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Optimizing the Loan Life Cycle

NTC Keeps Focus on Core Competencies, Client Success by Carole VanSickle Ellis When it comes to protecting the interests of the nation’s largest investors, servicers, and mortgage lenders, Nationwide Title Clearing, Inc. takes an innovative, research-based approach to perhaps the most intimidating and complicated facets of real estate and lending. NTC’s official description is often listed as that of a “document processor” or “research service provider,” but that relatively simple nomenclature encompasses a vast array of services and a dedication to tracking down vital minutia in lending records that can make a difference of countless thousands—or even millions—of dollars for NTC clients. “We create processes and manage them based on very complex rules,” Jeremy Pomerantz, vice president of business development at NTC, explained. “There are more than 3,600 jurisdictions in the United States, each of them with a variety of rules and requirements in terms of the paperwork and processes that affect the loan life cycle. It is our job to understand those rules and help our clients remain compliant so they can get business done and mitigate risks.” NTC maintains an entire team of individuals operating “in the background,” as Pomerantz described it, to keep channels of communication between NTC and every county in the country. This provides the company with an ongoing, constantly updated series of requirements, templates, licensing processes, and recording information that enables institutional and large-scale investors to keep their loan portfolios in compliance. “Each deal is different,” Danny Byrnes, chief revenue officer at NTC, observed. “Sometimes our role is as simple as providing the assignments of mortgage from entity A to entity B. Other times, it involves clearing up faulty chains of title and perfecting what is on record for transfer.” Of course, all of this must be done with little or no delay, regardless of the complexity of the process, which is where NTC’s extensive experience beyond the conventional field of “title clearing” comes into play. “We have handled some of the largest transfers in our industry’s history,” Byrnes noted proudly. “In the last 15 years, we were involved in four of the largest transfers directly via boots on the ground and mechanical involvement in the capital markets sector.” A Track Record of Evolving to Meet Client Needs NTC was founded in 1991 in California and relocated to Palm Harbor, Florida, in 2002, where its headquarters have remained since that time. In the past 30 years, NTC has weathered multiple economic cycles and grown to more than 600 employees operating in three different states. “With each new growth phase, NTC keeps its focus on core competencies and client success,” said Pomerantz. The latest manifestation of that focus is the company’s new custody facility housed in Florida, which has a capacity of over 2 million collateral files, the latest in controlled access and security, and even Radio Frequency Identification (RFID) for use in locating, tracking, and updating files in record time. Thirty years ago, the concept of title clearing was relatively simple and close to what most investors envision when they think about the process today. Put simply, a title clearing company’s role in a real estate transaction was to investigate the chain of title on a property and determine if there were any issues to be resolved prior to a new individual or entity taking ownership of the property. These issues often involve unpaid liens, easements, and other situations wherein an unknown or undisclosed party holds interest in the property. In the event that such issues existed, the title clearing service or a settlement agency would work on each issue to resolve it and “clear” the title. If an issue were not resolvable, it would be noted as an exception in the final title policy and not covered by title insurance. That process, historically simple in light of today’s title clearing processes, is considered by most real estate investors today to be so complex that the services of a title company are invaluable and a nonnegotiable part of doing business. NTC’s role in the industry is magnitudes more complicated than its initial title-clearing processes from 30 years ago. Awareness of the vast array of complex scenarios that can exist in a large portfolio of loans and the ability to identify those scenarios and resolve them is a core strength for NTC operations. “Each client is unique and needs a different combination of our services, which include collateral cleanup, custody, prepping pools of loans for securitization, exception management, clearing exceptions, tracking payoffs with lien releases, and many other complex, high-volume processes integral to the successful packaging, sale, or purchase of loans,” Byrnes explained. “It is not uncommon for our prospective clients to tell us they have thousands or even hundreds of thousands of loans they need to move in the next six months, and they need our services on every one of them.” The cost of failure when it comes to the title clearing and post-closing processes is staggering in the mortgage industry, where a single oversight may be magnified thousands of times over across a loan portfolio. In the industry, both a buyer and a seller are responsible for their own due diligence on any acquisition and may attach a “side letter” to the loan sale agreement that essentially promises to “fix” any exceptions in the loan pool within a predetermined period of time. If the exceptions are not fixed, the buyer can sell the loans back, giving buyers a significant advantage over the seller if loans are not performing as expected. “‘Buy-back’ can be a four-letter word for sellers,” Byrnes said. “Our services are designed to make those side letters, which are a common and accepted aspect of the business, smaller and easier to manage. For example, some transactions might have side letters listing 2,500 exceptions on a pool of 5,000 loans. By comparison, a side letter with 600 is much easier to tolerate and manage.” NTC uses an internal platform to track exceptions and the widening pool of “ripples” that results

