The Real Estate Espresso Podcast

On today’s show we are taking yet another look at the macro economic environment. Virtually everything in the world of real estate investing is being dominated by the macro environment.   The Federal reserve increased the Fed funds rate another 25 basis points. They made the argument that future rate hikes are going to be data dependent.  I watched the entire press conference today and there were some obvious holes in the press conference.  The first major hole is that there were no questions on the Fed’s balance sheet. That’s astonishing to me. The discussion centered entirely on interest rates and there was virtually no discussion on the stability of the banking system or generating liquidity.   Chair Powell made mention of the most recent report on the retrospective of the SVB failure.  The insane thing about these bank failures is that the underly banks were fundamentally strong. They were weakened and eventually bankrupted by the outflow of deposits.  Chairman Powell said in his remarks that he recognized that his view of the current situation is at odds with history. But he said this time is different. He knows that the this time is different argument is not supported by history.  But it’s never different. The yield curve inversion is screaming, it is the market screaming at the top of its lungs that they don’t believe the Fed. The Fed has it wrong.  So what does this mean for us real estate investors?  I believe it means that we will see more bank failures, and that all the member banks themselves will have to come out of pocket to top up the reserves at the FDIC. That will weigh heavily on bank earnings across the industry. These reserves are not funded by the taxpayer. The fund is funded by the member banks.  More bank failures means tightening credit as banks lose the ability to lend money. They don’t trust their own balance sheet because they know their balance sheet can change on a moment’s notice based on nothing more than rumour.  The second inning is over and the batter struck out at the plate. We are now entering the top of the third inning in this saga.   ------------ Host: Victor Menasce email: podcast@victorjm.com

On today's show we are looking for tangible evidence of what investors are looking for. ------------ Host: Victor Menasce email: podcast@victorjm.com

The Federal Reserve published an ironic report on the day that the FDIC took control over the First republic Bank. The report was all about the demise of Silicon Valley Bank. It was a retrospective of sorts on what contributed to the failure of the bank and what shortcomings were present at the bank regulator.  The thesis of the report is that the issues of SVB were unique to SVB. But that fails to address why there was a similar problem at Signature Bank. Or what about the problems at Credit Suisse, or First Republic Bank?  Under the Dodd Frank Act which was passed in the wake of the GFC the FDIC is supposed to hold 1.3% of all insured deposits in reserve. Well, it’s clear that the FDIC has nowhere near that amount being held in reserve.  The FDIC balance sheet was consumed by 50% on the SVB transaction. There can’t be much left.  So here we are, six weeks after the first bank failure.  In the immediate aftermath we were told that the cause was weak management and that the banking system is resilient and strong. Then we heard the same message when Signature Bank failed. Now First Republic, but the banking system is resilient and strong.  The fundamental problem is that there is a mismatch between the nature of the actual liquidity of the banks and the structural liquidity of the banks. What I mean is that depositors can request their money on any given day. But when the bank lends money, they lend it for long duration. So the banks’ true ability to generate liquidity is far less than the expectation of giving depositors their funds on demand.  We learned that lesson when Lehman Brothers failed in 2008. Lehman Brothers bank in the Bahamas was taking in LIBOR deposits which were of short duration. When deposits dried up, the bank became insolvent overnight.  Yes, Lehman Brothers was structurally flawed that is clear. But what about any bank? Are they truly in better shape? We have banking contagion. It is here. It was easily predictable, and our banking system is not resilient nor is it strong.  There are calls from the white house for increased banking regulation. But if you actually take time to read the SVB report, it is clear that the existing regulations were not actually being used.  -------------- Host: Victor Menasce email: podcast@victorjm.com

 Our book this month is called “Thinking Fast and Slow” by Daniel Kahneman. Daniel Kahneman is a professor of experimental psychology at Princeton University. He is the recipient of the Nobel Prize in economics for his life work in psychology and how decisions are made that influence business, society and economics. This book is the result of decades years of research, including numerous academic papers on how thought processes in the human mind function. I thought this book would be very Powerful because there are many examples of flawed thinking in every day life and certainly in business. Moreover, the book was recommended to me by Ken McElroy, and when Ken has something to say, are usually listen.  ---------- Host: Victor Menasce email: podcast@victorjm.com

