Hard money borrowers who work in the residential arena generally either buy and hold property to sell later or fix and flip assets as soon as possible. Originators who work with these borrowers should understand the vagaries of the housing market and adjust operations accordingly.
There was evidence of a U.S. housing slowdown by the fall of 2018. And the nation last year recorded the worst October for stocks since 2011. But economists aren’t sounding alarm bells yet.
Some 56 percent of business economists said they expect the next recession to hit around the end of 2020, but 33 percent said it could be earlier, according to a fourth-quarter 2018 poll by the National Association for Business Economics. Just 10 percent said they expect to see a contraction as early as 2019, however.
No housing bubble
Rising mortgage interest rates impacted the housing market this past fourth quarter and will likely continue to do so in 2019. Well-known housing economist Robert Shiller told news outlet CNBC, however, that he doesn’t fear a history-making sharp housing downturn like the one that the nation experienced from 2008 to 2012.
Gross domestic product (GDP), or the total value of goods produced and services provided for the country, increased to an annual rate of 4.2 percent in the second quarter of 2018 — before ratcheting down to an estimated of 3.5 percent growth mark for the third quarter of the year. Economists are not in agreement as to whether the nation is entering a bear market or simply experiencing a stock-market correction. In good news for hard money lenders, and the mortgage market in general, worries of a housing bubble aren’t part of the conversation.
The U.S. economy was still performing well as of this past fourth quarter, amid some speculation that the stock market decline and volatility was being driven by Federal Reserve policies. The Federal Reserve continued to ratchet up its benchmark federal-funds rate in 2018, with more rate hikes forecast for 2019.
Stability ahead
Economic indicators looked mostly positive in late 2018, with inflation in check and unemployment at the lowest level in 50 years. Consumer confidence ticked downward ever so slightly as of the end of this past October, to 98.6, according to University of Michigan’s consumer-sentiment index — which was at 99 at the beginning of the month.
GDP in 2019 is likely to rise at a moderate 2.3 percent pace, compared to about 3 percent growth in 2018, according to Steven Rick, CUNA Mutual Group director and chief economist. Fannie Mae also has forecast GDP growth at 2.3 percent for 2019. Fannie noted falling home sales and softening mortgage demand is ahead, but so is an improvement in overly tight for-sale housing inventory.
Trade tensions in North America receded following the announcement of a trade agreement between Mexico, the U.S. and Canada. Trade relations with China worsened, however, and present a downside risk for the U.S. economy, Fannie Mae noted.
Growth opportunities
If economic forecasters are correct in their assumption of only slight headwinds for housing amid higher mortgage rates, then growth opportunities should continue in 2019 for originators who work with hard money lenders — although they’ll be muted when compared to recent years. As of this past September, the National Association of Realtors Confidence Index, which polls real estate agents, said Realtors believe conditions will improve for the single-family housing market over the next six months.
Realtors’ expression of confidence in the housing market came despite existing-home sales falling in September 2018 to their lowest level in nearly three years, a decline attributed to rising rates. Job gains and increased property inventory are two bright spots for asset-based hard money mortgage originators.
Those positives translate into more potential homebuyers, especially if inventory gains are made at the affordable end of the market — where inventory has been super tight in many markets. This should put hard money lenders in a good position to continue making deals in 2019.
Still, increasing competition within the mortgage market is underway. That, coupled with broader issues in the economy, will require close monitoring and well-oiled marketing and customer outreach for hard money lenders to differentiate themselves and grow their lending portfolios going forward.
Possible challenges
Besides the expected Federal Reserve interest rate hikes, originators who work with hard money lenders will need to keep their ears to the ground on geopolitical risks that could impact the mortgage market. Political divisiveness is at an all-time high in recent times, and that can translate into tensions and policies that affect consumer confidence and economic growth.
In addition, originators who work with hard money lenders must constantly re-evaluate where they stand in relation to the competition. Most notably, there has been a dramatic increase in the availability of capital for real estate investors, most notably from crowdfunding and alternative-lending platforms that offer fix-and-flip investors options that weren’t available just a handful of years ago.
A joint study by the University of Cambridge and the University of Chicago suggests this alternative-lending sector has hit its stride and is poised for even more growth. One study, the Americas Alternative Finance Industry Report, predicts continued, steady growth in most segments of the alternative-lending market. The sector’s 2016 U.S. market volume of $34.5 billion represented a 22 percent increase over the 2015 mark, according to the report.
Alternative lenders provide a variety of benefits to the fix-and-flip real estate investor, such as a national online footprint, 24/7 accessibility and financial backing from deep-pocketed financial firms that provide a reliable and consistent flow of capital to customers using alternative-lending platforms.
This growth in alternative-lending platforms will continue to impact the hard money market and help to move the industry forward. Is everyone ready?