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What Lenders Should Look for in a Capital Provider

Choose Your Partners Carefully to Avoid Risk by Eli Novey A Demand for Housing Means a Demand for Capital The need for capital in the residential real estate market has never been more acute. The lack of available housing inventory, already an issue before the pandemic, has only become more complex and widespread in the past 18 months. For more than a decade, the United States has massively underinvested in its housing stock, with the amount of new housing being built woefully unable to keep up with population growth. Housing supply was further constricted as the expected exodus of Boomers from their homes never happened, and mortgage credit issued by banks following the 2008 housing crisis remained tight. As of today, the median price for a single-family home rose the most on record in the first quarter of 2021. For lower-income renters, the situation is even more dire, as the U.S. currently has a shortage of 7 million affordable rental units for families with incomes at or below the poverty line. Not only is capital required for ground-up construction projects to meet this staggering market need, but it is also necessary for renovating and rehabilitating America’s aging housing stock. The pandemic has underscored the importance of this by changing the way people work, and thus changing their housing needs—both in terms of the geographies they wish to live (suburbs over dense urban areas) and in the features they desire for their homes (such as home offices and swimming pools). Despite this great need, residential real estate lenders should remember that not all companies providing capital are created equal or hold themselves to the same high standards. When choosing who to partner with, lenders should differentiate candidates based on the following criteria: access to capital, a consistent and reliable funding process, excellent service levels, industry expertise, and a disciplined approach to credit. Access to Capital It should go without saying, but reliable access to capital should be among the most important considerations when seeking a lending partner. For the lenders, much of this value comes down to repeat business. Home renovation projects are typically short term, with most loans having a duration of less than two years. Given this timeframe, borrowers are in the position of having to generate a constant stream of new opportunities, especially considering renovation stock has a finite supply in today’s housing shortage market. Having a reliable lending partner with ready access to capital saves valuable time, allows for faster turnover, and builds stronger relationships for lenders. Consistent and Reliable Funding Process Lenders in the residential bridge loan industry depend on volume to meet market demand, which in turn relies on a steady stream of available capital. In choosing a capital provider, it is critical to select a partner that will purchase loans from lenders on a steady basis—allowing for a measure of predictability and liquidity to apply to new opportunities. A good capital provider provides transparent guidelines to lending partners for guaranteed execution. Lenders should be cautious of those who ask them to share all the loans they are working on and only buy the ones they like, rejecting many others from a “black box” approach. This approach disadvantages regional lenders, who can only service so many loans at one time and want them off their books as quickly as possible. Industry Expertise and Recognition Capital without knowledge has no value, so the provider lenders choose to partner with should have a deep understanding of mortgage credit in the residential and commercial space. They should be well-versed in real estate lending, capital markets, securitization, asset-liability management, asset management and credit. A lack of understanding of the monetary supply chain can lead to false assumptions, incorrect leverage, and unreliable service to the borrower. Furthermore, the provider a smart lender chooses to partner with will be forward-thinking and can deploy innovations from overseas to address needs generated by the pandemic. For example, as more people seek single family home rental options in the suburbs, the market is responding with increased renovation projects targeted towards long-term rentals instead of resale. Toorak Capital Partners has adopted a lending model that determines credit based on the income generated by the rental property itself (not solely on the income of the borrower) and gives borrowers another option for growth. A Disciplined Approach to Credit Lenders should only consider capital partners that center the borrower experience and prioritize getting property valuations right. When valuations are accurate on the front end, this helps ensure that large losses are incurred on the back end, which eliminates significant risk. Beyond credit checks and related due diligence performed at the time of initial loan funding, borrowers are required to substantiate renovation progress of their investment property before they can draw on any portion of the loan. This process provides for an additional touch point during the loan term and can act as a canary in the coal mine that indicates early signs of distress. Excellent Service Levels The ideal capital provider will have impeccable customer service. Ideally, a capital provider invests in technology that streamlines the customer experience for its network of lending partners. This technology can combine ready access to a qualified representative with real-time information on the status of each bridge loan. Such an investment sends the message that immediacy matters—and that experts are in place to handle the inevitable unexpected question. Again, this level of service speaks to expediency. Any issue that is not managed in a timely, professional manner takes away from the lender’s available bandwidth. Grave Implications of Choosing the Wrong Approach If there is ever a cautionary tale of what can happen when capital is provided to lenders in an irresponsible manner, look no further than the Global Financial Crisis of 2007-08. In the years leading up, mortgage-backed securities were often backed by inexperienced lenders looking to “fix and flip” properties in a low interest, capital-intensive marketplace. This asset class suffered from poor visibility into the core asset, limited credit

