The Real Estate Market Contagion is about to EXPLODE

Forbes is now saying that real estate

has two more massive shoes to drop and

it's not good especially in the face of

a potential banking crisis that's now

starting with a potential near collapse

here of Silicon Valley Bank I think

they'll be bankrupt very soon their

balance sheet is a complete disaster

they're losing money hand over fist this

video isn't about them it's actually

about real estate take a look at this a

Forbes piece here two more shoes to drop

in the real estate market listen to this

the first shoe in the U.S housing and

commercial real estate market was the

entire year of 2022 consistent interest

rate hikes a significant reduction in

sales volumes and a cold cold draft of

real estate prices we've already seen in

a lot of areas home prices are down from

their Peak 20 percent Phoenix Austin

Idaho these areas are down 20 percent

from Peak the only place that's really

holding up is South Florida and parts of

Northern Florida right now but that's it

most of the entire country is average

down 10 from Peak already here sales

volumes net new orders for new homes

down 15 percent alone are 38 DR Horton

80 on KB Homes so what's the next well

take a look well first take a look at

here if commercial real estate firms

particularly in the office Market or for

them a conditions remain dire according

to recent studies 71 of office space

could support four times their current

usage uh in other words you're seeing a

lot of sort of consolidating of of

office space so what's next to happen

audits listen to this most real estate

private Equity firms have a December

year end and must provide audited

financial statements to Banks and

investors by the end of March or April

because December 21 was literally the

lowest interest rate environment in

history while rents revising very

quickly the value of real estate was

near gravity list fast forward to the

end of 2022 and what do you have many

Real Estate Investors have not

proactively reassessed the value of

their real estate holdings and now

thanks to higher interest rates what's

potentially likely to happen a massive

write down of privately held real estate

values and ultimately because you're

seeing a Slowdown in rents and incomes

and a Slowdown in pricing especially in

commercial real estate you can see some

massive write Downs in real estate

valuations for any company holding real

estate right now we saw this I mean this

writing on the wall has been here for

over a year now you can look at open

doors balance sheets and and I mean uh

was from memory six months ago I called

for at least a write down of a 20 uh

loss on their real estate holdings which

puts them at almost negative because

they have somewhere around 6.6 billion

dollars in assets but then somewhere

around six billion dollars in debt but

as soon as you write down 20 you

actually have more debt than you have

assets that's how you go bankrupt Open

Door anyway they ended up taking it 10

write down personally I think they've

got another 10 to 15 to go because the

other thing is open doors properties are

trash compared to actual properties on

the market go through any open door

listing I guarantee you you almost vomit

that's been at least my experience I've

been traveling around for my real estate

startup househack househack.com and

every Open Door listing I go into we see

the sign and we're like oh we already

know what we get we're gonna get and

sure enough we go in low quality garbage

the write Downs are going to be pretty

insane but anyway audit season is The

Moment of Truth For Real Estate with

significantly fewer transactions and

fewer comps to compare properties to So

Real Estate Investors are going to have

to defend their values for the first

time since the raid spike in the next

two months now what's remarkable is that

actually aligns with the fud cycle of

when I think you're actually going to

see the year-over-year comparisons and

real estate values where all of a sudden

you're going to get Tucker Carlson and

CNBC and and CNN or whatever going oh my

gosh year over year home prices are down

over 10 percent that's going to put the

fear of God into home buyers at the same

time as inventory generally surges in

March April May right now yes we are at

very low inventory levels duh everything

expires December 31st of course you have

low inventory levels the first three

months of the year when that ramps is

probably going to align with not only

these audit write downs but also with

those year-over-year Panic numbers for

Real Estate Peak fee or for Real Estate

is still ahead of us my opinion all of

this revaluing is happening right now

will last for the next 60 to 90 days why

is this important if an Investor's loan

to value maximum with their lender is 80

as in the bank will only lend you eighty

percent even even if even if the value

of property drops what happens if the

investor owes the bank more than what

they're willing to lend you you either

have to pay the loan back or give the

bank more cash this is basically a

margin call on Commercial Real Estate

not all loans have this this is why I

love the 30-year fixed trade mortgage

that we have in America because even if

you go upside down on your real estate

you don't have to pay any more money to

the bank this is something known as a

re-margining provision a re-margining

position or provision allows a bank to

call you up and say hey look this is a

commercial loan this is a business loan

the value of your asset has fallen

you're screwed pay up well you pay up

what happens now with cash that might be

available to go buy deals at certain

real estate firms are actually paying

down their debt instead of going to buy

deals now you have even less people

capable of even buying in real estate

see how these dominoes are starting to

align it's not good be patient with

buying real estate real estate we the

where we are in the real estate cycle it

would make sense to wait until we are

past the bottom and then buy that's it

very very important remargining is very

dangerous and that's coming again you

don't have that on 30-year fixed rate

loans I'll give you a quick example and

by the way if you want to learn

everything I know about real estate

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I actually on uh the plane that I have

made sure that I had a 20-year term

fixed no variable rate and no

re-margining provision I purposely made

sure I did not have a re-margining

provision because if the value of my

plane goes down I don't want to put more

money into that sucker that's bad

because I want my money to go buy deals

anyway this most of the time you don't

have the privilege or the luxury to say

I don't want a remargining provision so

what do we have over here The Current

financial market conditions are

dramatically tighter owners who may have

been safe in recent years could now be

forced to find other financing options

or become for sellers well that's the

other issue if you're walking into a

freaking banking crisis and banks are

calling you up going yo pay up and

you're like dude I don't have any money

and the bank's like well then go borrow

it from someone and then you go okay

well who's gonna lend it to me certainly

not Silicon Valley Bank how about you

lend it to me lender well I'm just like

yeah no no no we are re-margining we're

not lending you more

[Music]

