All Forum Posts by: John Carbone

So we are 2-3 percent away from an 8 percent mortgage. what were home prices like back when you remember having an 8 percent mortgage?

 I agree with the remote work changing the way people vacation and gatlinburg is prime to capitalize on that. however, interest rates going up lately haven’t been “modest”. A 200 basis point increase represents nearly a 20 percent reduction in the underlying asset to maintain the same total expenses. As Colin mentioned, properties go off of the multiple of what a cabin earns. A few years ago properties used to sell for a 5-6x multiple (100k gross rental cabin would sell for 500-600k). Covid has brought more exposure to the area and financiers have noticed that a true fmv of a 100k rental cabin is actually closer to $1m given how low the property taxes are along with modest insurance rates (compared to beach towns). During this time though interest rates have risen, which is putting a strain on this 10x gross multiplier. Are ADR’s going to rise enough to cover the increased interest expense input in the formula? Possibly, but there will be a ceiling on ADR at some point and there will be a breaking point with interest rates. 

All the charts right now show there is no slow down, but the charts always lag by a few months. The old metaphor is everything is perfect until it isn’t. It’s the stairs up to the top and the elevator down. When people get nervous they sell. A lot of people who own have massive equity. The prospect of collecting 50k profit a year dwindles when sitting on a 500k plus long term capital gain. People are emotional, and most people want the 500k now especially if they are nervous. So we could be coming to a point where there is a “bank run” style sell off in the area with people panic selling and we could easily see a revaluation back to early 2020 prices. It doesn’t take a lot of sellers in a small market like this to disrupt things locally. 

Also another negative factor is the 10 percent second home loan has been essentially wiped out by Fannie/Freddie. I spoke with some lenders and they are now charging up to 4 percent origination fees on these loan products (as of April 1). Local banks are quoting around 6 percent on investment loans too. Some local banks were giving 15 percent down loans and they have changed their policies internally to 20 percent down effective the beginning of 2022. So if you look at an 18 month horizon, people were snapping up cabins with 10 percent down at sub 3 percent notes. Now, the next group of people will be looking at larger down payment, worse terms due to most mortgages being jumbos now with the appreciation, and closer to 6 percent interest rates. A full double up in interest rates for the next wave of buyers. That is not “modest” by any means. Something has to give here. Long term it won’t be an issue, but there could still be a lot of pain like what Collin mentioned back in 2008-2012.