The Second Half Outlook for Real Estate Investors in 2022

As we close out the second quarter and head into the third quarter and last six months of 2022, Rehab Financial Group is giving you a market trends update. Today we’ll give you a lot of information that will impact you on your real estate investment journey during the next two quarters.

Looking Back at the Second Quarter

The second quarter was nothing better than tumultuous. The fact is that we are seeing changes in all of the programs across the board for all real estate investors and homeowners in general. Not only has it impacted new housing, not only has it really slowed refinancing, but it has finally crept into our space, the real estate investor space.

Short term rates and short term programs have gone through some dramatic changes over the last 30 days. Let’s start out with the rising interest rates. The Fed is absolutely determined to control inflation and slow down the market. During this quarter, we saw interest rates increase not once, not twice, but three times, and we’re going to continue to see those increases as we face the third quarter. We’re going to keep seeing more slow down in the industry. Refinancing has really dried up. You’ve seen a lot of the conventional lenders really trim jobs and more roles in the industry and space.

A Housing Market Slow Down

We’ve seen that the new housing market has even slowed a bit as well. As interest rates continue to increase, we’re seeing lots of things impacting the market as far as foreclosures, housing availability, and 30 year programs. Rental rates have also been impacted, as well as our short term programs. The pause for landlords in this timeframe is for several different reasons. One is they’ve seen their interest rates double over the past year. Interest rates that were below four percent are now exceeding seven to seven and a half percent, causing that monthly payment to put pressure on them to consider passing on those costs to the actual renter.

Wall Street is now putting more pressure on the 30 year DSCR product than ever before. They want to ensure that the landlords can pay that monthly mortgage payment and continue to cover that monthly mortgage payment in a down marketplace. They are getting more restrictive on the LTVs that are available as well as increasing interest rates at the same time. All of this is being passed on to the landlord and the renter. So in the foreseeable future, the question will be is, how much more pressure will that 30 year product put on landlords and renters alike?

The Fed Stepped In

The Fed has also been taking an aggressive approach to balance the housing market. For the first time now, we are starting to see the housing market slow a little bit. That was from the increases in rates that they’ve already have. Demand in housing is still three and a half million to 5 million units short from what the consumers really want out there. For the first time we’ve seen inventory increase between a million three to maybe a million five worth of houses that are available on the marketplace. While inventory is rising, it’s still not near the demand.

Rentals are disappearing like crazy. The fact is site and unseen renters are signing lease agreements just so they can get ahold of those properties. Plus, the fact that people can still move around and work from anywhere as a benefit of what happened during the pandemic is still making rentals more attractive than home ownership. During the second quarter,  the impact and the pressures on the short term product became clear. Wall Street is also concerned about the ongoing performance of these loans, and interest rates have now increased almost 200 basis points in some areas on those products.

Not only is it interest rates, but it’s also reduction in leverage. The changes that the majority of the market is seeing is that Wall Street’s putting lots of pressure to change leverage guidelines. They are now requiring 15% to 20% down on purchase and have now capped their LTCs of less than 80%, 75%, even 70% experience is still a major variable in being able to obtain those higher LTVs. The impact to the changes that Wall Street has demanded has forced many of our peers to require 15% to 20% down now on a down payment for the purchase of a property.

They’ve capped a lot of the LTCs at 80%, 75%, even 70% in a lot of cases now. With Rehab Financial Group, we’re still delivering the same 100% of purchase, 100% of rehab, up to 70% of the after repair value with no down payment. Investors are saving $20,000, $30,000 a month. But now, because of the increase in interest rate demanded by Wall Street, the fact is that our payments are almost equal.

Looking to Q3 and Beyond

Last but not least, Wall Street’s involvement will have a lasting impact.. The changes that are going on in the marketplace, driven by Wall Street’s concern about will these loans continue to perform is not impacting the demand out there for fix and flips and the availability growing with fix and flips as well.

The fact is that the foreclosure rates continue to increase month over month. We saw second quarter jump up over first quarter. We anticipate that third, fourth quarter and going into next year that foreclosures will continue to increase the availability of good fix and flip properties available to you, the real estate investor. So from Rehab Financials perspective, we think this is a very good market for real estate investors. And there’s going to be plenty of inventory available for you to take advantage of during these next six to eight months.