it's very scary uh let's see here

I feel like if I'm waiting to know when

to buy all I need to do is wait for

Kevin to start buying without saying

Secrets away

no don't copy me don't don't

uh not Financial advice anyway those who

have been kicking the valuation can down

the road may be forced to acknowledge

the fact that interest rates are up even

if they're performing well Banks May

force them to answer the question do

your loans meet the value test

next taxation now this is actually

really interesting I'm going to sum it

up though when property values go down

tax revenues go down smaller towns that

are not well capitalized could literally

go bankrupt

it has happened before it will happen

again then property taxes go up

austerity measures go in property values

go down even more because they have to

start shutting down fire departments or

whatever I kid you not cities will shut

down your fire departments not all of

them obviously but people think I'm

crazy when I say that it literally

happened in the city that I live in

which I know I'm in Florida right now

literally happened Ventura California

couldn't raise their local taxes anymore

and they're so terrible at managing

money what happened I said all right

we're closing fire station four and

guess what response times for the fire

department and paramedics

up like 20 because the fire department

closed down yeah it can happen and guess

what that does lowers property values

even more it's insane so anyway I'm

speeding through this part because uh I

I think that's that's obvious but I

think it feels a little bit more Arcane

the next thing obviously would be that

being that for seller right and that's

that's scary and look at this the short

answer is we'll probably know by summer

yeah so that's Forbes right here telling

you uh oh you've got a pretty big

oopsie-doopsy potentially Coming For

Real Estate but it's not just Forbes

who's complaining about this it's also

Bloomberg Bloomberg had a phenomenal

piece on this and it really gives you

the worry about a commercial real estate

some people think commercial real estate

is a good investing opportunity right

now biggest value trap you could touch

right now is commercial real estate look

at this even wealthy landlords are

skipping payments on Office Buildings

Commercial Real Estate Investors uh

let's see here interest Rising interest

rates and remote work will bring more

deep defaults to downtowns near you

uh okay oh here's the news hold on on

Silicon Valley Bank Silicon Valley Bank

Financial is in talks to sell itself

dude nobody's gonna buy them they got a

bunch of toxic assets I mean then again

JP Morgan bought bear Stearns for

fraction Pennies on the dollar but

anyway what do we have over here

take Pacific Investment Management Co

funds managed by the 1.7 trillion dollar

asset manager acquired by Columbia

Property Trust which owned 15 office

buildings in New York SF Boston

Washington DC uh let's see here what do

we have here acquired okay high quality

Office Buildings in major U.S city offer

long-term value so you've got somebody

here this is in 2021. in 2021 even after

office is empty during the pandemic

funds managed by the 1.7 trillion dollar

asset manager which owned 15 buildings

uh it it worth 3.9 billion dollars got

it okay so so they were bullish then so

what are they saying or not last month

this company

defaulted on 1.7 billion dollars of

mortgages okay so in other words they're

bragging about how great commercial real

estate is and then what are they doing

over here now they're defaulting on 1.7

billion dollars worth of mortgages look

at that what do you think defaults on

mortgages do defaults on mortgages ruin

the banking crisis even more this just

makes everything even worse those

mortgage-backed Securities that are

sitting on the balance sheets of

JPMorgan Chase Bank of America Citibank

Wells Fargo they're becoming literally

toxic you can look them up again there

you could go to the uh the balance

sheets of these companies uh and then

type in uh usually you could do cmbs

those are uh commercial mortgage-backed

Securities that's a search you could do

for them uh you could do MBS searches

either way you'll find them in the

reports for these companies and it's

scary because a lot of them are going to

get written down substantially there's a

reason why JP Morgan has an unrealized

