Find out what’s happening in real estate and the economy that could impact your investment strategy, plans, and performance this year…

No Fed Interest Rate Cut Till June

Experts are now pushing back their forecast of a Fed rate cut until at least June this year. That’s not welcome news to millions who were hoping for a break from rampant inflation and high borrowing costs.

Though we could get a well timed rate cut or two before the presidential election.

For now investors need to make their plans based on where rates are at, with a cushion for even higher mortgage and loan rates as banks seek to offset risk and defaults.

The $400M Trump Fine, And The End Of NY

Former president Trump has just been hit with an almost $400M fine in NY, for boasting his properties were worth more than what the judge thinks they are worth.

This ruling has faced harsh criticism from the likes of Shark Tank investors and fund managers. This may be the final straw that has the last remaining investors pull out of NY for good.

It’s a reminder that values are always influx, they are just an opinion, and that opinion can be changed at any time.

It’s a fresh warning of what happened to many investors in the last great recession when banks began slashing credit lines and trying to force homeowners to accelerate the pay back of loans due to revised valuations.

Calls For $50 An Hour Minimum Wage

Forget $15 or $35 an hour. New calls are being made for a $50 an hour minimum wage. That’s about $100k a year. Which may really just be getting by for many households with kids these days.

In turn, it would either mean doubling or tripling inflation on goods and services to keep up with the wage increase, or companies having to lay off another 30% to 60% of their staff.

For real estate companies, it likely means consolidating with fewer team members, but of higher quality, and at higher wages.

The AT&T Outage

AT&T’s massive nationwide service outage is a fresh reminder to investors, entrepreneurs, and businesses that they cannot rely on just one connection.

For both phone service and internet, you need at least one additional back up, and remote alternatives on different providers so that you never get disconnected. You can imagine the havoc this can wreak with closings and deal flow.

These occurrences may become even more common has cyber attacks and online crime grow.

The Dallas Federal Reserve Bank says that its modeling anticipates the recent rise in interest rates will bring home values down by another 20%.

With the recession reportedly behind us according to recent government data, could this really happen? What other factors might put even more downward pressure on home values? What does it mean for formulating purchase offers?

Interest Rates & Home Values

Mortgage rates have already risen by more than double this year. Many believe that the fed isn’t done with its rate hikes either.

From 2006 to 2009 the Dallas Fed estimated house prices went down by over 30% due to rising interest rates at that time.

As we are already at an average of around 7%, it’s not a stretch that we could see many borrowers paying 9% or far more for mortgages in the near future. In the past they have been as high as 14%, and even 20%.

The higher they go, the fewer buyers that qualify for home loans. The fewer homes that may be sold. Which in turn puts more downward pressure on prices.

The Impact Of New Airbnb Changes

Airbnb has been busy making changes this year. Among their latest announcements are changes to pricing, and trying to attract millions of new listings. Even though they already grew by 15% over the past year.

Many existing hosts seem to think that this is resulting in fewer bookings, and more pressure to reduce prices.

In turn this could make acquiring and holding short term rentals much less profitable. Given this has been a major driver of some markets, any dip here could impact surrounding home trading prices as well.

Other Factors Impacting Home Prices

If the bulls are right, then if we are in a new upward phase of the economy none of this may be worth worrying about.

Of course, last week we covered several data sets that suggest borrowers and their lenders may be falling further into distress. The performance of credit cards, business loans, and auto loans all hit their worst point in two years as of the third quarter of 2022. If they can’t get on track, then together with inflation and higher rates, it is easy to see how many could end up defaulting on their mortgages as well.

A lot still depends on the segment of the market. The luxury end of the market still seems well insulated against any issues. Jeff Bezos can easily afford to lose billions, and still be able to purchase a new $100M home for cash.

Age and tolerance of higher rates may also be a factor. Some may just mentally not want to borrow when rates hit a certain point. Others will be more concerned with the monthly payment.

Pricing It In

Just because home values may be falling doesn’t mean it isn’t a great time to invest. In fact, many have been waiting for this moment to act.

However, it is very important to price in this drop when you are buying.

If you are fixing and flipping, and it is taking you nine months to turn around a property, and you anticipate prices down by 20% by then, you’ll need to factor that into your offer and profit margins.

Rental property investors may not see annual rental rates and income affected, though are wise to offer this much less to ensure they are not heading underwater and end up in a position where they cannot sell or refinance for another seven to 14 years.

Fortunately, this is much simpler for wholesalers. Yes, you still want to price in some cushion. Though if you are selling directly to your end buyer within 36 hours of closing, not much is likely to change. Besides, you’ve already resold it.

