After almost seven (7) years of the ongoing Credit Crisis, will the financial markets ease up a bit more in 2014 or will they tighten up even further? Interest rates continue to hover at, or near all-time record lows due to “Quantitative Easing” strategies (or “create money out of thin air in order to artificially boost stock, bond, and mortgage values”). Yet, the U.S. economy and financial markets seem to be as nonsensical as ever before.
For anyone who worked in, or invested in the real estate fields prior to the start of the Credit Crisis (www.thecreditcrisis.net), how many of us still recognize the real estate and mortgage industries as we move forward into 2014? While it is very true that there have been numerous “Boom” and “Bust” housing markets over the past 100 + years, real estate investors typically had more flexible forms of financing options back then if even at much higher rates.
Over the past century, the two (2) most well-known and discussed sluggish or depressed economic time periods were “The Great Depression” (1929 – 1939) and “The Credit Crisis” (2007 – present day). In both eras, these negative financial event time periods were preceded by “Boom” times related to easier capital access and wild speculative investments in stocks, real estate, and other investments prior to the financial markets drastically tightening up access to the more flexible capital sources. Many times, the “solutions” offered for negative situations, however, may later turn out to magnify the problems even more.
The Great Depression (1929 – 1939)
Prior to the ongoing “Credit Crisis”, the USA had “The Great Depression” which adversely affected many banks, businesses, and citizens. “The Roaring 20s”, which preceded the start of “The Great Depression”, was a period of time when investors seemed challenged to lose any money in the stock market just prior to the financial implosion back in 1929.
What was one of the primary causes for the ending of the “Roaring 20s” combined with the official start of “The Great Depression” back in 1929? ANSWER: Banks and investment firms began to figuratively “slam the brakes” on the availability of capital by way of severely limiting access to margin loans for stock investments, business loans, and real estate loans.
Once margin loans were restricted or severely limited just prior to the start of the stock market collapse, then margin loans were “called” as all due and payable by the issuing lenders or Wall Street firms or financial institutions. As a result of this massive “call” of outstanding margin loans that a high percentage of typical U.S. citizens were using to purchase stocks, investors were forced to sell their stocks at any price possible, in order to pay off their existing highly leveraged margin loans which suddenly became “all due and payable” to the issuing banks or investment firms.
When there are more sellers for an investment class such as a stock than there are existing ready, willing, and able buyers, then prices tend to rapidly fall. Sadly, some stocks ended up worthless due to the massive panic selling.
What was considered the worst financial year of “The Great Depression”, according to various financial analysts, back between 1929 and 1939? ANSWER: 1932. Why? This was the year when the “Bank Runs” began at some financial institutions when bank customers flooded their local bank branches in order to try to pull out all of their remaining cash deposits.
Government Bailouts & Programs linked to The Great Depression
Herbert Hoover was the U.S. President back when The Great Depression first began. President Hoover did not believe that the U.S. government should become too involved with trying to bail out the individual investors who were struggling with their finances at the time, or with the near 25% national unemployment rates.
President Hoover was then followed by Franklin Roosevelt, and his various economic stimulus programs related to his “New Deal” financial and economic strategies. Some of President Roosevelt’s “New Deal” programs included these ones listed below:
1.) FHA (Federal Housing Administration): This was a government agency created to improve the housing crisis which began during the many years of The Great Depression. Back prior to the introduction of FHA, 40% and 50% down payments were required to purchase a high percentage of owner occupied homes. Subsequent to the introduction of FHA, it became easier to purchase homes with much lower down payments and longer term government-backed mortgage loans.
Interestingly, the most common funded residential loans for owner-occupied homes in the USA after the start of “The Credit Crisis” continues to be FHA insured loans. As I have noted in past articles, upwards of 97% of all funded residential loans in the USA over the past few years are alleged to be either government backed or insured loans (i.e. FHA, VA, USDA, Fannie Mae, or Freddie Mac).
2.) The Home Owner’s Loan Corporation (HOLC): This agency was created back in 1933, or just one year after the start of the “Bank Runs” in 1932. There was also a flood of foreclosures during “The Great Depression” years just as we have all seen nationwide during the ongoing “Credit Crisis” years. The HOLC loan programs were allegedly designed to help provide existing homeowners with the option to refinance short term mortgage loans into more affordable longer term loans in order to try to reduce the high number of foreclosures.
In many ways, the HAMP (Home Affordable Modification Program) and HARP (Home Affordable Refinancing Program) loan options seem a bit reminiscent of the old HOLC programs back in the 1930s. All of these financial acronyms which begin with the letter “H” were supposedly designed to help existing homeowners to remain in their homes by reducing their existing monthly loan payment options.
Whether it related to increasing the loan term from five (5) years to 30 years or by reducing the amount of interest charged on the mortgage, the goal was to try to make the monthly payments more affordable one way or another so that there wasn’t a giant flood of foreclosures causing havoc to home values across America.
3.) The Civilian Conservation Corps (CCC): The CCC was created by President Roosevelt back in 1933 to try to help reduce the massive 25% national unemployment numbers. This work relief program helped employ many struggling Americans by way of building many public works programs related to parks, roads, buildings, and trails across the USA.
In recent years, the unemployment or “underemployment” figure estimates for Americans has varied between 8% and 20%+, according to various financial analysts and economists.
Who really knows the actual unemployment numbers? Regardless, the projected annual median household income has fallen in 2013 as compared with back in 2007 or 2008. Where are today’s “New Deal” jobs programs which may help employ more Americans, and hopefully increase existing wages for more people as well?
Will Boom Times Follow The Credit Crisis?
While it is very true that millions of Americans lost their savings, homes, and jobs during both The Great Depression and The Credit Crisis, it is also true that much new wealth was created both during and after these severe economic depression time periods.
Is “The Credit Crisis” version of “The New Deal” tied more to the financial bailout programs such as “Quantitative Easing”, “Operation Twist” (or buy long term debt with short term money (or vice versa) in order to artificially drive down interest rates”), or other bailout strategies which seem to benefit the larger financial institutions more so than the average American citizen?
Americans are more likely to invest more capital in investments like real estate if they are more certain of their jobs being there in the near term. Additionally, homeowners are more likely to not “walk away” from their homes which may currently be in foreclosure if they have some equity to protect.
In spite of a very sluggish recession or depression since 2007, depending upon one’s personal perspective or financial position today, home values have skyrocketed in many regions over the past year or two. Amazingly, some previous “Bubble Bust” states such as California, Arizona, Nevada, and Florida have experienced annual home rates of appreciation reaching 25% to 35% + per year.
After the end of The Great Depression back in 1939, there were many families who created the bulk of their family’s generations of net worth by creatively and assertively purchasing heavily discounted assets for literally cents on the Dollar. That $50,000 home may eventually turn into a $500,000 free and clear asset as time goes by for many savvy investors.
Are the same potential investment opportunities available to Americans today in 2014 as compared with Americans back in the 1940s or 1950s? Only time will tell.
In hindsight today or looking back into the past, it seems very easy to suggest that there were seemingly endless solid investment opportunities available to Americans shortly after sluggish economic time periods. Many years from now well into the future, we may look back to 2014 as a year in which the positive investment opportunities far exceeded the negative investment options.
Let’s all hope that the potential “Boom” periods of time in our futures are at least as prosperous for many people as compared with “Boom” periods of time for past investors who were willing to take calculated risks which later paid off for both themselves and for their families for many years or generations thereafter.
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.