loss in their 10K ending December of

2022 we don't even have all of the write

Downs yet for commercial real estate and

they already show a loss an unrealized

loss of over

47 billion dollars it's insane it's

scary some of this stuff is scary anyway

so now you're getting a default over

here anyone who recalls the 2008

financial crisis in the housing bubble

bursting also might remember the score

and heaped on homeowners who stopped

paying mortgages because their houses

were hopelessly underwater they may now

find it ironic that some of wall

Street's most prestigious companies are

threatening a similar Behavior yet for

institutional investors defaults can be

a strategy to open the door to debt

restructuring debtors with commercial

mortgage-backed Securities must at least

technically default on their loans

before they can renegotiate terms

commercial mortgage-backed Securities

are non-recourse debt which means

borrowers can walk away and creditors

can't go after their own Assets in other

words words you look at the balance

sheets for some of these companies like

Silicon Valley Bank and what happens

what do you find on them oh crap

commercial mortgage-backed Securities

what did Bloomberg just tell us these

people could just walk away from these

assets they could literally walk away

from them look at this here's Silicon

Valley Banks 10K end of last year what

do we have right here 1.4 billion

dollars in agency commercial-backed

mortgages right here well another 1.4

billion dollars right here agency

mortgage-backed Securities another 6.6

billion dollars this company's going BK

especially when you write down another

one they they that's if they had to

write this down that's their entire

income for last year that's gone uh and

nothing obviously you would write it

down 100 but it's it's showing you the

con the real risk is not only commercial

real estate but it's also the banking

sector that's a disaster because that's

when you get j-pal who comes in and goes

oh crap we broke things I mean look at

this uh Elon Musk isn't paying his rent

at Twitter certain places certain parts

he's not using anymore he's basically

this is called self-evicting what you do

is you basically move out of part of an

office and then you're like oh we don't

need that space anymore we're just not

going to pay uh okay so we talked about

the Strategic buy down Amazon is pausing

construction for its second headquarters

of your Washington Facebook has reduced

the amount of space it has leased to New

York today the average office usage is

about 50 percent of pre-pandemic levels

which could be the new Norm this is

terrible news by the way for the

commercial mortgage-backed security

Market investors were hopeful that more

people would return to the office oopsie

oopsies that's why it's called a value

trap baby office building values have

already fallen 25 from just a year ago

yeah you're gonna have to write that

down even more another problem is that

investors have simply paid too much the

fund see this is I oh my gosh I'll tell

you let me just like if I could grab

your shoulders in real life right now

and then we'll go have a beer later okay

I would grab your shoulders and go Wall

Street doesn't understand ground floor

real estate they overpay all day long

they have all this money and and their

mbas from fancy colleges and nobody

learns boots on the ground real estate

no nobody understands the value of

actually getting a good deal anymore

it's scary this is why I'm doing house

hack it's it's to buy homes under market

value there's an Arbitrage opportunity

and most of Wall Street doesn't get it I

mean they literally are willing to

overpay for stuff that's that that's

Wall Street for you oh we'll overpay for

Real Estate so we could get our asset

under management fee it's a fraud it's

not actually fraud it's just the way the

system is but it it's if I have any say

with it we're going to change it that's

why I'm trying to create the Vanguard of

real estate with my startup house hack

accredited investors househack.com

anyway the fundamentals of offices have

been deteriorating since before even

with a strong jobs market and booming

corporate profits landlords had to boost

concessions such as free rent to be able

to attract tenants this is another scam

right here this is another big scam you

