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anon_0k9zlfz6lz9oy
Guest
Explain. All I know is credit spreads have blown out for real estate loans. At normal spreads wed have rates around 5.5% on 30 year fixed rate mortgages right now.
I'm referring to the Fed, not the products. I should have been more clear but the Fed can restrict credit and mandate large reserves and lower loan balances which would slow things down far more than rate increases.
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anon_0k9zlfz6lz9oy
Guest
So in other words intentionally trying to tank the real estate market due to how strong it is? We have credit spreads nearly 150bps above historic norms already. Why would they want to tank the real estate market?
I'm saying the Fed needs to slow things down and if that means pushing home prices down then that is a good thing.
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anon_0k9zlfz6lz9oy
Guest
Headline Inflation is gonna be low 3’s, outside shot of a 2 handle in less than a month. Core will follow in a delayed manner due to the oer delay.
The fed just raised at one of the fastest paces of all time. I dont understand why people are borderline mad the real estate market didnt tank.
I think people have money saved up from a very strong economy and historically low unemployment. They want to buy cheap houses. Either first time home buyers or older people wanting a 2nd home at the beach.
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anon_0k9zlfz6lz9oy
Guest
Are you in a town with a lot of office buildings? Alot of them are emptied out and where the office buildings used to pay X% of the towns property taxes they are now paying substantially less pushing more burden onto residential properties
First, on Cape May, I don't get it. The other day, I was perusing West Cape May and other towns up the "left coast" of Southern Joisey, and I was shocked at the prices. Unbelievable.
As far as Arizona, I know from Sedona, the locals were in a tizzy about party rentals, and I can't blame them. One of the biggest hot button items is that if trash is not properly disposed of and left outside, the Javelina have a field day knocking over trash cans and feasting on the spoils. They are so primitive looking, and you never want to get near a mother Javelina and it's babies.
Sedona is a party place?
WTF is a Javelina?First, on Cape May, I don't get it. The other day, I was perusing West Cape May and other towns up the "left coast" of Southern Joisey, and I was shocked at the prices. Unbelievable.
As far as Arizona, I know from Sedona, the locals were in a tizzy about party rentals, and I can't blame them. One of the biggest hot button items is that if trash is not properly disposed of and left outside, the Javelina have a field day knocking over trash cans and feasting on the spoils. They are so primitive looking, and you never want to get near a mother Javelina and it's babies.
In the pictures I posted. Some sort of hairy desert pig that loves knocking over garbage cans and feasting on garbage.
I think this will become more and more common between home values increasing and commercial real estate suffering.
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anon_0k9zlfz6lz9oy
Guest
Predictable if you followed the forward looking data. Home prices still rising, set a new record high
calculatedrisk.substack.com
Black Knight Mortgage Monitor: Home Prices Increased Month-to-month to New Record High in May
National Payment to Income Ratio Increased to Near Record
calculatedrisk.substack.com
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anon_0k9zlfz6lz9oy
Guest
Not totally true based on the data. Credit spreads in relation to mortgages widen largely due to the following circumstances.
1) rate volatility
2) lenders believe we are toward peak rates. When you are toward peak rates and believe they come lower in the near future there is a higher likelihood of expedited prepayment and lenders want to be compensated for that
3) deeply inverted yield curve (pairs with point #2)
Heres a very good piece on it with the data.
Lawler: Update on Mortgage/Treasury Spreads
CR Note: A year ago, housing economist Tom Lawler explained why the spread between mortgage rates and the 10-year Treasury yield was wider than “normal”.
open.substack.com
And of course this thread is regarding 1-4 family homes. In CRE Offices will take a bath, retail is getting whacked and there will even be some multi family distress as well due to some bad bridge debt taken out without any hedges that are facing maturities.
How do you hedge maturity?Not totally true based on the data. Credit spreads in relation to mortgages widen largely due to the following circumstances.
