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.
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, 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.
Search