Effects of Economic Pressures on Borrowers

Back on recession watch, Leading Indicator #2 – the FHA mortgage delinquency rate. This isn’t typically in lists of leading economic indicators, but it may be a proverbial canary in the coal mine in the current context. FHA borrowers have low to moderate incomes, with a median income of about $75,000 a year, and most are first-time homebuyers. Judging from the recent increase in the delinquency rate on FHA loans, these households are under mounting financial stress. This is despite the exceptionally low 4% unemployment rate and goes in part to the credit characteristics of the borrowers, including lower credit scores and downpayments. Even more important may be their high debt-to-income ratios. With mortgage rates and house prices as high as they are, borrowers have to shell out a big share of their income to their mortgage payment to get into a home. They may have gambled that rates would fall and could refinance, bringing down their payment. However, the Fed’s higher-for-longer rate policy and quantitative tightening have forestalled that exit strategy. Combine this with higher homeowner insurance premiums and property taxes, and borrowers struggle to make mortgage payments. What happens when the job market wobbles even a little bit? Thus, why this is a good statistic to include in our recession watch. Not that the financial troubles of FHA borrowers are enough to push the economy into recession. Indeed, high and middle-income mortgage borrowers are having no trouble making their payments at this time – the gap between the FHA delinquency rate and those on Fannie and Freddie loans has never been as large. But if the economy is headed for trouble, it is FHA borrowers who will signal it first. And they are. #rates #FHA #income #recessionwatch #fed

The 30-year fixed-rate mortgage in the US has reached 7.5%, a 20-year high. This obviously impacts buyers who are taking on new mortgages. It also affects current homeowners since the financial psychology being exhibited in today’s market shows that existing homeowners with more attractive (lower) interest rates are less likely to move to another home unless there are underlying circumstances (e.g., relocation for a job; desire/need for more square footage; WFH affords a change in locale/lifestyle). This “lock-in effect” is a term that describes a homeowner’s hesitance to sell their property due to the fear of a higher mortgage rate. This has clearly resulted in a shortage of existing homes for sale on the market. According to Morningstar: ~90% of mortgage borrowers have an interest rate below 5% ~70% have an interest rate below 4% ~25% have an interest rate below 3% According to Redfin, the beneficiary of this trend has been homebuilders. Newly built homes accounted for 31.4% of all U.S. single-family homes on the market in Q2 2023. This is an increase from 17% prior to the pandemic. For comparison, the number of newly built homes on the market was up 4.5% in June 2023 compared with June 2022, whereas the number of existing homes for sale fell 18%. The ramifications of this market extend to the service side of the industry. Real estate professionals who depend on transaction volume to make a living are feeling the strain. This includes agents, attorneys, title companies, inspectors, etc. https://lnkd.in/gCfaGTxN #commercialrealestate #cre #residential #homebuilding #realestatedevelopment #construction #realestatefinance

Let’s talk about the current economic climate and it’s effect on Commercial Real Estate: The market gets excited whenever there’s a hint that interest rates might drop, which makes people spend more and drives up prices. This can create a problem because then the people in charge might need to keep interest rates higher for longer to prevent prices from rising too much. It’s like a seesaw: when one side goes down, the other goes up. This can lead to problems like a weaker economy and trouble for banks, making it harder for people to borrow money. What risks does the commercial real estate sector face in an environment of prolonged higher interest rates? Firstly, higher borrowing costs can increase the financial burden on property owners and developers, potentially leading to reduced investment in new projects and slower growth in the sector. Secondly, rising interest rates may dampen demand for commercial properties as businesses face higher financing costs for expansion or relocation, resulting in decreased occupancy rates and lower rental income. Additionally, existing commercial real estate loans with variable interest rates may become more expensive to service, increasing the risk of default for borrowers and potentially leading to higher rates of loan delinquency and foreclosure. Overall, prolonged higher interest rates can weaken the profitability and stability of the commercial real estate market, posing challenges for investors, developers, and lenders alike.

