The federal government is putting together “sweeping” new regulations for the banking sector. What does that have to do with us as real estate investors? Plenty. Let me explain.
One clue that the feds are serious about this is the recently suit filed against Goldman Sachs. Goldman Sachs is the largest of the investment banks. The are trying to fan public anger against the banks in a time when Goldman just announced that it is shelling out $5 billion to its top executives.
To get a better context on what’s really going here, let me give you a little background.
The banks have always had lots of money. With money comes political power. A powerful, out-of control banking sector led to the great depression.
After the great depression, the federal government had enough leverage to put laws in place that greatly limited the amount of risks that banks could take. For example, it took banks out of the investment and securities business. The result of these regulations was a relatively stable financial market from the 1930’s through the 1970’s evidenced by very few bank failures during that period.
Starting in the 1970’s, their was a trend toward deregulating the banking sector. Arguments were made by banking sector advocates that laws put in place after the great depression were now “out of date” with the new technology.
The banking crisis of the late 1980’s, which resulted in huge numbers of bank failures, was a direct result of the deregulation of banks.
Even though we faced period problems like the S&L bailout in the 1980’s, congressman and senators who were heavily backed by the banking sector quietly put laws in place that gave banks the ability to grow much larger. For example, some of those changes included the following:
1. Removing restrictions on interstate banking,
2. Allowing commercial banks to get into the investment banking business, and
3. Prohibited the Federal government from regulating most derivatives.
There is a long list of other changes that could also be added.
In addition, these banks were adding all sorts of creative new investment products beyond making loan. One example was the mortgage loans which were bundled together and sold as securities. The banks wrote the loans, but were not on the hook if the borrowers failed to pay back the loans.
These financial products were complicated enough to make assessment of the risk very difficult for the consumers of these investment products to understand. Investors continued to pump massive amounts of cash into the market into investments that were much riskier than they understood them to be.
The net effect of these activities was to create a massive bubble in the housing market fueled by these investment products and the companies that created and sold them.
As you will recall, the fall out from the financial crisis was a loss of some 8 million jobs in the US. The Federal Government created the $700 million TARP fund to bail out big banks.
Oh yes. And many ordinary people like you and me will remember it best are those who lost a large portion of their retirement nest egg.
I will admit I had nothing riding on the stock market at the time, so I had no direct losses through investments.
So what does it all mean for the ordinary real estate investor?
First, there are incredible purchase opportunities right now. If you are like me, you’ve been buying up foreclosed homes that were once part of those bundled mortgage securities products. Those who have the cash and/or credit to buy bank owned properties have made some excellent buys in the last couple of years. Those deals are still coming in, and will continue to do so.
Even though “the economy” shows some signs of improving, you will continue to see great purchase opportunities that resulted from the economic crisis for next few years.
Second, these are anything but normal market conditions. Don’t expect the great purchase opportunities we’re seeing right now to last forever.
The federal government is going to pass new banking legislation. Their lobbyists supporters in the congress and the senate will be fighting “real” reform tooth and nail, but the financial sector is not going to be like the wild west when this thing is over and done with.
It’s likely that the federal government is going to be successful in putting the brakes on the risky tactics of the largest banks that created the current financial crisis. I think it’s going to be a very long time before risky banking practices create conditions for another housing bubble and collapse. Recall that after the great depression, reforms put in place created a very stable financial system for decades.
So what are we left with? Great purchase opportunities now. Movement toward slow and steady growth in the future.
Decades of slow, steady growth would favor a strategy of buy what you can while the buying is good…and hold onto it. I’m putting my money where my mouth is, because that is my strategy right now and for the coming years.
April 26th, 2010 at 6:54 pm
All these changes, which are happening in every sector, is going to affect us all, and not just as real estate investors. Bottom line – everything that happens to us real estate investors will ultimately affect the consumer. Everything trickles down to the middle class and it has to for many businesses to survive.
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