Tighter Loan Qualifications Lead to Stronger Rental Markets
The “Buzz” among the politically charged today is centered around the Frank-Dodd Financial reform act. Over 2,000 pages in length, it contains only instructions to the regulatory agencies to create the policy - its a work in process and this seems to scare everyone.
What is clear is that we will see Fannie/Freddie and the other GSE’s scaled down and eliminated. The new rules put in place for loans to be securitized are going to be more stringent on private sector loans.
-Real Down Payments of 20% (no secondary financing or carry-back)
-Higher credit scores
-Lower “Maximum” loan amounts.
With just these changes, less than 36% of those who could have qualified for a loan today will qualify for a home loan after the new rules go into effect.
Pair this with the reality of a shrinking pool of first-time home buyers and lower consumer confidence in home ownership and we start to see a strong undercurrent of renters.
Our markets in the southwest US (Phoenix, Tucson, Las Vegas, Reno, etc) have seen heavy adjustments in home values from the highs of 2005-2007, which should have lead to a buying frenzy. It didn’t because in these same markets, household income declined in-step with home values. Families buying power has declined which is creating a generation of renters.
Most surveys of the Phoenix apartment market report lower vacancy, increasing rents and lower concessions. Owners are experiencing a strong rental market.
Multifamily values have remained low mostly as a reflection of the distressed condition of the properties going to market. These buildings were cannibalization, and run on a shoestring while lenders pushed off foreclosures and owners struggled to run their failing assets.
With the recent surge in acquisitions these buildings are bouncing back. We will soon see a new wave of properties hitting the market that are stabilized, clean, reset to today’s values and producing real (not Pro-forma) cashflow.
We are returning to an investment market from the days of a trading market.
I’m including a link to an interactive heat map from the Wall Street Journal on-line today, illustrating the states that will see the greatest changes to qualifying for a home loan. http://ow.ly/5qhAh
It’s been a long dry-spell, but we are entering a market cycle where hard work will be rewarded with profit again.
As always, open to your comments and suggestions.
John Kobierowski
