Take Aways from 2022 AAPL Conference

Take Aways from this years American Association of Private Lenders Conference

I recently attended the Association of Private Lenders Conference held at Caesars Palace in Las Vegas, NV.  First off, what a different sentiment than last years conference.  The real estate and loan market has taken a turn for the worse in the past few months.  So what was everyone saying this year?

Economic Outlook

The conference kicked off with an economist giving her take on the US economy as whole, as well as the real estate market.  As a whole, the job market remains strong, but higher inflation is taking a bite out of consumers. The Federal Reserve is widely expected to continue to increase rates until inflation is under control.

Right now the labor market is fairly strong, with unemployment around 3% and jobs being added at a relatively healthy rate.  However, the Federal Reserve is on a mission to push unemployment up. It’s believed that the federal reserve will need to continue to raise rates until unemployment is about 5%, at which point inflation should begin to fall.  Rate increases are also expected to take a bite out our wage growth.

How will this affect the housing market?

The short answer is…it’s already having a negative impact on the housing market.  Since rates have spiked in the last three months, the average borrower’s cost to buy the same home compared with 2020 have increased 70%.  That’s a huge increase!  This is causing a reduction in house buying activity.  House buying activity (volume of deals) has decreased for the last 4 consecutive months.  Houses are staying on the market for longer, and more deals are being cancelled.  Prices are widely expected to fall over the next 12 months. Right now, sellers are reluctant to reduce prices, but as houses sit for longer and longer, they’ll eventually will be forced to lower the price to clear the sale.

Is it all bad in the housing market?

While high interest rates have clearly had a negative impact on borrowers, there are some bright spots.  First, single family home inventory still very low. With limited supply coming to the market, its estimated there is a 2m deficit of housing supply.  Furthermore, the cost of new home construction remains high, and supply chain problems are causing more delays. All of this is a positive for home values, as supply  is expected to remain low.

What’s the outlook over the next 12 months?

The next 12 months is expected to be choppy.  The Federal Reserve has made it clear that rates will be going up two more times in the next three months. Mortgage rates for a 30 year conventional loan are already just under 7%.  By and large, it’s expected that home values fall 10-15% over the next 12 months, depending on the market. Some markets, like Florida west coast, may be more resilient. 

What’s the outlook for the private lending market?

Private lending volume is expected to slow, but not for all lenders. Lenders will solid balance sheets will have an opportunity to grow volumes.  While loan aggregators (note buyers) have been dominant players over the past two years, they’ve largely backed away from the market. Some have exited completely.  This has caused the note buyers that are still in the market to become much more selective.  Lenders will large balance sheets that can close deals, are already seeing a jump in volume and will continue to do so. 

Another big concern from lenders, is the ability for borrowers to refinance their bridge loans at the current rates. In some cases, higher rates make it impossible to refinance into a DSCR loan unless borrower can bring additional capital to the table.  Most borrower don’t have additional cash to put into a deal.  This will force more borrowers to sell their properties.  Will those borrower’s be able to get the price they need?  That all depends on how far prices fall.  Next few months will be interesting. Stay tuned! 

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John Femenia