Coronavirus pandemic has been a disruption to normal living; from social distancing, to working from home, and even how you look at someone when they cough. We have also seen how banks have been changing the way they lend money, Theo goes over a recent article JP Morgan Chase released on the new rules around borrowing for home loans and how this could be the beginning of how all banks could change. He explains how this could impact the housing market and provides additional studies on what we can expect in terms of house sales.
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To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.
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“Obviously they will not live on the streets, therefore, they are more likely to move into an apartment and rent. ” -Theo Hicks
TRANSCRIPT
Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners, and welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks.
Each week we air two Syndication School episodes that focus on a specific aspect of the apartment syndication investment strategy. And for the majority of these episodes we offer a free resource. These are free PowerPoint presentation templates, Excel calculator templates, PDF how-to guides, documents that will help you along your apartment syndication journey. All of these previous documents, as well as previous Syndication School episodes are available for free at SyndicationSchool.com.
In this episode I’m gonna try something a little bit different than what we usually do, maybe a little bit more speculatory – if that’s even a word – than usual. I was reading some articles about the ways that banks have been adjusting to this new Coronavirus world… And I came across some interesting things that I thought would have a future benefit to apartments… So I kind of wanted to run through some of those, and then I’d love to hear anyone’s thoughts about what I talk about today.
So if you have thoughts, either in agreement or disagreement with me, I would love to know… So you can send those to me at theo@joefairless.com, or you can just message me on Facebook, or post something in the Facebook group and tag me in it. That way, if what you think I’m saying today is absolutely crazy – which I don’t think it is, but maybe you do – at the very least I can know that and maybe we can have a follow-up next week or in future weeks about what I’m gonna discuss today.
I don’t think this is anything too crazy. I think a lot of people will agree with my logic… It all started when I came across an article stating that J.P. Morgan Chase, who is the largest lender by assets in the U.S, as well as the fourth largest lender overall, made two announcements. The first announcement – I’m recording this on the 22nd of April… This one came out on the 13th of April, so about a week ago. It says “J.P. Morgan Chase to raise mortgage borrowing standards as economic outlook darkens.”
Basically, the key point from that article is that customers applying for a new mortgage will need a credit score of at least 700, and will be required to make a down payment equal to 20% of the home’s value.
So I did a little research… Okay, 700 seems high, and 20% is obviously a lot higher than the 3.5% for your typical residential homes… So I took a look and found out that according to Experian, approximately 58% of Americans have a FICO score of at least 700. And then I also wanted to figure out what the average down payment is for a home, and it is 10%. Obviously, average isn’t the median, but I think it’s safe to assume that the majority of people aren’t putting down 20% for their homes. Most people are putting down 5%, 3.5%, and I’m sure the average is 10% because some people are putting down 20%.
So J.P. Morgan Chase is basically only allowing people who have a credit score of 700 and the ability to put down 20% to buy a home. So based off of the Experian numbers and the average down payment numbers, potentially the vast majority of people can no longer afford to buy a home through J.P. Morgan Chase. Obviously, this is just one bank… But the assumption would be that if they’re doing this to hedge against risks, then other banks will probably follow in suit in the coming months, which — obviously, it’s only been a week, so it’s too hard to tell. So that was one interesting thing that I saw.
And then secondly – and this is more recent, too – this is the article that came out within the last few days… And it says that J.P. Morgan Chase temporarily terminates HELOC loan offerings. So Home Equity Line of Credits.
So not only is it more difficult to get a new loan through J.P. Morgan Chase, but it’s also impossible to pull equity out of your existing home if you have a loan through J.P. Morgan Chase. Now, again, as I mentioned before, one bank – I understand. But typically, from my understanding, if one bank does something, other banks are more likely to follow in suit.
So why am I talking about residential loans? Well, obviously, if residential loans are more difficult to secure, then people who would typically be in the market to buy a new home or need to buy a new home, or people who are in the middle of a move, or maybe once they begin to allow banks to foreclose on people, they aren’t gonna be able to qualify for a new home, and obviously they’re not going to live on the streets. They’ll cut other expenses, and that’ll be one of the last expenses they cut, therefore they’re more likely to move into an apartment and rent… Because maybe their credit score isn’t high enough, maybe they can’t afford the down payment for a new loan.