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What’s Driving Strong Investment Demand In the Multifamily Sector During COVID-19?

CBRE Econometric Advisors (EA) Analysis of the Strength of the Multifamily Asset Class by Nathan Adkins, Jing Ren, and Neil Blake The multifamily sector’s share of overall transaction activity has grown steadily over the past 15 years. Starting from a quarter of all transactions in the mid-2000s, multifamily expanded to a third of all transactions by 2016, overtaking the office sector, and giving multifamily the largest share of any property type by investment volume. It remains the preferred sector in 2020 with its share reaching a 20-year high of 36%, underscoring investors’ confidence in the sector. In 2021Q1, the share increased even further, to 38%. A combination of recent robust historical performance, resiliency during the pandemic, and expectations of stable future rent growth are fueling investors’ confidence in the multifamily sector. Supported by demographic trends and a growing preference for urban living, multifamily provided high and stable cash flow yields compared to other CRE sectors over the past decade. In the post-pandemic future, investors see multifamily as a safe, stable asset with less volatility and uncertainty than other sectors. Degree of resilience of multifamily sector varied by class, type and region From Q1 2020 to Q1 2021, the U.S. Sum of Markets multifamily vacancy rate increased by 50 basis points (bps), while rents fell 4.2%. This is a milder response than that experienced during the Global Financial Crisis (GFC), when, within a year, vacancy rose by 180 bps, and rents fell by almost 7%. The Sum of Markets statistics are dominated by large, dense, expensive metros which have been harder hit by COVID-19. These large metros saw many of the urban amenities that attract renters to higher priced markets shuttered in the interest of public health, while simultaneously, the prevalence of remote work made it possible to migrate to cheaper, less dense markets. These smaller metros were only lightly affected by these demand issues and most are well on their way to recovery. Additionally, suburban, Class B/C and mid-size Midwest, West and Southeast multifamily markets have all fared better during the pandemic than Class A apartments in urban cores on the East and West coasts. Performance differences in urban and suburban markets Urban core submarkets, like large, expensive markets, lost attractions such as walkable restaurants, bars, and entertainment venues due to pandemic-related shelter-in-place orders. Meanwhile, unemployment from hospitality and service industries put more pressure on urban core already stretched thin for affordable housing. Consequently, the worst-hit submarkets this year have been the urban cores in San Francisco and New York City, where effective rents fell by more than 15% year-over-year. This disparate impact of the pandemic on urban core and suburban submarkets is most starkly illustrated in their recent divergence in vacancy rates. Urban core and suburban vacancy converged in 2015 and have been essentially the same for the past five years. The flight from the shuttered, expensive urban cores is evidenced by a 180-bps jump in vacancy after