our oxymoronic “Fiat Money” (or “assets backed by nothing of real value”) primarily by the power of the computer keyboard stroke. Prior to President Nixon taking the U.S.A. off of the “Gold Standard” back in the early 1970s, the value of the U.S. dollar was allegedly backed by gold more so than “thin air.”
Also, American money is backed by oil by way of the “Petrodollar” system since most forms of oil worldwide have been traded for U.S. Dollars over the past few decades. Sadly, more countries like the “BRICS” nations (Brazil, Russia, India, China, and South Africa) are opting to trade their oil for currencies other than the U.S. dollar.
With less demand for U.S. dollars worldwide in recent years and the combination of rising inflation partly due to the introduction of trillions of dollars by way of “Quantitative Easing” and other government and Central Bank “bailouts”, the price of gasoline has skyrocketed due to the weakening value of the U.S. dollar.
I may venture to guess that demand for gasoline here in the USA in recent years has dropped due to the sluggish economy and $4 to $5+ gasoline costs per gallon. If true, then the weaker U.S. dollar may be the primary reason for the much higher gasoline costs rather than a lack of supply of oil for American consumers.
As I once learned in past Economics courses back in college, when supply exceeds demand for a product, then prices tend to drop. However, when oil is traded for weaker U.S. dollars, then gasoline prices tend to skyrocket, sadly.
Since the financial implosion began back in the Summer of 2007 after the near collapse of the world’s derivatives markets (i.e., Credit Default Swaps, Interest Rate Options, etc.), then many of the financial bailouts offered by Central Banks and governments worldwide have focused more on saving many of the largest banks, investment banks, and insurance companies as opposed to directly helping individuals or small to mid-sized business owners. Why haven’t more of the U.S. citizens or “Mom and Pop” businesses been bailed out as well? Why can’t people also be “too big to fail” as alleged with some of the larger U.S. banks and Wall Street firms?
There have been upwards of millions of homes foreclosed in the USA since 2007, and countless personal and business bankruptcies. Couldn’t the USA take a few trillion dollars of allocated “bailout” money for the big banks, and redirect it towards helping U.S. consumers reduce their credit card debt, student loans, mortgage loans, business loans, and possibly to provide them with some “seed capital” for business and investment expansions?
Credit Crisis “Solutions”: Let’s create more Money and Debt out of “Thin Air”
In recent years, the Federal Reserve has become the primary buyer of stocks, bonds, and mortgages with their various “bailout” methods, partly by way of “Quantitative Easing”, “Operation Twist”, and numerous other anonymous or not so anonymous bank bailout loans or investments. The “Fed” allegedly invests upwards of $85 billion per month in U.S. Treasuries and mortgages trying to stimulate the various investment markets.
How nonsensical is it that the Dow Jones index levels now hover near 15,000, in spite of the ongoing sluggish national economy? Without the Federal Reserve’s infusion of potentially countless trillions in the stock and bond markets, then would the Dow Jones levels of today be closer to 6,000 or 7,000 just a few years ago?
How about the U.S. Treasury Bond market? If the Fed wasn’t the primary buyer of U.S. Treasuries as opposed to individual or foreign investors or governments, then how high would the interest rates be today due to a rapidly declining supply of non-Federal Reserve U.S. Treasury buyers?
Thirty (30) year fixed rates are tied to the directions of the 10 Year Treasury Yields. An increasing demand for U.S. Treasuries tends to bring down interest rates. On the other hand, a declining demand for U.S. Treasuries due to perceived risks may lead to rapidly increasing interest rates.
“Free Money” is not always so “Free”
Mortgage rates have been slightly increasing in recent months, partly related to Fed Chairman Ben Bernanke’s suggestions that the “free flow” of capital may not always be there to continue trying to allegedly bail out the banks, investment banks, Wall Street, and the stock, bond, and mortgage markets. If the Federal Reserve begins to slowly turn off the figurative “spigot” of their trillions of dollars of capital, then the financial markets may be adversely impacted significantly.
Whether or not the Central Banks and governments worldwide continue onward with their trillions of dollars of bailouts and investments, the perception of smaller future bailouts may cause investors to purchase more or less stocks, bonds, real estate, or other assets in the near or long term. Additionally, the creation of too much capital in recent years had led to massive inflation or hyperinflation for various types of products like gasoline, as noted above, food, clothing, and other basic commodities.
With Real Estate: Inflation is much better than Deflation
With real estate, inflation tends to be a positive for both current and future appreciation levels. Historically, homes in the USA have appreciated close to an average of 3% per year over the past fifty (50) + years. Between 2012 and 2013, the median priced home in various U.S. regions has increased between 5% and 25%+, due to the combination of near record low interest rates, artificially suppressed home listing inventory levels, and an increased demand from individual and institutional investors.
Homeowners, retail shopping center owners, and other property owners are more likely to “walk away” from an “upside down” property than owners who have equity in their properties. Thankfully, more properties nationally have gone from negative equity to positive equity in recent years due to rapidly increasing sales and prices. There are few things worse for an investor to have then mortgage debt currently exceeding their property values.
For many Americans, the bulk of their net worth comes from real estate more so than for any other type of investment option. Improving equity in real estate nationally also may lead to a more prosperous economy, and hopefully to more jobs created as well.
Tragically, the recent stock market boom has only benefitted a very small percentage of Americans who are fortunate enough to actually even own shares in Dow Jones, or other stock indices. Yet, the recent price improvements in the U.S. housing market have helped more Americans feel a bit more prosperous and happy here in 2013.
From Bust to a more steady Boom?
How many homes between 2007 and 2010 dropped in value between 20% and 50%+ plus due to the Credit Crisis implosion? Even with recent price appreciation over the past year or two in various regions, many properties are still well off their housing peak prices back in 2006 or 2007. However, a slow and steady economic recovery may last a lot longer than a rapidly escalating price “boom” which we have seen in past economic “Boom and Bust” time periods.
How long will median prices continue to improve regionally and nationally? How long will “Quantitative Easing”, and other bailouts, continue at the same mind boggling multi-trillion dollar pace? How long will interest rates continue to hover near historical lows? Are these financial gains short term or long term? The answer is “Only time will tell” because there are truly too many economic and financial variables out there today to really make an educated guess.
There is no historical precedence in U.S. history to compare with the near financial implosion of $1,500+ in derivatives worldwide as well as for the various trillion dollar financial bailouts tried in recent years. As such, let’s all hope and pray for a more steady economic recovery, as opposed to one with more volatile and extreme “boom and bust” cycles as in past years.
Author: Rick Tobin
Rick Tobin has a diversified background in both the Real Estate and Securities fields for the past 25+ years. He has held seven (7) different Real Estate and Securities brokerage licenses to date.
Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), Equity Funds, and foreign money sources.
You can visit Rick Tobin at RealLoans.com.