When there is blood in the streets..

Question

Buy quality real estate in quality locations, or at least that's the advice.

Although the injuries from the current housing 'correction' and 'bubble' in other areas are not as severe as those inflicted in 2008 there will be pain and some suffering. https://fortune.com/2022/10/21...

At most risk are more recent home owners, specifically first time homebuyer's that took advantage of lower lending rates, but at increased asset valuations, many with limited down payments and even more limited disposable income and reserve liquid assets. A notable percentage likely would not have been able to afford to purchase a home or property if not for the low cost of borrowing and due to increased pandemic reserves, may have have even been overly confident and competitive during the price 'wars.'

Undoubtably in many areas valuations are declining rapidly and will continue to do so where there was a significant disconnection of income to home prices. Just because a $500k home costs under $2-2500 in mortgage payments, doesn't mean it's not an expensive asset that requires maintenance and upkeep to sustain value.

Assuming the recession and job losses are as anticipated by many 'economists' there will be an increase of distressed and defaulted properties. Bank repossessions are up nearly 40% YTD. https://vermontbiz.com/news/20...

Also weighing heavily on lender and investor balance sheets are commercial and office space leases, the majority of which would face increased vacancy rates and downward pressures on rents as economic activity slows. Compounding this sector is that commercial mortgages are often of shorter duration and more sensitive to rate increases than residential securities.

The costs of refinancing and/or purchaser's proposed borrowing costs of these commercial properties are likely to be significantly higher than in recent memory and particularly limited in areas of steep price declines.

As options for buyers and sellers become more limited there is likely to be more competition for quality 'deals' and increased due diligence and analysis on behalf of investors, lenders and those associated with the transaction.

Creativity and experience in structuring transactions becomes more paramount. For example many sellers that can afford to do so could potentially offer buyers, seller carry terms that are significantly more incentivizing than what banks are offering. All while earning a significantly higher rate of return than the same bank would offer the seller for their significant deposit.

In times of fear, uncertainty and stupidity lies intelligent opportunity.

If quality real estate is an excellent inflation hedge and secure asset, perhaps both parties can benefit from maintaining an interest in it?

Also, when markets shift, prudent investors shift with it. Their longterm strategy and investment parameters might stay focused, but they're aware enough of their surroundings and apply their insight to capitalize on the information digested.

Conditions have changed but the playing field has only leveled. There are half of the buyers there were a year or two ago and the 'easy' and 'good' deals might not look as rosy in the coming months and years.

Good relationships will be more valuable and indispensable than in euphoric market upswings. Knowledge is power especially as dumb money leaves the marketplace. Recent examples? Meme stocks, crypto, NFT's...please.

For the past year I have been cultivating a relationship with the head of business development at my local personal credit union. As a member profit share and oriented community lender they lend their own capital to their own members. They make in house credit and property decisions and make sense mortgages. I figured a 25-30 relationship has some incentive to the local lender and as a result they are willing to offer qualified borrowers and properties well below market rates and favorable terms, AND are happy to do so.

It is very likely this strategic and relational advantage will result in profitable transactions for my clients, as they are able to analyze returns on considerably more favorable terms, while sellers have fewer offers to entertain.

The market will always shift, evolve and move...will you?

Kyle Bergren · Answer

Its already a challenging and illogical market everywhere. All I can say from my experience, its been terribly hard to find deals that make sense. If money is being loaned at rates of 8-12% then for me to feel comfortable the CAP rate needs to site another 5-7% above that. So my risk acceptance at the moment is in la-la land. Many investors are okay with that because they're banking on appreciation. Its feels like herd mentality.

I remember reading an article stating the times (world wide) are similar to the tensions prior to World War I. I know history doesn't repeat itself but as Mark Twain once said it certainly rhymes.

Chris Martin · Answer

We are in the bottom of the first inning, maybe top of the second. It will get interesting at the seventh inning stretch. Stay calm and wait. No blood yet.

Lennar earnings is a good leading indicator, with TX (as in Austin, TX) having cancelation rates at 33% and declining backlog per their latest 10-Q on page 35. The good news is that they (Lennar) are in a good spot financially and can let options expire (page 43 of their 10-Q) with little impact if the building environment continues to falter.

FNMA remains healthy per their latest 10Q, page 38.

No reason to panic. Not related to real estate, but if China invades Taiwan, I believe the global economy will most likely collapse. Globally, watch TSM as a leading global indicator, not LEN.

Mike Dymski · Answer

Well written post.

People don't buy when there is blood in the streets.  How do we know?  Because prices are low because no one is buying.  And there is no funding available, particularly without experience.  Investors focus on investing while others focus on "the market".  Investors are buying this dip right now, while they still have access to funding.

Lumi Ispas · Answer

@AJ Wong,

Good job on researching what's happening on the market, and you always want to read into the info a bit more. Here's an article showing that the amount of foreclosures in 2022 are the same as in 2020 and about half of 2019. The foreclosure levels today in US are actually below the average foreclosure rate in USA over the last 100 years!

The numbers look so high percentage wise as banks put most foreclosures in hold after Covid started and now they are processing them. A lot of people that are in foreclosures are the ones that took advantage of not paying their mortgages as the banks allowed it. A lot of these owners are working out payment plans with the banks or selling their homes for a profit, meaning they won't be foreclosed on.

You always want to read three sources of information, and try looking for data articles, not articles that interpret the data as most writers don't understand Real Estate and they are just looking for sensational information.https://www.attomdata.com/news/market-trends/foreclosures/attom-midyear-2022-u-s-foreclosure-market-report/#:~:text=Nationwide%200.12%20percent%20of%20all,the%20first%20half%20of%202022.

This time around the market is so far different than 2008:

1. The market is flashed with cash, meaning lots of buyers looking to buy,

2. Owners have so much equity that most sellers in foreclosures if they would even want to talk to a Realtor could sell the property and walk away with money

3. Inventory is so tight due to landlords securing interest rates at less than 50% of today's rates, and not willing to sell them

4. Wealth in general had increased for RE investors due to Inflation, savings, age, so more investors are buying a lot more properties without selling

5. Real Estate market is local. The only markets that will have a correction will be the ones where Real Estate prices went up very fast and unsustainable, which is less than 10% of USA.

With other words, the sky is not falling people. While you will always find a deal, don't panic.

Lastly, commercial interest rates are about 2% under the conventional rates, and in the conventional market there is a bunch of new programs to buy down the rate, ARMs, or seller pay 2-1 buys down. The banks finally have fun and can play in the market as they can start making money on loans.

With other words, what change will you make in WHAT you buy, WHERE you buy, as construction costs are not really coming down and most properties can't be rebuilt today with the new construction cost.

When there is blood in the streets..

Most Popular Reply