The Real Estate News Brief: Collapse of Three Banks & the Fed’s Likely Reaction, 1031 Exchange Under Fire

In this Real Estate News Brief for the week ending March 11th, 2023 and beyond… the collapse of three banks in one week, how this might change the Fed’s decision on a rate hike, and a new attempt to kill the 1031 exchange.   Hi, I'm Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review.   Economic News   We begin the latest economic reports and the failure of a huge bank in Silicon Valley. The collapse of Silicon Valley Bank happened in just 48 hours, after a $42 billion bank run. It’s now the second biggest bank collapse in U.S. history after the collapse of Washington Mutual in 2008.    The crisis began when the bank said it needed to raise $2.25 billion to shore up its balance sheet, but that spooked investors which include some of the biggest tech companies and venture capitalists in Silicon Valley. Withdrawals happened so rapidly that the company was forced to sell all of its available-for-sale bonds at a $1.8 billion loss. At the end of the two-day run, the bank had a negative cash balance of $958 million. (1)   Fintech investor Ryan Falvey of Restive Ventures told CNBC: “This was a hysteria-induced bank run caused by venture capitalists. This is going to go down as one of the ultimate cases of an industry cutting its nose off to spite its face.”   The root cause of the collapse goes deeper however, into the lap of the Federal Reserve and its fight against inflation. As the Fed hiked rates, many of the startups withdrew funds to keep their businesses afloat. That led to a funding shortfall at the bank, and the need to sell those bonds at a loss.    The government is trying to prevent further damage to the economy by taking control of SVB and promising to make good on all deposits including deposits worth more than the FDIC-insured $250,000 maximum. The Treasury Department, Federal Reserve, and FDIC said in a joint statement: “This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.” (2)   Regulators are also dealing with two other bank failures. They have taken control of crypto-friendly Signature, which has a sizable commercial real estate loan portfolio. They are also promising that customers will have full access to their deposits, beyond the $250,000 FDIC insured amount. (3) It’s a different story for crypto-friendly Silvergate which has also failed. That bank started to go downhill after the collapse of crypto exchange FTX last year. At this point, the bank has now announced that is will shut down and liquidate assets to meet its obligations with depositors. (4)   Economists say the banking failures point to what some now expect to be a “hard landing” for the economy, or at least harder than the wished-for “soft landing.” While they were recently forecasting as much as a half point rate hike at the Fed’s next meeting, there’s now talk that the Fed will have to back off. CNBC reports that the probability of a quarter point rate hike rose above 70% at one point last Friday. But the Fed will also be considering new economic data including a report on February’s Consumer Price Index. (5)   Moving on to the job market. Initial claims for unemployment jumped to 211,000 last week. That’s the highest since Christmas, but most of those lay-offs were in New York, so they may not indicate a national increase. Meanwhile, continuing claims were up 69,000 to a total of 1.72 million. (6)   As for job growth, the government says that companies created a robust 311,000 new jobs in February. That’s less than the 500,000 jobs created in January, but more than Wall Street analysts had forecasted. The unemployment rate did rise slightly to 3.6% and job openings have come down somewhat, to 10.8 million. In December, there were 11.2 million open positions and a record 12 million earlier in 2022. (7) (8)   Mortgage Rates   Checking in on mortgage rates… Freddie Mac says the average 30-year fixed-rate mortgage was up 8 basis points this last week, to 6.73%. The 15-year was up 6 points to 5.95%. (9)   In other news making headlines…   Another Whack at the 1031 Exchange   President Biden is taking another whack at the 1031 exchange. His budget proposal suggests that by eliminating 1031s, the government would collect an additional $19 billion. The 1031 gives real estate investors a way to transfer equity from one investment property to another similar property without triggering a taxable event. But it would only defer the tax obligation, not eliminate it. (10)   The White House is calling it a “sweetheart deal” for real estate investors, but it’s also a shot in the arm for the economy, when investors can reinvest without taking an immediate tax hit. Let’s say you own a property that has increased in value, and you’d like to sell that property so you can buy a similar property elsewhere. If you have a huge tax bill, you wouldn’t have enough money to do that, which might discourage you from selling in the first place. The 1031 allows for movement within the real estate industry, and a tax bill that comes due when the investor eventually sells without reinvesting.    Biden’s budget proposal also seeks to eliminate the carried-interest tax break. It says the loophole allows “wealthy investment managers to pay a 20% rate on the pay they receive for managing fund assets, instead of the 37% rate that comparable wage earners pay.” And that by closing this loophole, the government would save $6 billion dollars.    That’s it for today. Check the show notes for links. And please remember to hit the subscribe button, and leave a review!   If you’d like to learn more about how to invest in real estate and the benefits of a 1031 exchange, go to newsforinvestors.com. You can join RealWealth for free and have access to our Learning Center and our Investor Portal. That’s at newsforinvestors.com.   Thanks for listening. I'm Kathy Fettke.   Links:   1 - https://www.cnbc.com/2023/03/10/silicon-valley-bank-collapse-how-it-happened.html   2 - https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm   3 - https://www.cnbc.com/2023/03/12/regulators-close-new-yorks-signature-bank-citing-systemic-risk.html   4 - https://www.coindesk.com/tech/2023/03/10/how-silvergates-crypto-collapse-differed-from-silicon-valley-banks-no-us-government-bailout/   5 - https://www.cnbc.com/2023/03/10/just-like-that-market-pricing-swings-back-to-quarter-point-fed-rate-hike.html   6 - https://www.marketwatch.com/story/jobless-claims-jump-to-211-000-and-hit-highest-level-since-christmas-6911db39?mod=home-page   7 - https://www.marketwatch.com/story/jobs-report-shows-strong-311-000-gain-in-february-puts-pressure-on-fed-for-bigger-rate-hike-1e45fe1e?mod=home-page   8 - https://www.marketwatch.com/story/u-s-job-openings-drop-to-10-8-million-but-they-are-still-too-high-for-the-fed-1111e9ea?mod=economic-report   9 - https://www.freddiemac.com/pmms   10 - https://www.bisnow.com/national/news/capital-markets/biden-budget-proposes-end-to-1031-exchanges-118036