Lower Average Loan Sizes Are Likely
- Aug 01, 2017
At the beginning of the year, industry professionals saw rising interest rates, the changing administration, tax reform and adjustments in legislation as catalysts for a more volatile real estate market. As the fourth quarter approaches, predictions are increasingly optimistic. Allen Shayanfekr, CEO of Sharestates, discussed with Multi-Housing News how the economy and financial environment will impact the industry by the end of the year.
MHN: Mortgage rates fall or increase slightly from one week to another. What do you think the numbers will look like by the end of the year and how will these values influence the multifamily market?
Allen Shayanfekr: I don’t believe we’ll see any large fluctuations in interest rates before the end of the year. Shifts of 25-50 basis points will definitely impact market real estate prices to some degree, but I don’t expect any large shifts that could cause material changes to the real estate landscape.
MHN: How do rising rates impact loan origination?
Shayanfekr: Currently, rising interest rates are having a very minimal impact on loan origination volumes on a per-loan basis. Typically, commercial real estate loan amounts are determined using a calculation called Debt Service Coverage Ratio (DSCR). With increasing interest rates, DSCR calculations become tighter because a larger portion of properties’ free monthly cash flow is directed towards interest payments. Generally, this won’t necessarily slow down the number of loans being originated, but it could decrease the average loan size being approved. We’ll likely continue to see lower average loan sizes through the end of the year as the market adjusts.
MHN: Considering the slight increase in mortgage applications, it seems that there is a lot of market optimism. What are your predictions for the rest of the year? What should we expect?
Shayanfekr: With an increase in mortgage applications and the current relatively low mortgage rate, more developers are able to buy property and finance projects. I believe that this trend will continue and that the real estate market will continue to progress and grow in the near and long-term future.
MHN: Will the transactions volume be affected by increasing interest rates and growing supply?
Shayanfekr: We shouldn’t expect to see fewer home transactions. Increasing interest rates and a growing supply of homes are general signs that the economy is growing. With a growing economy, we also tend to see incomes rise. Prospective homeowners will remain undeterred from the increasing interest rates and with the growing supply of homes they will have the opportunity to find a home that fits their criteria. In addition, experienced real estate investors understand the flows of the industry and won’t be swayed by marginal changes. In the long run, transactions should continue at a consistent baseline.
MHN: What are the chances of a massive dip in real estate activity, since many claim the industry is at a cycle peak?
Shayanfekr: There is a possibility that there will be a market correction as the prices reach record highs. However, this will not affect projects that are intelligently financed. Also, it is important to note that places like New York are historically insulated from some of the market highs and lows.
But, it is also interesting to note, that the price to fix-and-flip in some areas is outpacing the profits to be gained from renting a space as is. This is true in the Bronx, where the cost per square foot is ever increasing. Regardless of what happens, real estate is and has always been historically one of the best investment opportunities.
MHN: What are the chances that 1031 exchanges will be eliminated?
Shayanfekr: 1031 exchanges are under fire by current legislators, but the likelihood there will be any short-term changes is slim. There are so many changes going on with regards to the infrastructure of the system that moves to make changes specific to like-kind exchanges is minimal.
Image courtesy of Sharestates