Dodd Frank is slowing changing the housing and commercial real estate market. So far, gg’s research on Dodd Frank and its long-term impact confirms Martin Armstrong’s Real Estate Cycle conclusion that there will be a long-term decline in US real estate from 2015 thru 2032.
Click here for a summary of the latest Dodd Frank rules that took effect January 10, 2014.
This most recent rule is a modification of how balloon or interest only loans are designed and qualified will have the most impact on commercial lending. Commercial lending has been slowly moving to private lenders (ie. hedge funds, private equity trusts, individual accredited investors) for the last few years. This new rule will just continue to push that trend. A couple of things about that trend: private investors want higher rates/returns than the bank and commercial real estate has been built on balloon loan structures. The cashflow, revenue returns and business expenses are based on this underlying development budget: interest only loans and renewal of those “balloon loans” every 5-7 years (thus never really paying down the principal). During the last crisis, commercial real estate balloon loans got renewed by that flood of money from the Fed and influence from the gov in order keep the system afloat for a while. In other words, cans kicked down the road. Thoss loans will need private money or new loans structured or lot of cash or all of the above between 2015-2020. This will be a big impact. Private investor lending is in control of the real estate market now. Cash is king.
For residential lending, the impact will be a continued squeeze on prices. If you can’t get a mortgage, you can’t buy a house. And we have alot of foreclosures still sitting on the banks’ balance sheets that need to be sold. Foreclosures that can’t be refinanced because of continued unemployment or the new loan rules. You might note that student loans must be included in the debt-income ratio (which was lowered on 1-10-14). Young people will not be able to buy a house with a traditional mortgage without lower debt-to income ratio, a job, higher credit score, cash in the bank if they want a balloon mortgage, higher down payment, and cash for closing costs. Low mortgage interest rates from commerical banks doesn’t mean a thing if applicants can’t meet these new rules. Young people will rent when they move out of their parents’ house.
These rules are changing the real estate lending system in the US. Private lending is taking over: from hedge funds to crowdfunding. gg sees a few things happening from this change. Lots of cash/capital stuck in these funds until people realize that the system has changed and understand/learn how they can navigate/make a profit the new system. Real estate prices continuing to fall coupled with private lending will mean capital/cash will be lost in the coming years. (Some hedge funds and crowd-funding entities may become Ponzi schemes.) Private investors require higher rates, negating any impact “lower rate” moves from the Fed on the real estate market
If you are going to use cash to invest in private lending funds or other entities, do your due diligence. If you own your house outright, you could owner-finance and actually sell your home. But do your due diligence.
These new rules are designed to buffer non-performing loans from the secondary market impact (derivatives, etc.), like we had in 2007-2009 that banks use to hedge their loans and make their fees. It is designed to keep downturns in the residential and commercial real estate within that market to not move into insurance, stock, and bank markets. There will be unintended consequences to these changes. Lending moves to private capital (which may or may not be transparent), interest rates go up, and money will be lost as investors figure out how this new system works.
Be very careful, do your due diligence!! Young people especially seem to be geared toward trusting crowdfunding systems and use word of month as their due diligence. Learn to read a balance sheet and an income statement and ask for them from any investment you get involved with. And always have a exit strategy!! Think of this change like the tech boom of the end of the last century. Everyone got very excited, everyone eventually got in, and lots of people lost money, but a few got very rich.
The most important impact on the market will be the continued long-term contraction of the real estate market. gg highly doubts that the new lending investors and funds will take that into consideration for their ROI formulas. Bad info in, bad info out.
Cash is king and more people will rent. If you going to get in this system change in the next 15 years , the rewards will be great for the right deal structure. But, do your research and have a couple of exit strategies.
This is part of the over-all paradigm shift during this winter season of the longer-term 80-100 year cycle.