Taylor Loht is based in Richmond Virginia where he has secured a FINRA broker-dealer license and is active raising capital for sponsor projects across the nation. So far he has raised $200M in capital. You can learn more and you can connect with Taylor at NTCapitalGroup.com. ------------- Host: Victor Menasce email: podcast@victorjm.com

Today's show is a live talk from The Real Estate Guys Secrets of Successful Syndication Conference in Dallas Texas, held on March 23. We're talking about the principles of raising capital with investors. -------------- Host: Victor Menasce email: podcast@victorjm.com

This question comes from Steve in Utah. Two years ago I bought a subject to rental property that has a loan with it that has a 2.25% interest rate fixed for 30 years.   A great deal for me!!! however back in November I noticed the loan servicer had changed.    Today this loan would be under wrote at 6%,    I did some quick calculations to determine the difference in value to the note holder with vastly different rates.   The differences are massive as shown in the chart with the amount of difference in interest paid at at the 5year, 10 year and 30 year points.   The value of a loan written at 2.25% has to be a massive discount from face value,  Also a factor with this historically low rate is the unlikelihood it’s paid off with a refi.    My Question is who is dealing with this loss on paper?  Who is bearing the consequences of holding a note that pays this low of interest in this climate?  Did the original servicer have to massively discount this loan to off load it to the new servicer?   What is happening with these notes that are not sellable without massive discounts to face value?  Is this the banking crisis in a nut shell?  weather its the bank holding treasuries it bought at very low rates, or note they made at very low rates,   isn't the outcome the same?  is it all marked to market now? ------------- Host: Victor Menasce email: podcast@victorjm.com

On yesterday's show we talked about how there are signs of monetary deflation present in our economy. We discussed the definition of what is inflation and what is deflation? Today's show is the second in a two-part series on monetary deflation. On today’s show we are looking at specific examples of how money can disappear from the money supply. ---------------- Host: Victor Menasce email: podcast@victorjm.com

On today show, we are looking again at the macro environment. So much of what is happening in the world of real estate is being dominated by the macro environment, which is why we keep coming back that. It’s specifically on today show we are looking at a definition for inflation, in order to understand deflation. There is a case to be made for deflation. Today’s show is the first of a two part series on deflation.  Now I know what you’re thinking. How can we be experiencing deflation when all of the statistics are pointing to inflation. In fact the Federal Reserve and central banks around the world have been raising interest rates in order to fight inflation.  You’re wondering - Has Victor totally lost his mind?  We have become accustomed to thinking of inflation, as meeting the consumer price index. The Bureau of labour in statistics has several metrics for price indices. There is the consumer price index which includes the more volatile food and fuel components. Then there is core, CPI, which excludes These more volatile components. However, in almost every case throughout history, it can be shown that these measures are not the inflation per se, but rather the symptom of inflation. The actual inflation is the inflation of the money supply. When you have more currency bidding for a fixed amount of goods and services in an economy, that excess money will eventually bid up the price of those goods and services.  So that’s inflation. But what about deflation? If consumer price inflation is the result of inflation of the money supply, then would it make sense that consumer price deflation would be the result of a decrease in the money supply?  -------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about how cities are getting pressure to perform better when it comes to turning around zoning and building applications. Many cities have earned a terrible reputation for being bureaucratic nightmares when it comes to getting a zoning application approved, or a site plan application, and in some cases a building application approved. Most cities have recognized that a new zoning application is complex and requires a multi-disciplinary approach. For that reason, most cities offer an informal pre-consultation meeting. This gives a developer the opportunity to get feedback from all of the city departments in a single one hour meeting. There will be the planning department, utilities, fire department, police department, streets department, the parks department, maybe even the local school district.   Having gone through countless of these meetings I can tell you that they are helpful compared with no pre-consultation, but they fall far short of what is ultimately needed. Cities have a job to do and they can’t spend a ton of time in meetings with developers on projects that are still at the concept stage. Who knows if these projects will ever see the light of day? I can tell you also from first hand experience, that cities often suffer from indecision that looks like moving goal posts from the perspective of the developer. In fact, I can’t think of a single application before a city that has not experienced moving goal posts. By moving goal posts, what I mean is that you get feedback from the planning department telling you what it will take to get your application approved. You hold your round-table pre-consultation meeting with all of the city department. Then you submit the application and the feedback from the city is full of surprises. --------------- Host: Victor Menasce email: podcast@victorjm.com