1) rate volatility
2) lenders believe we are toward peak rates. When you are toward peak rates and believe they come lower in the near future there is a higher likelihood of expedited prepayment and lenders want to be compensated for that
3) deeply inverted yield curve (pairs with point #2)
Heres a very good piece on it with the data.
Lawler: Update on Mortgage/Treasury Spreads
CR Note: A year ago, housing economist Tom Lawler explained why the spread between mortgage rates and the 10-year Treasury yield was wider than “normal”.
And of course this thread is regarding 1-4 family homes. In CRE Offices will take a bath, retail is getting whacked and there will even be some multi family distress as well due to some bad bridge debt taken out without any hedges that are facing maturities.
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anon_0k9zlfz6lz9oy
Guest
You dont. You hedge rate risk by buying rate caps up front when taking out the debt. Pricing on $25.5mm loan and a 3 year rate cap at a 1% strike in late summer 2021 only cost around $170K. Its a hedge that has paid handsomely.
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anon_0k9zlfz6lz9oy
Guest
Stock market up 20-40% this year and housing flat for most part. So rates have had a huge effect.
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anon_0k9zlfz6lz9oy
Guest
Of course rates have an effect. But the market didnt crash like everyone was claiming it would.
Dow was 34K last summer, it’s 35K now for example. So up a 3% yoy.
Can’t argue with facts. The employment number is strong despite the rate increases. If the Fed can live with 3% inflation, we can dodge a recession.
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anon_0k9zlfz6lz9oy
Guest
Stop. No one looks at the Dow. Everyone's money is tied to the S&P which is up 20%
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anon_0k9zlfz6lz9oy
Guest
S&p is up about 5% yoy fyi. S&P was 4300 last summer and is what 4500? 4550 now?
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anon_0k9zlfz6lz9oy
Guest
Not sure how many here follow commercial real estate. But that space is going to get uglier than most think.
Here’s a little piece I wrote on it
This is why in 2024 there will be blood in the streets in the commercial real estate market which includes large scale apartment complexes. Armageddon is coming to some and the buyers who can get in will make the type of money that makes people uncomfortable to even talk about. This is slightly complicated but I’m going to make it simple.
First lets define a couple things to help you understand this.
1) DSCR. This stands for Debt Service Coverage Ratio. This is simply taking your Net Operating Income divided by your debt service. For example, if my annual debt service was $1 and my annual NOI was $1.50 I would have a 1.5 DSCR $1.50/$1 = 1.5
2) Lenders wont lend you money right now (for the most part) unless your DSCR is at least 1.25. Meaning that if your annual debt service is $1 they’d need to see $1.25 in NOI annually.
Now, here’s why things are going to get crazy.
These are distressed debt, performing assets. Very rare to see but very common right now due to the most aggressive rate hiking cycle we’ve ever seen. There are quality properties, operating well that are coming up on loan maturities in q4 2023 and into 2024 that will have one of two options. Refinance or sell.
Here’s the issue though. This hypothetical asset could currently be at a healthy 1.5 DSCR but if their rate on that loan lets say is 4.5%, they’re looking at a refinance at rates around 6.5%.
To put those numbers into perspective, let’s say it’s a $10,000,000 loan with interest only payments. Monthly debt service on a $10,000,000 loan at 4.5% is $37,225. Which at a 1.5 DSCR would mean their monthly NOI is $55,837.
If they refinance that $10,000,000 loan at 6.5% that would mean monthly debt service is now $53,892. At their monthly NOI of $55,837, they wont qualify for that refinance for the whole loan amount of $10,000,000 as that would only equate to a DSCR of 1.04, well below the 1.25 the bank will require.
So what loan will they qualify for? Well at their current NOI of $55,837, the most a lender will lend to them is at a $44,670 monthly debt service. $44,670 monthly debt service even at interest only payments would mean max loan proceeds on the refi of about $8,300,000. Meaning that in order to refinance they will have to bring $1.7 million to the table!
So now they have two options, refinance at a higher rate AND ask your investors for $1.7 million OR sell.
