The Brexit vote shocked global markets, and served up a wonderful opportunity for owners of US real estate: government bond yields plummeted again. Since real estate loans are priced off government bonds, homeowners and landlords are beneficiaries of the chaos.
As discussed at length in previous issues, these microscopic bond yields mean that when the tide turns, the losses to bondholders will be horrific. For now, bond owners appear to have gotten a "stay of execution" as a result of the chaos.
Pundits are predicting it will take two years just to figure out how England will actually implement their extrication from the EU. Furthermore, French groups have already started clamoring for a vote for France to leave the EU.
Therefore, we are likely to see intermittent paroxysms in the financial markets over the coming 2-3 years, which will likely keep a low ceiling on interest rates.
I say get while the getting is good! If you haven't looked at refinancing your home and/or investment properties recently, it's worth your time to investigate.
If you missed my summary from last week, here's where the rubber meets the road in real estate lending, based on recent transactions: - Credit unions are the easiest to deal with, with some of the most flexible underwriting and lowest down payments. Their rates are generally in the middle range of the market. Navy Federal is the largest, and I recommend joining them to all who are eligible, and that's anyone who has served in the US military or who is related to someone (living or deceased) who served. You can join the credit union for a deposit as little as $5.
- Large investment firms will do incredibly cheap rates for borrowers with stellar credit, and who bring substantial assets to the firm. The key is to work with someone in the firm who knows how to work the system and has closed aggressive loans. It takes a lot of work to get the rock bottom rates, and most people within those organizations don't know how to push the right buttons.
- If you don't fit the "cookie cutter mold" that banks love to see, getting a loan from a major bank is still a painful process. Best to work with a mortgage broker and let them do the brain damage for you. There are smaller banks throughout the country that are easier to work with, but finding them and understanding their underwriting criteria would be a full time job. My clients have used one particular mortgage broker quite successfully on numerous transactions.
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The CEO of one of the largest US homebuilders, Lennar, provided some great perspective on US housing on their recent earnings call.
In a nutshell, he reiterated what I've been observing in this newsletter for over two years: that the supply of US housing is not meeting demand, and there are structural factors that will make the situation worse in coming years. Here's an excerpt:
"The overall housing market has been generally defined by a rather large production deficit that has continued to grow over the past year.
While questions have been raised as to the real normalized levels of production that are required to serve the U.S. current population, we believe that production levels in the 1 million to 1.2 million starts per year range are still too low for the needs of American household growth that is now normalizing."
Of course, the most overheated real estate markets are in danger, and one cannot buy or build indiscriminately. But overall, as a nation, we have a housing crisis. The recent boom in apartments won't solve it because the focus is mostly on luxury apartments in urban areas -- which are already showing signs of weakness.
The real opportunity is in affordable housing. If you can own property that cash flows at a rental rate the middle class can afford, you own a rock solid asset. It's an asset that yields far more than other asset classes, plus has ample room for appreciation.
Please read the Lennar CEO's comments which are summarized here. If you agree with his analysis, as I do, let's talk about cash flowing real estate. |
