The recent mortgage turmoil has many wondering about the impact on the economy, mortgage industry, and the real estate sector. As a landlord myself, I was curious to determine the affect of the market changes on the pool of tenants and future rental rates. For some answers, I went to a well respected mortgage broker, Steve Beecham, President of Hometown Mortgage in Alpharetta. www.hometownmoney.com
Steve is the former president of the Georgia Association of Mortgage Brokers, and his firm has been consistently in the top 10 mortgage brokers in volume in Georgia over the last four years.
My discussion with Steve followed two different groups of people: retail buyers and landlord/investors.
Retail buyers are probably the most negatively affected by the squeeze in credit. This happens in two different ways. The first way, according to Steve, is that jumbo borrowers, who are borrowers seeking loans of more than $417,000, with marginal credit and seeking 100 percent financing, will find it tougher to get a loan. A few months ago, this was a normal and fairly easy transaction to complete, but today it is non-existent in the current market.
Steve also conjectures that some borrowers today, will need a "5 to 10 percent higher credit score as opposed to two months ago," to do the same loan.
The second consequence to retail borrowers is the rise in interest rates. According to one statistical modeling study by the U.S. Bureau of Census, a one half percent rise in interest rates will take about 360,000 buyers out of the market nationwide. So, as the interest rates move up, more buyers are unable to get into a home. Or, they have to adjust their expectations and seek a lower priced home.
The other segment affected by this new market fluctuation, is the landlord/investor. According to the National Association of Realtors, this segment of borrowers makes up 23 percent of all borrowers; a hefty portion of the mortgage market.
One affect of this mortgage meltdown on the landlord is that they are seeing more qualified applicants than in years past. Frankly, many landlords have suffered through the last few years renting to anyone with a job. Now, with the rise in the number of applications, landlords are being more judicious in their selection of tenants. Tenant selection is beginning to involve credit scoring, criminal background checks, and past tenancy referrals. While this was prudent in the past, many landlords found themselves looking the other way on some of these issues. Now, better tenant selection will rule the day.
Robert Locke, president of Crown Management, www.crowngeorgia.com one of the largest property management companies in the state, says that the upward trend in rents has not started, but will shortly.
Locke says that his company has seen an "increase of rental applications by 80 per month."
His business is sky rocketing, and he is seeing a "spike in (rental) applications from people who thought they could buy, but can't."
This increase in renters will obviously create upward pressure on landlord pricing. Rents may start pushing back up to their pre-2001 amounts. Many rental rates in the Atlanta market have remained stagnant at best and in many sub-markets have declined since 2001. This has happened as landlord costs have steadily increased. Insurance, property taxes, and repair costs have steadily risen during the period. Just the upward trend in petroleum prices alone has increased carpet and vinyl pricing for many landlords by 12 to 18 percent. So, it appears that the upward pressure on rental rates, will help landlords recoup some of their lost income of the past six years.
In speaking on the mortgage industry problems in general, Locke, whose company manages more than 700 properties throughout the northern suburbs, says he remembers the savings and loan scandal of the late '80s, with the Resolution Trust Corp/ taking over the real estate of the S&L's.
In an ominous correlation, Locke says "We are seeing many of the same symptoms that we watched back then."
So, as the mortgage industry continues to fluctuate, landlord/investors are looking to the news that Locke iterates, "This is good for investors."
However, for the retail buyers, it looks like fewer choices in mortgage products may lead to delayed home ownership and higher rent costs.
www.capitallistings.com
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