2022 Will Bring New Challenges for Asset Management
Companies with Ability to Scale Will Succeed
By Rebecca Smith and Andrew Oliverson
What’s next for the U.S. housing market? That is the question preoccupying buyers, sellers, real estate investors, and mortgage servicers across the country. For the last eighteen months, foreclosure moratoriums and protections for homeowners impacted by the COVID-19 pandemic have contributed to a supply imbalance.
As many of those protections retire at the end of this year, new challenges will be in store for mortgage servicers, investors, and asset managers who have been patiently waiting to resume business as usual. Mortgage servicers will face bottlenecks as they begin to restart evictions and foreclosure processes. Meanwhile, buyers and sellers will continue to grapple with the limited supply that is expected to persist into 2022. Asset managers will have their own challenges getting back to business, with supply chain disruptions and labor shortages continuing to tie up regular property maintenance and renovations.
An Unprecedented Increase in Home Demand
The COVID-19 pandemic is credited with creating unique market conditions that led to record appreciation in home prices. Foreclosure moratoriums and a temporary halt in construction ratcheted up the pressure by limiting the amount of inventory that came to market. As a result, competitive bidding wars for limited listings drove prices up. According to the Radian Home Price Index, provided by Radian’s subsidiary Red Bell Real Estate, LLC, home prices have risen 14.9 percent since the beginning of the pandemic, with the average home price appreciating more than $37,000 over the last eighteen months.
When the Consumer Financial Protection Bureau (CFPB) rule restricting foreclosures is lifted at the end of 2021, servicers will begin to restart foreclosure and eviction processes. This will release some new inventory onto the market as some delinquent borrowers will opt to sell their home or are eventually taken to foreclosure. However, with some municipalities running on skeleton crews and shortened business hours, servicers will be jammed as they navigate mortgage servicing requirements for a backlog of borrowers impacted by the pandemic.
Even as some new inventory begins to trickle into the market, experts say there is more demand than the market can handle. The National Association of Realtors reported there is still a shortage of 5.5 million new homes. Meanwhile, the millennial generation is coming into the market in a big way. They have formed 12.3 million new households since 2012, while only 7 million new homes were built during that time. All signs are pointing to a continuation of similar supply and demand pressures as we move into 2022.
Investors who have waited on the sidelines are ready to jump in. There is an estimated $150 billion of unspent capital in private equity real estate funds. But investors will need more than cash to succeed. Major disruptions in the construction industry will have ripple effects on real estate investment and asset management for the foreseeable future.
The Disruptive Landscape Continues
While the pandemic bolstered home prices, it simultaneously disrupted many of the industries that support the real estate sector, including construction, materials, servicing, and property management. The cost of labor and materials has skyrocketed—that is, if you can even find labor and materials. With building materials in short supply and contractors booked out for months, renovations and even minor repairs have become significantly more costly and time consuming.
Since the onset of the pandemic, the global supply chain has been under extreme strain. Bottlenecks in Southern California and China, as well as the recent debacle in the Suez Canal, have tied the global fleet of container ships in knots. This triggered a surge in the cost to ship materials—according to a Reuters report the cost of a shipping container from China to the U.S. has climbed over 500% in the last year from $4,500 to over $20,000. A shortage of nails has seen suppliers putting daily limits on the number of boxes contractors can purchase.
The National Association of Home Builders reports that despite the drop in softwood lumber prices from astronomical highs earlier this year, it has been offset by huge increases in the prices of materials like building paper, nails, pipes, and windows. Over the first half of 2021, some building materials have increased more than they did in 2020 by many times over.
To add salt to the wound, the construction labor market suffered an exodus of skilled workers during the pandemic that it is still desperately trying to recoup. To keep pace with demand, the Associated Builders and Contractors estimates the construction industry needs an additional 430,000 craft professionals this year and nearly one million over the next two years. It does not appear this problem will be fixed quickly, as the construction industry has an aging workforce and lack of new skilled workers entering the field.
Companies with Ability to Scale Will Succeed
So, what does this mean for small and medium-sized investors? The real estate landscape has changed significantly over the last eighteen months. Properties have become more difficult and expensive to acquire, and new challenges have evolved for repairing or rehabbing properties. Additionally, the build-to-rent (BTR) industry has gained momentum as single-family rental investors opted to produce their own inventory, creating competition
for fix and flip investors.
Likewise, servicers are entering a more complex environment than ever before. Mortgage servicers will need ramped-up capacity to reach out and respond to the large number of homeowners requiring loss mitigation assistance. They will have their hands full with carefully navigating legal and regulatory requirements for foreclosures and evictions.
Succeeding in this new environment will require investors and servicers to have an asset management partner with scalable capabilities that include a comprehensive repair strategy, access to the supply chain and materials, and a reliable vendor network.
Radian’s asset management subsidiary, Radian Real Estate Management LLC, maintains a nationwide network of over 40,000 vendors including contractors, property managers, and real estate agents that can help investors acquire, rehabilitate, and market investment properties as soon as they hit the market. Full-service asset management capabilities can also help servicers get the best execution on their properties and mitigate losses after a foreclosure sale.
Many things could change in the coming months and beyond. Interest rates are already trending higher and some homeowners are beginning to sense we are nearing a peak in house prices. But residential real estate will continue to offer opportunities for investors who can deploy professional asset management capabilities and expertise when and where it’s needed most.