ready for this okay here's what

companies do now

I kid you not this is how people get

scammed in real estate all the time

they look at the rent rolls for a

property and they're like oh the cash

flows so wonderful wow you rent all of

those two bedroom one bath units for two

thousand dollars a month that's

fantastic

but what they don't tell you is when

tenants sign up they're potentially

getting two or three months rent free

we'll see think about that if you're

giving three months rent free let's just

say on a twenty four thousand dollar

annual lease two thousand dollars a

month right three times two is six right

what you've just done is you've actually

discounted the rents by 25 to get the

property rented right

but guess what the person the sucker who

buys the property doesn't realize that

the rents are inflated they're like oh

yeah these two and ones are getting uh

two thousand bucks a month

the reality is they're only worth

fifteen hundred dollars a month so now

you're over paying for real estate on

top of that I'm telling you there's so

much

dare I say near fraud in real estate

it's it's insane uh but anyway and

people don't get it they just what they

want I just want to see you you know

your projections it's insane anyway even

with a strong jobs Market booming

corporate profits landlords have to give

free rent to attractive tenants the

underwriting that people that people

made when they bought the buildings had

no relation to reality

yeah exactly that's what I'm saying the

deal underwriting is complete garbage in

real estate it's it's so sad there's

fundamentally unsound economic economics

behind the deals the Outlook is far

Grimmer today than in 2021 the Federal

Reserve is forecasting the unemployment

rate will rise to 4.6 by the year end

even when the economy recovers it's

clear that many buildings will never

recover owners are exploring conversions

to housing oh that's hell dude but those

deals won't make a dent in office supply

in the short term because of zoning

exorbitant costs and the complexities of

engineering

do not think you can go turn strip walls

into homes easily it ain't happening

nobody wants a parking lot as their

front lawn

uh the amount of Redevelopment it's

insane it's insane we can't even build

enough normal homes on dirt and people

think somehow we're going to turn a

bunch of commercial buildings into homes

in a jiffy

murder interpreter

uh even when they come okay great short

sellers are betting that more debt tied

to offices will go into default

completely agree hedge funds uh

including whomever right here are using

credit default swaps it's 2008 all over

again oh my God uh known as cmbx

uh to wager against bonds tied to Office

Buildings similar to previously

successful bids against shopping mall

debt by Carl Icahn and Michael burry wow

I don't think this is the big short but

there is going to be a lot of distress

in office there could be an opportunity

for many of the biggest investors which

still have piles of money and are poised

to pounce they're waiting for a lot of

these buildings to go back to the banks

well if they go back to the banks man

more banking stress that's what you're

literally facing even more banking

stress and it's scary because of what's

happening over at Silicon Valley Bank

it's it's very scary you don't want you

don't want to see this the sucker's down

45 in pre-market it's insane it looks

like it's actually rebounded at chunks

since the pre-market I think it was down

to something like 30 bucks uh in in the

pre-market it's popped up a little bit

now because you have this talk about uh

oh their Capital raise failed uh yep see

there you go Silicon Valley Bank Capital

raise failed now in talks to sell itself

well dawg is the stock plummeted of

course uh their their raise failed uh I

don't know I'm still actually seeing on

some sites here that we're actually on a

halt on uh svb still so so we'll see

it's going to be pretty volatile but uh

good luck I don't know who wants to buy

a bank right now with a bunch of toxic

assets but what it does do is

potentially lead the FED to slow down

uh I know everybody's still talking

about this potential for 50 BP no way

Jose now with a potential banking crisis

afoot wait for the dust to settle I

actually I actually think there's a

greater likelihood of no rate hike than

there is of a 50 BP rate hike