This is why there will be an INSANE amount of forced sellers of loans up against maturities until rates come down. Remember, this example was of a loan previously performing GREAT, a 1.5 DSCR!
Get your money ready. 2024 is the biggest opportunity we’ve had since post GFC.
Here’s a little piece I wrote on it
This is why in 2024 there will be blood in the streets in the commercial real estate market which includes large scale apartment complexes. Armageddon is coming to some and the buyers who can get in will make the type of money that makes people uncomfortable to even talk about. This is slightly complicated but I’m going to make it simple.
First lets define a couple things to help you understand this.
1) DSCR. This stands for Debt Service Coverage Ratio. This is simply taking your Net Operating Income divided by your debt service. For example, if my annual debt service was $1 and my annual NOI was $1.50 I would have a 1.5 DSCR $1.50/$1 = 1.5
2) Lenders wont lend you money right now (for the most part) unless your DSCR is at least 1.25. Meaning that if your annual debt service is $1 they’d need to see $1.25 in NOI annually.
Now, here’s why things are going to get crazy.
These are distressed debt, performing assets. Very rare to see but very common right now due to the most aggressive rate hiking cycle we’ve ever seen. There are quality properties, operating well that are coming up on loan maturities in q4 2023 and into 2024 that will have one of two options. Refinance or sell.
Here’s the issue though. This hypothetical asset could currently be at a healthy 1.5 DSCR but if their rate on that loan lets say is 4.5%, they’re looking at a refinance at rates around 6.5%.
To put those numbers into perspective, let’s say it’s a $10,000,000 loan with interest only payments. Monthly debt service on a $10,000,000 loan at 4.5% is $37,225. Which at a 1.5 DSCR would mean their monthly NOI is $55,837.
If they refinance that $10,000,000 loan at 6.5% that would mean monthly debt service is now $53,892. At their monthly NOI of $55,837, they wont qualify for that refinance for the whole loan amount of $10,000,000 as that would only equate to a DSCR of 1.04, well below the 1.25 the bank will require.
So what loan will they qualify for? Well at their current NOI of $55,837, the most a lender will lend to them is at a $44,670 monthly debt service. $44,670 monthly debt service even at interest only payments would mean max loan proceeds on the refi of about $8,300,000. Meaning that in order to refinance they will have to bring $1.7 million to the table!
So now they have two options, refinance at a higher rate AND ask your investors for $1.7 million OR sell.
This is why there will be an INSANE amount of forced sellers of loans up against maturities until rates come down. Remember, this example was of a loan previously performing GREAT, a 1.5 DSCR!
Get your money ready. 2024 is the biggest opportunity we’ve had since post GFC.
Commercial is fvcked right now and in 2025. I might plow ahead and do a new construction build next year because by the time that finishes, rates should be lower. Most expect the FED to starting easing the back half of 2024 now.
PS residential is more ridiculous than every guys. Most properties still all going over asking, even with rates pushing 8%. Massive supply/demand problem. Very different from last fall but I am curious to see if things cool this fall/winter like they did last year.
PS residential is more ridiculous than every guys. Most properties still all going over asking, even with rates pushing 8%. Massive supply/demand problem. Very different from last fall but I am curious to see if things cool this fall/winter like they did last year.
Disagree on MF. Cap rates have move wider, vacancy ticking up, rents have flattened.
Commercial real estate is a slow-moving train wreck. Obvious to all for years.
Nope.
The CRE market is too slow to impact anything except for a blip here and there. We all know what is happening. The stock market reacts to new info.
And I can tell you from insider knowledge (I’m the director of sales for a home builder in Maryland). That’s it’s only going to get worse. It’s scaring the heck out of me from a societal standpoint, but foreign investment is buying up ALL the new multi-unit dwellings in the mid Atlantic. These people are terrifying, HUGE money. Dropping $5-10 million a day on new multi family dwellings exclusively in the mid Atlantic…. It’s great for us, but scary for the market
Wrong. It ain’t slow. This wreck is a highway crash.
Super slow. Been happening for years, will continue for years (due to long lease terms).
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