Real Estate Marketing & Beyond
I’ve been writing about changes evolving in the housing market for several months. Recently, Morningstar Credit Ratings’ take away from the SFIG Residential Mortgage Finance Symposium was a very similar perspective of where the market is currently at and most likely headed. There are a lot of moving parts to take into consideration including midterm elections, trade wars, tariffs, rising interest rates, overwhelming student debt, and volatility in the stock market with a downward trend. The only certainties are uncertainty and that the market is evolving.
Generally, symposium panelists remain optimistic about the single family rental market while also acknowledging a slowdown. For the housing market as a whole, the primary concern is affordability for millennials as first time buyers saddled with burdensome student debt. This is further exasperated by the ongoing inventory shortage of houses in this market segment. Also part of the mix is a lack supporting mortgage products specific to the demographic and market segment.
The result is optimism in the single family rental market with an awareness that changes are also happening here. Specifically, the focus is away from rent increases and towards full occupancy by quality tenants. There was some consensus that because of the affordability issue, preference is for working-class tenants.
Morningstar also finds that the residential mortgage-backed securities (RMBS) landscape is evolving in this shifting market. The single-family rental market continues to expand but a shift towards fix-and-flip loans may be occurring. Notable in this market segment is that Fannie and Freddie pilot programs for single family rentals have ended with no plans for future program expansion. Fannie and Freddie remain susceptible to changing political pressures but the focus can be expected to favor affordable homeownership over affordable rentals.
Regardless, changes are expected in the single family rental market. Kevin Dwyer, head of RMBS for Morningstar Credit Ratings, sees some movement of single family rental loans into the fix and flip market segment. “A few securitizations did get done unrated this year, and that’s usually the first step to get going,” Dwyer said. Morningstar recently published an article outlining some of the risks in this segment that included overestimating the property’s value after the repairs or the market demand for the home.
The SFIG Residential Mortgage Finance Symposium also anticipates changes happening in private label-RMBS. The private-label sector is a very small part of the RMBS market compared to the U.S. government. However, it is growing. Issuance stands at $30 billion so far in 2018, double the $15 billion from 2017, according to Daniel Kim, Wellington Management’s lead RMBS and housing strategist. Dwyer also noted this may be an area to look for new loan products. Market watchers should expect the development of these to be slow and deliberate. As the market evolves, this is likely to include mortgages falling outside of the Consumer Financial Protection Bureau’s Qualified Mortgage definition.
This is possibly a venture back into territory similar to the main trigger of the 2008 mortgage crisis. However, rating agencies are expected to know much more now than before the crisis on how the originators created the loans. For self-employed mortgage applicants, bank statements may be relied on as proof of income, rather than tax documents. Still, different loan originators will have different acceptance criteria with one accepting 12 months of bank records and another requiring 24 months.
The single family housing market is evolving but it isn’t dying. For the full Morningstar report click here.
Please comment below with your perspective. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.