 

New changes to what is being reported on credit reports could hit many potential home buyers hard, and keep them out of the market.

Along with rising interest rates, new hits to credit scores could take more home buyers out of the market. This may be welcome news to some investors who have been craving less competition.

While credit scores may not be needed to obtain transactional funding to wholesale properties, investors should also be watching out for the impacts on end buyers, and who may end up not qualifying or being able to close.

Buy Now, Pay Later

One of the latest moves by the big credit bureaus has been to include buy now, pay later loans on credit reports. This includes TransUnion and Equifax.

According to TransUnion, this is being done in the name of “inclusion.” It is estimated around 100 million Americans use this type of financing each year. It’s already a $91B market, growing at over 45% per year. It is expected to become a $4T market by 2030 according to Allied Market Research.

You’ve seen these ads online. Now when you go to check out you may see payment plans being offered by Buy Now, Pay Later companies like Affirm, Zezzle, Klarna and After Pay.

It seems convenient, but this could also create major problems.

For a start, borrowers using these loans for items as cheap as $50 can’t really afford them. It is also multiplying inflation. Now fashion companies can quadruple their prices, because consumers can pay over time. So, instead of a pair of yoga pants being $25, they may sell for $100. Then there are many hidden costs or interest involved in some of these types of credit.

This is during a time when there are already tens of billions of dollars in spiking business and credit card defaults and late payments.

The lenders want this credit on reports to motivate people to pay on time. Or perhaps because they are not paying on time. Including them on credit reports may only exclude millions of borrowers from homeownership.

This also comes in the wake of some lenders counting recent COVID forbearance programs the same as foreclosure. A move that takes even more out of the buyer pool. Even if their mortgage company put them into forbearance without their permission.

Summary

Be wary of convenient looking buy now, pay later deals. They are not designed for the benefit of consumers. Now they might exclude millions from being able to buy homes.

On one hand this may free up more inventory and lower competition for investors. It also means that while it won’t affect you obtaining 100% transactional funding for wholesale deals, it may mean many end buyers won’t qualify to buy your deals with financing.

 

2021 is going to be one of the biggest years for real estate investors yet. Not everyone may enjoy the ride, but make no mistake that some will easily add double digit percentage points to their wealth and emerge as far bigger players over the next 12 months.

These are some of the most important factors that will determine how it goes for you.

Mindset: It Is What You Make It

You can choose to cringe and shrink and be fearful every time you are challenged. Or you can choose to find the opportunity and to create opportunity in every scenario. It is your choice how you choose to see it and act.

Commitment Vs. Flexibility

Stay committed to your goals, but flexible in how you achieve them. Expect shifting market trends, migration, curveballs, and more. You may have to adapt your tactics, but don’t back down from your goals.

Financing & End Buyers

Expect there to be some twists in lending over the next year. Banks and conventional mortgage lenders may change their underwriting criteria and appetite for making loans. There is a lot of cash out there, and those with capital will have to choose to back someone with their capital. Being able to adapt to who has the cash and can borrow money for your real estate wholesale deals will make a huge difference in your deal flow and volume for the year.

Data

Be knowledgeable and wired in. Don’t rely on the media headlines and fake social media spin for figuring out what’s happening in the market. Get the best data you can, as early as you can and stay ahead of the curve.

Focus

Focus on your own business and serving your customers the best. Worry less about what the rest of the world is doing.

Marketing

Today, the reality is that 90% of your success in real estate relies on marketing. You should strive to have great product, systems, and service, but it won’t make a dime of a difference without marketing to match.

Your Network

It is times like these in which who you know and who knows you will make all the difference. Work on expanding and strengthening your network.

 

Since the beginning of the Covid-19 crisis, small businesses around the country were forced to shut down. As the national economy finally reopens, several are struggling to remain afloat. The resurgence of the Paycheck Protection Program might change things.

The Payroll Protection Program emerged earlier this spring as part of Congress’ CARES Act—which devotes $650B to aid Americans in light of the national climate—and has been extended until August 8, 2020. PPP loans are subsidized by the U.S. Small Business Administration (SBA) and are meant to help small businesses cover costs like payroll, mortgages and utilities. PPP loan applicants can receive forgiveness depending on the business’ adherence to guidelines.

Some have doubted the credibility of the program and demanded transparency from both the SBA and the Department of the Treasury. The SBA’s July 6 press release shared the application information of over 650,000 successful borrowers. This was only a fraction of the over 4.4 million businesses which applied for PPP loans, a number comparable to the thousand loans given by the SBA annually.

