The stock market is getting crushed this year. Crypto is imploding. The economy is on the verge of recession, and some argue that we are in one. Despite the “not enough supply” battle cry across social media it seems that most people are not buying right now or cannot afford to. Housing inventory has almost tripled in some cases:
The three-month moving average of active listings in the North Texas Real Estate Information Systems jumped from 933 in April to 2,915 in June – an increase of more than 200% in 90 days, according to an analysis of NTREIS data by Dallas-based HomesUSA.com.
Why the alarming surge in contracts being canceled for new homes in Dallas-Fort Worth? – Dallas Business Journal (bizjournals.com)
I noticed, at least in my local market where I owned properties, better properties are selling for less than what I sold for a few months ago.
With each rise in interest rates, multifamily is taking a price hit. Sellers might be expecting to still get a higher price, but reality seems to be setting in for most. A lot of deals have fallen through, and prices are taking hits. Investors do not have an appetite to buy a property with negative cash flow. The ones that have closed recently likely had to retrade.
Sellers would be wise to accept a retrade versus relist their deal and have no buyers show up. A lot of buyers are on the sidelines and the ones looking are not looking to overpay. Otherwise, if an acceptable price cannot be found, a refinance might be in order.
Refinancing
The first step to refinancing is seeing if it makes sense. If you have 2 years left on a bridge loan with a cheap rate cap bought last year: no worries. If you have 6 months left on your term it might be a good idea to refinance if you do not want to sell into a buyer’s market.
Buyer’s market is subjective but empirical evidence suggests there is no longer 20 buyer groups lined up to outbid each other on every listing. Q3 activity is very slow. A lot of deals are being shopped offline seeing if there is a buyer that will agree to a price.
Interest Rate
The refinance option is strong for the time being. The 10-year treasury is below 3% currently. The rule-of-thumb for agency rates is add 2% to the 10-year treasury rate. This means your refinance rate might have a 4-handle on it. Having a 10-year loan fixed below 5% should give you some comfort that you can make it to the other side.
If you do not want yield maintenance or defeasance, then it is a good idea to opt for an agency floating rate. With the velocity of transactions, it might make the most sense. Not a lot of buyer groups and investors seem to have the patience to hold for 7 to 10 years. With how much money is being printed and how fast inflation is moving, a 3–5-year hold is plenty to get the job done.
A floating rate will not have the prepayment penalties that long-term fixed rate debt does. The drawback being rate caps have skyrocketed in price. You could think of the rate cap is a type of prepayment penalty that you pay upfront for the flexibility. The other reason a floating rate makes sense on an agency refinance is that rates could go back down just as easily as they went up this year. This is to be determined.
There is an FOMC meeting today, and we will likely get another 75-basis point hike. This will put the front end of the curve at 2.25% to 2.50%. We will see what happens to the 10-year but if it holds steady then the fixed agency rates will be good.
Conclusion
The market is in turmoil right now. This is a good opportunity for people to buy a deal that did not have a chance just a few short months ago. The groups that bought deals on bridge loans coming due need to decide if they want to sell at a reduced price or refinance into agency debt. This will depend largely on what the partnership wants to do.
