Writing has been minimal. In fact, let’s be honest, it’s been non-existent. Part of this can be attributed to my busy schedule with various projects, but the main reason is that there hasn’t been much new or interesting to write about; it’s all been repetitive. So, I decided to embrace the silence.

However, I’m breaking that silence now because recent world events are forcing me to refocus my attention. As you’re likely aware, the United States, and by extension, the world, is experiencing a banking crisis. At the time of writing this, three major regional banks have collapsed (Silvergate, Signature, and Silicon Valley Bank), four others were teetering on the brink of failure before being “rescued” by the Federal Reserve, and a global banking giant, Credit Suisse, is hanging in the balance.

Now, this isn’t a financial or banking blog, so I encourage you to seek in-depth analysis on these matters from reputable financial sources. Personally, I’ve been following various experts, and I’ve found three YouTube channels particularly informative: Rebel Capitalist, Blockworks Macro, and InvestAnswers.

But what I’m interested in discussing is how these banking crises and, more importantly, the government’s responses to them will impact the real estate market. In a nutshell: brace yourselves, because it looks like we’re headed for a real estate party akin to the late ’90s.

**Bank Failures, the Fed, and Government Response**

It appears there’s a general consensus about the causes of these bank failures. Incompetent bank managers failed to adequately hedge their risks. The primary risk, which brought down Silicon Valley Bank, was the devaluation of their assets as the Federal Reserve increased interest rates. There are many intricate reasons behind this, but government regulations incentivize banks to invest in government debt, such as treasury bills, treasury bonds, and agency MBS (mortgage-backed securities backed by the government).

It’s fascinating how government regulations often influence banks to purchase these types of securities. However, these “safe” government bonds aren’t entirely immune to risk. When interest rates rise, the value of existing bonds with lower rates decreases. Therefore, banks holding these bonds faced substantial losses as interest rates climbed. Silicon Valley Bank even had to sell its bonds at a significant loss, rendering the bank insolvent.

However, the government’s response to this issue is where things take an intriguing turn. They essentially established an “Incompetent Rich People Protection Program.” Every depositor at every bank in the United States is now guaranteed by the FDIC, and the $250,000 deposit insurance limit seems to have vanished in practice. Rich individuals, like those at Roku, whose CFO left $487 million in Silicon Valley Bank, will be made whole by the FDIC. There doesn’t seem to be any rationale for differentiating between making Roku whole and doing the same for other wealthy depositors or companies.

Moreover, the newly introduced Bank Term Funding Program (BTFP) means banks no longer need to worry as much about interest rate risk, as long as they invest in government bonds and agency MBS. The Federal Reserve now values devalued bonds at par, effectively ignoring the losses. The risk management aspect appears to be falling by the wayside.

**Rate Cuts on the Horizon**

Additionally, the financial markets are anticipating a halt in interest rate hikes by central banks, including the Federal Reserve. Some experts even predict future rate cuts. This anticipated pivot is right around the corner.

I’ve previously argued, following the logic of Luke Gromen, that the Federal Reserve has little choice but to pivot due to the massive national debt, which has reached $31 trillion. Higher rates would increase the government’s borrowing costs, which have already skyrocketed. In 2022, the federal government spent a record $736 billion on interest payments, surpassing even its expenditures on various programs. Given the current scenario, it’s conceivable that mortgage rates could drop below 5% by year-end. The bond market indicates that central banks have completed their rate hikes.

The housing market is sure to benefit from this change. Not only will demand increase due to lower rates and more available inventory, but homeowners may be more inclined to move up, thanks to the improved affordability compared to higher interest rates.

**Bank Failures + Moral Hazard = Investor Activities**

The close calls with banks like Silicon Valley Bank might serve as a wake-up call for many wealthy individuals, companies, and even the banks themselves. Banks traditionally invest in safe securities like government bonds and agency MBS, which are long-term investments.

But now, there seems to be a growing awareness that investing in long-term, “safe” securities with interest rate risk might spell disaster. Thus, many might start looking for shorter-term investments without counterparty risk. Real assets that don’t rely on the fulfillment of contractual obligations could become highly sought-after, as people realize that holding cash in the bank isn’t the same as holding cash in hand.

This could lead to increased interest in real assets such as real estate, gold, and silver, as they are free from counterparty risk. These assets do not require counterparties to meet their contractual obligations. Additionally, with government guarantees in place, we might see banks more willing to offer loans for shorter terms and at floating rates. Borrowers, in turn, may use these loans to invest in real assets like real estate, which cash flows and could appreciate in value.

**The Counterpoint and Uncertainties**

Of course, there are valid counterpoints to consider. Some argue that central banks may continue to raise rates to combat inflation, and they might use the government’s extraordinary interventions in the recent banking crises to keep doing so without worrying about the financial system’s stability.

However, there is still significant uncertainty about how the government’s actions will pan out beyond the next few weeks. If bond traders, who are typically ruthless pragmatists, do not believe that the Fed and the government can stabilize the situation, there is little the authorities can do.

There is also the possibility that small and mid-sized banks might go out of business as depositors flock to the “Too Big To Fail” banks. While this benefits the large banks, it could have negative repercussions for the broader economy, potentially leading to a recession.

Furthermore, the 30-year fixed-rate mortgage may not be a lasting option, as its historical popularity was largely based on government guarantees. These guarantees did not cover interest rate risk or duration risk, but they did address the risk of not getting your money back. With the government now ensuring deposits in all banks, the incentive to buy 30-year mortgage bonds may diminish, which could have implications for the mortgage market.

Political factors also remain uncertain, as politicians and lobbyists grapple with the outcomes of these banking crises. It’s unclear whether the real estate industry will benefit from this political tug-of-war or be sacrificed due to high housing prices being a political liability.

Lastly, the strength of the real economy remains in question. If the day-to-day atmosphere does not reflect a robust job market, high production, and overall prosperity, the financial economy may eventually mirror the real economy.

In conclusion, some experts are contemplating a potential “End of the World” scenario that goes beyond conspiracy theories, as it concerns the entire global fiat money system. Bond traders are practical individuals, not known for indulging in conspiracy theories. These traders believe that we may be witnessing the end of an era in which American money, backed by American might, has driven global prosperity.

In light of all these factors,