Interest rates - Home loan interest rates are benchmarked on the bond market. The bond market is usually opposite of the stock market. Having said that, the markets overall are influenced by many factors such as inflation, news, global issues and events, consumer spending, etc. My crystal ball is about as cracked as everyone else’s. My belief is that home loan interest rates will remain fairly volatile through the spring before finally settling down as we enter the summer time. I’d love to see them drop below 4.00% again, but don’t believe that will happen and if so, it will only be for a very brief moment. My suspicion is that rates will bump their head against 5% for most of 2022.

Oh, and when rates go up, buyers buying power goes down. So now you have less people that can afford that $650,000 home.

Foreclosures – They’re baaaack… Not a huge wave as so many predicted over the past 2 years, but they are starting back up. Good for the lenders who had their hands tied on this for far too long.

Cap Rate compression / Values – Wow…this is a tough one. It’s my belief that cap rates are unreasonably low which equates to inflated values for some sectors of commercial real estate such as Multi-Family and Industrial. Don’t misunderstand me, it’s fun looking at the vanity metric of the value of my portfolio (I say vanity because I’m a generational investor and have no plans to sell anything unless dictated by the demographics of the market, therefore value is more of a vanity number for me.) Cash flow is the sanity number. I can spend cash flow. Only way I can spend equity is to sell the asset. Anyhoo…Cheap money in the hands of ‘investors’ buying not based on fundamentals like cash-on-cash return for example. They are buying because there are few properties on the market and they have 1031 money they need to place or pay taxes on and the false assumption that values will continue their meteoric rise are compressing cap rates to lows never before seen. There are a few other factors at play too, but the main culprit as I see it is a tsunami of cash chasing few deals and properties being acquired based on shaky pro-formas. At some point the party will end, but I think it’ll take a considerable rise in interest rates before that and I don’t foresee that happening anytime terribly soon.

Rents – They keep going up and up and up. I believe they are near the top. Will they come back down? I don’t know. But I do know there are a lot of ‘investors’ buying based on rental rates that may or may not be able to be obtained/sustained. What if the rents don’t continue rising and instead plateau? What will they do if rents drop $50.00, $70.00 or more per month? I hope they have a contingency plan for that.

DCR’s – They’ve crept up from 1.2 to now many lenders are looking at 1.25+. Lenders are hedging their bets with many investors due to what I mentioned earlier.

LTV’s – They’ve decreased a little. There are still a few lenders out there doing 80% LTV’s, but most are heading towards 75%. If you have a good track record with the lender and a good relationship, there isn’t that much of a change in DCR and LTV.

Inflation – Oofff…There’s no way I can be brief and do this one justice. The short version is it’s back and it won’t go away anytime soon no matter what the Fed, the President, the press secretary or anyone in Washington says. There are far too many moving parts and influencing factors pushing inflation ever higher.

My thought is that the faster the government admits that their over-reaction to the CCP virus including mass vaccinations (of questionable efficacy) and forced shutdowns (which didn’t stop the spread) was a mistake and open up the economy completely, open up oil production and pipelines within our own country and work to bring manufacturing back home; the faster we’ll see inflation ease. Of course, it’d be great to see a real honest to goodness budget that actually gets us out of debt too; but that’s asking a bit much for the knuckleheads in Washington.

Fuel prices – They suck. See comment above. Let’s open up oil production on American soil.

Employment – I wish they’d quit playing with the numbers. There are still too many able-bodied people not searching for a job and there are still a ton of jobs left to fill. Get back to work. Be a productive member of society. I’m sorry, but relying on Tick-Tock (did I spell it right?) or Instagram to make you an instant millionaire is not a job. It’s a pure stroke of dumb luck and when you are no longer of interest, your ‘millions’ will dry up and disappear. Maybe we should be thinking of promoting trades in schools. We need plumbers, electricians, hvac mechanics, welders, carpenters, roofers, auto mechanics, etc. Oh yeah, we also need to thank and show gratitude and recognition to police, fire, EMS, nurses and teachers. Let me start now: THANK YOU for what you do and had to endure, especially over the past two years!!!

Materials & Supply Chain Issues – End the mandates and open up free enterprise. Now that I think about it…I think I covered this one previously too. Damn, am I that good? Naah…they are all interrelated. You can’t affect one without it affecting all.

And deals are beginning to fall apart – this is due to interest rates going up and buyers didn’t anticipate payments at a higher rate, prices that don’t make financial sense (often, it’s because the value is based on an unrealistic pro-forma) and 1031 money can’t find a home so the seller backs out.

And a follow up on this last point – I believe we’ll see a few ‘investors’ that disappear. This will result from many factors such as overly optimistic analysis, not planning for higher interest rates, lack of (depth of) knowledge of the market, their own ego and more.

Think I’m right?

Think I’m wrong?

Did I miss something?

Heck, let me know your thoughts. Drop me a line anytime.