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Real Estate Riddle: Tight Lending's Impact on Investments & Opportunities

Real Estate Riddle: Tight Lending's Impact on Investments & Opportunities

April 10, 2023

Riddle me this!  Batman, Robin, the Riddler and the Case of the Perplexing Property Market

One of my favorite shows when growing up was watching the T.V. series Batman. The show was famous for its vibrant and colorful set designs, as well as its memorable catchphrases such as "Holy [insert word here], Batman!" and "To the Batcave!" The episodes typically featured a cliffhanger, with the Dynamic Duo facing perilous situations that were usually resolved at the beginning of the next episode.

Now, imagine if you will, the Riddler (insert your favorite villain - Banks, The Feds, The Government, or The Man) is the instigator who has created this current dilemma we are facing in the housing and mortgage market.  How would that story be portrayed in a typical Batman episode in 1968?


Presenting, the lost episode:

In the bustling metropolis of Gotham City, a new villain emerges from the shadows, causing chaos and uncertainty in the world of real estate investments. The Riddler, known for his intricate puzzles and mind-bending riddles, has devised a scheme that threatens to disrupt the delicate balance of the property market. It's up to Batman and Robin, the city's beloved crime-fighting duo, to decipher the enigmatic clues left by the cunning mastermind and save Gotham's investors from potential ruin.

With the Bat-Signal illuminating the night sky, Batman and Robin race through the city in the iconic Batmobile, hot on the trail of the perplexing mystery. The Riddler's latest riddle reads, "When tighter lending leaves you quaking, what's the secret to investing unshaking?" As the Dynamic Duo delves into the complex world of lending standards and their impact on investments and opportunities, they realize they must untangle the web of intrigue surrounding the real estate market. Together, Batman and Robin must use their unparalleled detective skills to unlock the enigma of the Riddler's riddle and protect Gotham's citizens from the perils of an unstable property market.

As always, Batman and Robin solve the challenging situation brought about by the hands of the Riddler.  Unfortunately, that's the difference between fantasy and reality.  I think it's time to view something of substance, that is not for our entertainment, but rather for our information and knowledge base.  To be an additional piece of the puzzle for us to make an informed decision, if faced with questions regarding the housing and mortgage market.

Goldman Sachs Research Housing and Mortgage Monitor Report - April 5, 2023

Goldman Sachs recently issued their Housing and Mortgage Monitor report.  This month's report was on, "What to Expect from Tighter Bank Lending Standards".  It's a rather lengthy 31 page report with many graphs and charts.  I have a number of readers who either invest in real estate, or are involved in the building, selling or lending portions of that business.  This is a report that they dive into like a gold miner looking for nuggets of gold.  They are facing a lot of uncertainty regarding the housing and mortgage market.

I have consolidated the report (the gold nuggets) into a three paragraph synopsis below for those of you who want the key points from the report rather than reading the entire piece in detail.

Goldman Sachs Housing and Mortgage Monitor Report Synopsis:

Investor focus has shifted towards the impact of tighter bank lending standards on lending conditions. For residential mortgages, the impact is expected to be relatively muted compared to other forms of lending such as business loans or commercial mortgages. Three main factors contribute to this outlook: 1) mortgage lending is less sensitive to bank balance sheet pressures, 2) there is significant spare capacity for mortgage lenders, and 3) lending standards for residential mortgages had already tightened significantly before recent bank failures.

Despite tighter lending standards weighing on the residential mortgage sector, the net impact is expected to be more modest than for small business and commercial real estate loans. Households with lower incomes or mediocre credit profiles may be most impacted. Mortgage rates have lagged behind the decline in Treasury yields, widening the spread between the two benchmarks. This is due to factors like higher lender profits for mortgages sold into the securitization market and poor performance in the agency MBS market.

Home price dispersion across metropolitan areas continues to rise. Western U.S. markets have experienced rapid depreciation, while some Midwest and East Coast markets have seen modest home price appreciation. This divergence is expected to persist due to tight inventory levels in resilient markets and poor affordability levels in underperforming markets. Metro-level home prices will be more instructive than national prices when monitoring mortgage credit stress.

If you are considering selling or buying a home and need assistance with a referral for a realtor or mortgage broker, please contact me.  If you need help in identifying a 1031 DST exchange property to exchange into, or interested in private REIT opportunities, I am available to assist you as well.

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