Unaffordable housing. Just how bad is it? I think the below illustration, through the eyes of a homeowner / borrower, shows the impact of rates and how a homeowner likely has to trade DOWN in house today if purchasing to keep payments steady. A great real world example for today. "Consider a hypothetical John Doe who bought a median-price, $300,000 home in August 2016 with 20% down and a $240,000 30-year-fixed 3% mortgage with a $1,012 monthly payment. Doe feels pretty good. The value of his house has increased to $425,000 — based on the median amount of appreciation — and he's repaid $38,443 of mortgage principal. The price increase plus the paydown means Doe has almost $225,000 in home equity. He thinks it's time to use the increase to buy a nicer house. Doe wants to keep his mortgage payment the same and just use the surplus funds from the sale of his home to make a very large down payment" "Doe figures to clear $223,443 from a sale after repaying his remaining mortgage. To keep his current $1,012 payment, he can only borrow $148,622 in a new 30-year-fixed 7.23% mortgage. That means he can buy a house for $372,065, which means he would be trading down and not up — and that's before paying sales commission, taxes and expenses. In reality, he's probably looking at more like a $325,000 house. His profit has evaporated and he's actually down $100,000 in house quality. He's also added seven more years of mortgage payments, since his old loan had only 23 remaining years. Adding insult to injury, the Internal Revenue Service thinks he has a $125,000 profit, although he probably can avoid paying capital gains tax on the first $500,000 of gains if he's married" #mortgage #mortgages #housing #rates #economy https://lnkd.in/gECPuTxm

Konrad Putzier of The Wall Street Journal writes about the flashing warning signs of the commercial real estate credit crunch: many office landlords cannot pay back their debt and are now struggling to secure new loans. This is due to a confluence of factors including high office vacancies, high interest rates, devaluation of real estate and banks seeking to limit their exposure to the challenged office sector. With more than $1.5 trillion of CRE loans due before the end of 2025, borrowers must be granted more time to restructure their debt with lenders to avoid more defaults and the far-reaching economic impact that will follow.

👉The real estate market is making a mark for some, but for many investors, it's getting harder to get the financing they need to buy properties. 👉Rising interest rates, inflation, and supply chain disruptions are all making it more difficult for investors to secure loans. 👉A recent survey by the National Association of Realtors found that 65% of real estate investors are struggling to access financing. This is the highest level of difficulty in over a decade. 👉The rising cost of borrowing money is making it more expensive for investors to finance their deals. This is especially true for investors who are using leverage, which is when they borrow money to buy properties. 👉Inflation is also making it more difficult for investors to afford the down payments and closing costs associated with buying properties. And supply chain disruptions are making it harder for investors to find properties that meet their investment criteria. 👉As a result of these challenges, many investors are being forced to put their plans on hold or scale back their investment activity. This is having a negative impact on the real estate market, as it is reducing the demand for properties. 👉If you are a real estate investor, it is important to be aware of the current financing challenges. You should also be prepared to adjust your investment strategy accordingly. ✔Here are a few tips for real estate investors who are facing a financing crunch: 👉Be prepared to put more money down. If you are willing to put more money down on a property, you will be able to qualify for a lower interest rate. 👉Consider alternative financing options. There are a variety of alternative financing options available, such as hard money loans and private lending. These options may have higher interest rates, but they may be your only option if you are unable to get traditional financing. 👉Be patient. The market is cyclical, and financing conditions are likely to improve in the future. In the meantime, you can focus on building your credit score and saving money for a down payment. 👉If you are a real estate investor who is struggling to get financing, don't give up. There are still ways to make it happen. By being prepared and taking action, you can overcome the challenges of the current financing environment and continue to grow your real estate portfolio. ✔If you are a real estate investor who is facing a financing crunch, I encourage you to reach out to me. I can help you understand your options and develop a financing plan that works for you. ✔ Together, we can overcome the challenges of the current financing environment and continue to grow your real estate portfolio. 👉I know it’s hard to build to build a successful real estate portfolio in this environment, and I want to help you in any way I can. So, if you have any questions about financing, please do not hesitate to reach out. ✔ #dscrloan #investmentproperties #mottomortgagecompetitivepartners