To fully understand the current state of the market, you’ll have to take a look at the key driving forces for today’s housing market – supply and demand and record low interest rates. Now, the FED is offsetting inflation and attempting to reduce the impact of a recession by strong incremental interest rate increases at record rates.
The Fed is doing exactly what we all expected and for every action, there is a reaction. As a lender, it is important to be transparent with what is to come for its consumers as the country continues to fight inflation while still experiencing positive results in real estate investments.
In June, the Federal Reserve raised rates by 75 basis points – the largest increase since 1994. Our markets were the most volatile and we are starting to see an unpredictable shift in our economy.
The rise in interest rates and increase in home prices is pushing out the affordability for many homebuyers driving the rental market up. Borrowers for both traditional and non-traditional loans will start to see their credit box tightening while decreasing affordability.
Mitigating the risk of borrowers defaulting on their loans will be the most important factor moving forward as lenders. To do this, analyst and underwriters will be evaluating the borrowers experience, credit, and the asset under a strong microscope. Moving forward, lenders are starting to decrease leverage so borrowers will need to bring more cash to the closing table. Increase in interest rates means rates at which loans are trading have increased and as a result borrowers will need to pay more to borrow. Experience will now play a larger role in how much leverage you qualify for. As for the asset, your after-repair value will be capped at a lower leverage ratio.
These are all factors to ensure that your real estate investments remain sound and you are less likely to default. We’ve learned a lot from the previous recession so lenders will continue to use best practices to offset risk. The investing performance of the housing market for the reminder of 2022 is still on a positive trajectory. Housing pricing are still appreciating due to the lack of supply and the rental market continues to increase. It’s safe to say today’s housing market continues to break records and as a lender, we are there to guide our clients to the right investment decisions.