And even if they do have the 20% down payment to pay for a home, and they do have the 700 credit score or higher, because of the surge in home values during the most recent recession, they might not be able to get the quality of home they want, and therefore resort to renting a home or renting an apartment of that quality. So that’s another interesting observation that I had.
Say I’m used to living in a $500,000 home, and maybe I was putting down 5%. That’s $25,000. Well, now if I need to put down 20%, and all I have is $25,000, I can really only afford a $125,000 home. So I’ve reduced the amount of house I can buy by 400%. So if I’ve got $25,000 in cash, that’d be something I get per year on a house, then that’s 2k/month. Would I rather rent for 2k/month, or would I rather put a down payment for a $125,000 house? That’s another interesting observation.
Now, something else that’s interesting too is that one of the main benefits of buying a home, especially during the most recent economic expansion, was the insane increases in property values that came from natural appreciation. So I looked it up and according to Zillow, the average home value increased from 175k on March 2010 to 248k in March 2020. So that is an overall increase of 47%, or about 4.7% per year. So that means that on average, every single year, my house value grew by 5%.
So if I had, again, a 175k house, in ten years that house is now worth 248k. So 4.7% return per year just by living in your own personal house – it’s a pretty good return. However, when the Federal Reserve came out with their March consumer survey, they said that they expect home values to only grow by 1.32% this year, which is the lowest reading since this survey began in 2013.
So again, not only is it harder to buy a home, but even if I were to scrape together my 20% down payment, one of the main financial benefits of owning a home, which is that increase from natural appreciation, is basically gone… Which again, makes renting more attractive.
Now, once the Coronavirus occurred and people had to shut down their businesses, the number that was floating around for number of people who were out of work was about 16 million. I’m sure it’s a lot higher, but that’s one of the original numbers. I think it started off as 9, and then it was 16. So because of this, the number of borrowers on residential mortgages who requested to delay mortgage payments rose by 1,900% in the second half of March. Obviously, these are the types of people that can’t pay their mortgages and are asking for help, which the federal government has done by halting foreclosures.
So the question is “Will foreclosures resume before or after these borrowers are able to secure new employment?” Because if it resumes before, and these people need to delay their mortgages but they can no longer delay their mortgages without being foreclosed on, then these people may potentially lose their homes and have to rent as well.
So overall, because of this tighter lending criteria – again, that is the 700 credit score, 20% down payment, just J.P. Morgan based currently, and also the ability to not pull your equity out of your own home anymore, which I guess is another benefit of owning a home, is that the equity that is created you can pull out, which J.P. Morgan Chase is not allowing people to do at the moment… So that’s the tightening lending criteria.
We’ve also got the lowest projected home value increase since 2013 of 1.32%, compared to 4.7% in average the previous ten years. You’ve got the massive increase in the mortgage delay requests, which is 1,900%, you’ve got 16 million people – probably way over 16 million people now – who had jobs a month ago that no longer have jobs. This indicates that more people are going to be renting, as opposed to buying… At least in the next few years.
And to end, another interesting statistic from the National Association of Realtors – in March they announce that they expect home sales to be around 10% lower compares to the historical sales for this time of the year. So in March the previous years – this March is 10% lower. So again, we’re already seeing right away that less people are buying homes. Obviously, that means that they might just be staying in their current homes, or renting, but obviously as more and more people don’t have the ability to buy a home, renting is going to automatically become the default attractive option to these people.
So I’d love to know what you guys think. Do you think that more people are going to be renting or buying in the next few months, and maybe the next few years, after this is all over hopefully? You can let me know either on the Facebook group by tagging me, or you can privately message me on Facebook, or you can email me at Theo@joefairless.com.
Until then, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndication. Make sure you check out those free documents we have on there as well. Those are at SyndicationSchool.com.
Thank you for listening, have a best ever day, and we will talk to you tomorrow.
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