The Banks’ Recent Stress Test

What Does It Mean for the Real Estate Market?

Let me start explaining what the stress test is and why is it worth a blog. The Fed went through an exercise where several critical factors simulated Armageddon in the banking business. The factors were unemployment spiking to 13 percent, the stock market falling by 50 percent and a higher number of distressed or foreclosed homes. How would banks handle such a scenario? I like to think of it terms of one of my favorite movies, It’s a Wonderful Life and how the masses made a bank run on Bailey Savings and Loan. In this case, the banks had more than $2.00 at the end of the day.

Fifteen out of 19 banks had enough capital to withstand the failure of other banks in this worst case scenario.

The good news...

Our banking system is stable and they are lending to those who have good credit. That is one major reason why we are seeing a spike in buyers entering the real estate market. Another reason is the unbelievable low interest rates and low prices that are starting to climb making those who are on the fence...jump.

With a consensus that we have already seen the bottom of the real estate market (especially in Michigan), people who are looking for stability to get back into the real estate market are trying to snap up deals as quickly as possible.

For example, I have been working with an investor who wants to buy investment properties. We wrote an offer on a condo in Addington Park. Originally these condos were selling for $140,000. We saw a short sale for $75,000 in which that was the highest price in four years. Not only did it sell the first few days on the market...it had five offers, four of which were cash and three were over the asking price. Yes, the market is coming back.

The bad news...

Now that the banks are able to stand on their own and the economy is picking up, the Dow, NASDAQ and S&P at high. Money is flowing out of Treasury (bonds) and into the stock market to earn a better return on investment. This immediately impacts our interest rates.  In fact, the interest rates are up ½ percent over the last few months. Just look at the oversold financial sector. Bank of America is 70 percent this year. People lost trust in the banks and now the Fed will not have to prop them up any longer. The net effect is that a buyer will not be able to afford as much as before, possibly limiting the growth in the real estate market. What does that do for those looking to buy? Well, it sends them into buy mode rather quickly. Additionally, the warmer than usual winter is bringing out the buyers. The housing prices are still down 20-50 percent from where the market was.

What should one do?  If you are looking to buy a home for any reason...now is the time...even for those who have been waiting to downsize. 

If you have any questions please feel free to email me at pmruk@aol.com.

Paul Mruk