Q1 2020, reaching 6.1% in Q4 2020, its highest level since Q2 2010. While, in suburban markets, vacancy has remained on its pre-COVID trajectory. As for multifamily rents, urban core submarkets’ year-over-year rents declined by 12.7% from Q1 2020 to Q1 2021, worse than the 11% peak-to-trough contraction during the GFC. Suburban submarkets have been much more resilient, with rent slipping by only 0.1%, compared to 6.7% during the GFC. Performance by Building Class Social distancing measures also disproportionally affected employment in the services and hospitality businesses, which tend to pay lower wages. In theory, disproportional impact on low-income categories of workers should negatively affect demand for Class B and C multifamily housing, but this wasn’t the case. Higher unemployment rates in the low-wage service industry did not translate into higher vacancy rates in Class B and C. Due to supply constraints, Class B and C have been outperforming Class A since 2015. Rather than seeing this gap shrink with the onset of the pandemic, we saw them diverge further, as vacancy rates for Class A units jumped to 6% in Q1 2021, a 130-bps increase from the year before, while Class B and C vacancy rates stayed relatively stable. One possible explanation for the relative underperformance of Class A in light of these labor dynamics is that high-income renters are more able to work from home, and therefore have more flexibility in choosing where to live and whether to buy or rent housing. Recently enacted government policies, such as eviction moratoriums, also contributed to Class C overperformance. According to a recent U.S. Census Bureau Household Pulse Survey, about 14.5% of all renter-occupied households were behind on their rent payments. For households with an income of less than $50,000 a year, 20.3% were falling behind on rent payments. Performance by Market Despite the ongoing pandemic, out of the 69 multifamily markets tracked by EA, 51 recorded positive rent growth from Q1 2020 to Q1 2021. While some renters chose the suburbs over downtowns within the same metro area, others went further and moved away from gateway cities to secondary and tertiary markets, often to be closer to family. Consequently, markets with the highest annual rent growth in Q1 2021 were mid-tier markets: Riverside, Sacramento, Albuquerque, Tucson, Memphis, and Richmond, where rent grew over 6% year-over-year. With downtown commercial activity severely affected by the pandemic, rents fell furthest in major U.S. metropolitan areas, such as San Francisco, San Jose, Oakland, New York and Boston, where rents fell by at least 6% from Q1 2020 to Q1 2021. We expect this trend will reverse starting in 2021 and throughout 2022, with demand shifting back to major metros. Economic outlook and multifamily forecast According to an advance estimate of the Bureau of Economic Analysis, the U.S. economy grew at 6.4% (annualized rate) in Q1 2021. The April 2021 unemployment rate was at 6.1%, a considerable decline from 14.8% recorded in April 2020, but still above 3.5% recorded in February 2020. We expect the U.S. economic recovery to accelerate throughout 2021 with new household

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Offices Face Quantum Shift Post-COVID

