It has been a wild year in fixed income markets, as the Fed continues to raise rates to tackle inflation1. As a result, the surge in mortgage rates dampened originations across all types of mortgage products. Declining home prices has not helped the supply story either. Almost all forecasts point to sustained negative outlook for home prices as demand slows and mortgage rates rise.
Meanwhile, affordability constraints, a lack of housing supply and now rising mortgage rates have helped to keep rents high. Will this continue? One school of thought is that landlords can pass on the higher interest rate costs to tenants.
How could this impact the bridge loan supply? It’s yet to be seen whether the bridge loan borrower takes advantage of the lower home prices, perhaps use the fix-to-rent market and pass on higher interest costs on to tenants. In part, the timing of higher supply will depend on when and what the market deems as bottom or near bottom for home prices.
Lastly, our Delinquency & Resolutions data show that less than 1.0% of loans were liquidated with a loss and 1.1% liquidated with a gain. Part of the reason for this gain is because the pandemic related disruptions did not put downward pressure on housing values. This sector benefited from fundamental housing supply, in the backdrop of strong economic growth with increasing home prices up until Q1-2022.
1 The Fed has hiked interest rates six times in 2022 with four recent consecutive rate hikes of 75bps.