The report included everything from businesses’ names and loan amounts, to their NAICS codes and the amount of jobs retained. Some borrowers have acknowledged mistakes in the reports—particularly concerning employee numbers—but these are likely the fault of fast paced lending and borrowing. These details imply that borrowing businesses will be held accountable by the press for how they use funds.

Regarding loan forgiveness, the Paycheck Protection Program Flexibility Act—approved on June 3—gives borrowers more time to apply.. Borrowers who are hoping for loan forgiveness still have to apply on or before the maturity date of the loan.

The August 8 extension allows potential borrows to apply for a part of the remaining $130B. For those who miss the deadline, Congress is working on the proposal of an additional COVID relief service.

 

Where are the buyers and sellers to keep fueling your real estate wholesaling business?

We have been through some exciting times recently. Some investors are doing incredibly well, others are still struggling to find their feet again and adjust. It’s all about knowing who is buying and selling, how they are doing it, and what’s driving them. Know this, and you’ll find wholesaling much easier. Nail it and this could be your best year yet.

Who Is Buying Homes?

1. Flippers

Flippers are still buying. They need to in order to keep the money coming in. Though we may likely see more wholesaling than fix and flip due to market changes.

2. Landlords

Buy and hold investors realize that passive income is more important than ever before and they are looking for ripe opportunities.

3. Investors Who Are Expanding

Investors of all types, from those listed above to funds are expanding to new areas and property types to balance and de-risk portfolios.

4. Those Using Self-Directed Retirement Accounts

One of the biggest problems successful investors have is minimizing taxes. Retirement accounts can offer some relief. Yet, they often only provide real peace of mind, profitability, and maximum benefit in their self-directed forms.

5. The Wealthy Seeking Wealth Preservation

Wealthy home buyers have been very active. They are still buying up prime properties with big price tags. They see it as being safer than stocks or cash in the bank.

Who Is Selling Homes?

1. People Fleeing The City

Between the virus, lockdowns and rising crime, many are urgently looking to exit urban cities for less crowded areas.

2. Old Financial Centers

High priced areas that relied on physical office buildings and local jobs have quickly become less attractive, and will probably see steep declines in property values. People recognize those markets have popped and it’s time to cash out.

3. Owners Who Can’t Keep Up With Bills

With tens of millions of workers freshly unemployed, many just can’t keep up with the bills. Many need a reset or to downsize.

4. Over-leveraged Landlords

Landlords who over-leveraged and overpaid, and had no reserves to weather the storm should be cashing out if they can. They realize they can’t just count on high vacation rental and occupancy rates.

5. Speculators

Those who were banking on easy end loans and appreciation to make money are finding it’s not there now. They may have to sell at steep discounts and find another strategy.

‘Shadow inventory’ is a term being thrown around more and more in the news. Is it something that real estate investors should be worried about or is it just more scaremongering?

Shadow inventory are the properties that banks have foreclosed on or which are being foreclosed on and are not currently actively listed for sale. Some have come out in the news proclaiming that this additional inventory potentially threatens to further damage the housing market and weaken home values due to over supply.

Currently there are around 3.5 million properties for sale in the US and we are on track to see approximately 5 million units sold this year. Not a bad ratio at all. This puts us at about 9 months worth of inventory or 3 months more than were we would like to be at in a healthy real estate market.

Right now we are on the right path but the worry is that more homes coming on the market could skew the picture. Some have thrown out numbers as high as an additional 3.5 million properties which could come up for sale. However, when you actually dig into these numbers they are based on a lot of assumptions and not what is likely to happen. The banks certainly are holding a lot of additional inventory which is slowly making its way on to the market. This is actually smart for them to do strategically and will be great for real estate investors as controlled release will keep values up yet continue to provide bargain priced wholesale properties for several years.

However, many of these news articles are trying to count homes which have just fallen delinquent on their mortgages or have just received a notice of default. Note that this can happen on properties which are just 30 days late on their loans, leaving plenty of time for homeowners to catch up on their payments. Many more of these homeowners are likely strategically defaulting in order to motivate lenders to grant them loan modifications and have no intention of letting their homes go. Others will sell quickly as short sales especially with banks like Wells Fargo no openly offering $10,000 to $20,000 to homeowners to hand in their keys amicably.

So the bottom line for real estate investors is that there will continue be many deals to be done and that ‘shadow inventory’ is probably not as big a threat as some sensational headlines would like to make out.