The Federal Open Market Committee announced the second short-term interest rate hike this year, prompting industry professionals to give their take on the possible effects this might have on the lending process.
By Timea Papp (MultiHousingNews.com Article) — In a predominantly steady economy, real estate players have been gearing up for the next phase in the cycle for a while now. Borrowers and lenders alike are watching closely as the Federal Open Market Committee continues to raise short-term interest rates.
The Fed first hiked up rates in March and then again in June—from 1.75 to 2 percent—and according to Marc Suarez, managing director with Hunt Mortgage Group, “There has been talk about the Fed raising rates every three months. The Fed has penciled in two more rate hikes this year—we should expect one more for sure in my opinion.” However, despite rising rates, the yield curve has flattened, Suarez noted.
As cap rates start to move higher as well, in strong markets such as Florida “most of the deals we are seeing are debt service coverage ratio-constrained (DSCR) at the values,” Suarez continued, explaining that Hunt Mortgage Group has had success with early rate locks and by helping borrowers keep track of stabilization of property financials, as DSCR-constrained proceeds are rate-sensitive. Multifamily borrowers are still focused on value-add deals, showing no signs of slowing down, Suarez pointed out.
Lenders get creative
The increase in mortgage rates and the fact that the we are at a later stage in the real estate cycle haven’t discouraged borrowers nor lenders, Josh Migdal, partner with Mark Migdal & Hayden, specified. “In the wake of the financial crisis, banks have become more discerning as to whether borrowers should qualify for loans. This included larger down payments and lower levels of debt-to-income ratios. However, in recent years, people have begun to forget about the crisis. In fact, the Financial Times reported in March 2018 that subprime mortgage bond issuance in the first quarter of 2018 went from $666 million to $1.3 billion.”
In a market that has increased regulation and hindered traditional banks in some cases, non-bank lenders have taken advantage of the opportunity, Migdal explained, leading to situations where loans get approved through less lenient vetting procedures. “I believe that lenders are really trying their best to vet proposed borrowers based on well-thought-out underwriting guidelines, but are also getting somewhat creative for these loans to be pushed through and ultimately reach approval.”
As the lending landscape is shifting and adjusting, developers are finding ways to offer incentives to buyers. G&L Real Estate Development, the American division of Empresas Guzmán & Larraín, has put together a special lending structure for the company’s first U.S. luxury project, One Bay Residences. “The lending structure we offer our buyers allows them to purchase a residence with up to 97 percent financing, with the remainder of their deposit going to cover closing costs and upgrades, additionally removing the need to dip into their savings. This is essentially unheard of in Miami’s condo market, where deposits can range from 30 to 50 percent,” according to Nicolas Guzman, CEO of G&L Real Estate Development.
Foreign investors take a step back
The developer partnered with lender Academy Mortgage and has engaged a team experienced in managing condo financing platforms that “completes a comprehensive underwriting analysis to properly vet interested buyers,” he continued. Guzman also described a trend of a reduced influx of foreign buyers that usually pay cash.
“In the last three years, the market has seen a slowdown in residential real estate purchases by foreign investors. While buyers from Latin America, Canada and some European cities are still purchasing all cash, the overall quantity has decreased,” Guzman said. “At One Bay Residences, nearly half of the buyers have been from within the U.S. and we are seeing that it’s increasingly becoming a local, end-user buyers’ market.” One of the underlying factors for this drop might be foreign currency devaluations and a strengthening U.S. dollar.
South Florida’s construction landscape continues to thrive and developers encounter few or no obstacles in securing financing, despite the mindful approach of traditional lenders. In addition, it’s too early to predict the long-term effects of rising interest rates, given the lack of perceptible consequences.