Anyone Concerned About the Fed's Recent "Repo?"

14 Replies

The economy seems to be on fragile ground based on this "unexposed" information about the Fed repo. How are you preparing for a potential downturn?

@Kathy Fettke Certainly interesting watching the fed do more QE, you know, without doing "QE" according to them.  I have refinanced and pulled out equity on my primary home so I'm in a better cash position to take advantage of potential opportunities.  As alluring as it sounds to wait for a possible discount on properties, I'm not waiting until something happens in the market.  I'm trying to find opportunities now and when I find one, I plan to pull the trigger.  Planning to keep solid cash reserves and not overleverage myself to have some flexibility should a downturn occur. 

I could care less. I dont change anything really whether the economy is good or bad.

I have cash waiting, and I'm not doing marginal deals. Other than potential instability in the financial system, this repo situation is a bit obscure for me to translate to the real estate market. How could this specific situation turn into a real estate downturn?

The economy seems to be on fragile ground (???)

This is the strongest economy in decades.

The media tends to lie a LOT, it's probably not a real good source of ANY trustable information.

@Scott Mac When the Federal Reserve is creating and injecting $75B per day to keep banks liquid, that is concerning. This is not being covered in mainstream media and quite frankly, my inside sources tell me high level people at the Fed do not know how to solve it.

I'm taking as much money as I can out of banks and into gold but also buying cash flow properties in B neighborhoods in solid job growth markets. Those who think the economy is the strongest ever (in spite of $1 trillion annual deficit) should look at basic accounting practices.

@Kathy Fettke it is overblown non event. It is t QE it is just a matter of their being so much treasury issuance due to tax cuts that liquidity need to be provided as banks lending against treasury hit their limits. However that isn’t anything that is of real economic concern

They have been trying to force inflation for a while now. QE is how they will do it, and while it MIGHT go well, historically every time central banks try and force inflation it gets away from them in devastating fashion.

If inflation goes up drastically, cash will be worth less and fixed rate debt will hold a premium of value. 

I am worried, and the fact that so many people are confident makes me more worried. 

This is why having immediate access to liquid is king and having all debts low to none helps a ton.  I've said it before, id be more concerned with landlords that own cashflowing cheap houses with mortgages and collect low rents.  A family that can't afford a 80K home Must settle for paying $800 rent. They are barely making ends meet and will struggle in a economic downturn.  

@Anthony Rosa I was thinking that owning rentals in B neighborhoods would be a safer bet. Those who live in A class properties may have to downsize to something more affordable, and those in C class will either move in with family or be able to move up as B class becomes more affordable. During the 2008 recession, Real Wealth Network helped people sell bubble property in CA and exchange it for cash flow properties in Dallas. Those investors didn't even feel the recession because they received so much cash flow from people who were forced to rent after losing their homes. Rich and I bought 9 homes and the rents stayed high. And we were even highly leveraged on those, but the cash flow more than covered expenses. It was the CA homes I kept that took me down... plus a couple in Boise and TN that didn't stay rented -not enough diversification of employer and not enough cash flow

Originally posted by @Kathy Fettke :

@Anthony Rosa I was thinking that owning rentals in B neighborhoods would be a safer bet. Those who live in A class properties may have to downsize to something more affordable, and those in C class will either move in with family or be able to move up as B class becomes more affordable. During the 2008 recession, Real Wealth Network helped people sell bubble property in CA and exchange it for cash flow properties in Dallas. Those investors didn't even feel the recession because they received so much cash flow from people who were forced to rent after losing their homes. Rich and I bought 9 homes and the rents stayed high. And we were even highly leveraged on those, but the cash flow more than covered expenses. It was the CA homes I kept that took me down... plus a couple in Boise and TN that didn't stay rented -not enough diversification of employer and not enough cash flow

While I absolutely see your point I also think that lenders are much more stringent pre 2008. I remember in 2005/06 people were having bidding wars and overpaying in low inventory areas. I haven't seen that since. People were also taking out low interest teaser rates on a second mortgage and buying expensive cars, boats and living a dream. All of this with no income or credit check.. That's not the case anymore.  As soon as interest rates jumped they were finished.  I'm in NY and NYC and surrounding areas didn't feel the hit as bad as other states. If someone lost their home they rented in class A areas or moved in with famiky. People will always need to rent but these class B and C in cashflow areas are low earners that can't even swing getting a 100k mortgage but don't qualify for welfare.  In the end who knows, we can only speculate. I'm also a fan of appreciation over cashflow. To me the whole idea of RE is making money on appreciating value. I don't see the point of buying a home today that's worth the same 50 years from now to only pocket Maybe $500 a minth and sometimes picket 0. 

 


@Kathy Fettke

I would argue that the Fed's recent repo announcement has little to do with the economy being on fragile ground. The reason we have seen repo rates spike to 8+ % is because of a reduction in reserves (money that can be lent in the repo market), especially near quarter end when corporates have to pay taxes and banks pull reserves and hold more cash to improve their liquidity coverage ratio. The Fed is combating this reduction by purchasing T-bills and providing repo facilities (through January 2020) in the meantime. This is more of a funding/reserves problem than one where the economy is deteriorating. 

You could argue that weak ISM manufacturing and ISM non-manufacturing #'s may point to a downturn, however it looks like the Fed will step-in to provide cuts or asset purchases as needed. The Fed's argument is that we have had a strong consumer powering our economy. Thus, any negative consumer data is important to keep an eye on as the Fed will like become more accomodative.

As a mortgage lender and broker, not much has changed in the past couple of months. Rates are still low and people continue to purchase and refinance. Over the summer, FHA tightened guidelines, which implies borrowers who were on the border of being able to qualify will now have to rent, which should translate to fewer defaults. We (AFC Mortgage Group) have been surprised that even into the fall, we have not slow down yet.

@Gaetano Ciambriello Thank you for presenting your viewpoint. Consumer confidence is a trailing indicator in my opinion. It can change on a dime. A lack of reserves to this level, combined with low manufacturing numbers and potentially lower interest rates does not sound like a booming economy to me. :-) Sound like desperation and more financial engineering. We've come to think all this manipulation is normal, but so were no-doc loans last decade. I think it's most important to conduct a gut check and ask "Does this actually make sense? Like, common sense..." 

Either way, I am moving forward cautiously...