The Metamorphosis of the Office Market by Paul Fiorilla No sector of commercial real estate faces more uncertainty going forward than offices. Companies found during the pandemic that work can be accomplished productively from home, and many workers found that they prefer shorter commutes and more flexibility. Demand for office space will be reduced, and workspaces will be redesigned. The only question is how much of a disruption will occur. Offices have taken quite a hit from COVID-19, even though the measurable cost has been obscured by the long-term nature of office leases. The U.S. office vacancy rate climbed to 15.9 percent as of April, up 280 basis points year-over-year, while sublease space has more than doubled during that time, according to Yardi Matrix. That bump, however, is just the tip of the spear. Only about a quarter of downtown office workers nationally reported to an office as of April, with the percentage closer to 15 percent in New York City and San Francisco, according to security firm Kastle Systems. The question is not whether companies will reduce their office footprint post-pandemic, but by how much. Demand for space barely scratches the surface of the considerations faced by owners and occupiers. The industry must come to grips with a host of factors, including when workers can safely return; how many people will use offices and how often they need to be there; where offices should be located; how offices interact with lifestyle preferences such as commuting and walkability and, how to re-design space to attract and maintain talent while meeting functional needs. The industry is facing a “quantum fundamental shift,” according to Jeff Adler, vice president of Yardi Matrix. “The sector is at the beginning of a wrenching multi-year rethinking of the nature of work. Everything is in play.” Where to Work? The primary question hanging over the industry is how office utilization will change after the pandemic ends. “Every tenant is asking the same questions about how and when to get back,” said Benjamin Breslau, chief research officer at JLL. Breslau said that the percentage of workers reporting to an office is expected to triple by year-end, to 75 percent, and that work-from-home will double to 20 percent of workers from 10 percent pre-pandemic. Many companies have found that workers can be productive from home, but to what extent can it be done without impacting corporate culture and collaborative efforts? A consensus has formed around the idea that most companies will adopt more flexible arrangements, but what that means for office space demand depends on the details. In terms of how much space is needed, there is a big difference between giving employees a choice to be fully remote or requiring them to be in an office part-time. Those decisions are complicated not just by employee preference but by the nature of the job and the industry. Some types of knowledge work (such as programming) can be performed well anywhere, but others are more productive in a collaborative environment. Daniel Ismael, a senior analyst at Green Street Advisors, said the average office worker’s time in the office will likely drop to 3.5 days a week from 4.5 days a week pre-pandemic. While a part of the office space decision will be driven by the type of jobs and corporate culture, companies will also have to bear in mind the preferences of employees, which is another complex issue. If proximity to an office is no longer important, how will that change workers’ preference for where they want to live? In the years leading up to the pandemic, the default assumption was that young knowledge workers wanted to live in an urban environment. Job growth over the last 20 years has been concentrated in urban areas,even in secondary and tertiary metros. However, the pandemic prompted a drop in population in urban submarkets in gateway metros. Young families moved to suburbs to get more space while others who were suddenly unmoored from the need to commute moved to different parts of the country. Some moved to lower housing costs, but part of the movement was driven by the closure of entertainment and cultural venues. When those venues re-open, some will move back to urban areas, but others have left permanently. Companies could deal with this by shifting offices to the suburbs or moving to less expensive metros, or by adopting a “hub-and-spoke” model with a city headquarters and outposts in the suburbs. Mark Grinis, hospitality and construction leader at EY Global Real Estate, said during ULI that a more distributed workforce is at odds with the need for collaboration. Studies done by EY of workplace productivity found that secondary locations—the “spokes”—had the worst performance. Lifestyle Changes COVID-19 has prompted many people to think about lifestyle and where they want to be. Many workers were relieved to avoid long commutes of more than 30 minutes, but “walkable” neighborhoods with access to shopping and other amenities remains popular. Diane Hoskins, co-chief executive officer of design and consulting firm Gensler, said that many are choosing smaller cities and inner-ring suburbs, especially in the technology sector. “There’s a real appetite for reconsidering how cities work,” Hoskins said. “When you look at real estate as an investment in people, you say how do you do it in a way that optimizes … competitiveness to be able to thrive in a global environment.” One difficulty for picking a location is that few metros are configured to meet conflicting worker preferences.  Lifestyle considerations mean that office buildings themselves need to be re-thought to meet the new paradigms. For example, workers may demand less density for health considerations. If workers come to the office less frequently, then more collaborative space is likely needed to make efficient use of the time they are together. Companies may have to redesign space to add amenities to retain workers and/or entice them to come to the office. The myriad redesign changes, and even downsizing, are likely to require costly capital expenditures at a

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Real Estate Investing Outlook

The Pandemic Gave the Real Estate Industry a Crystal Ball to Identify Emerging Trends by Erica LaCentra Despite the global pandemic, the real estate investing space, in particular single-family rental, is booming. The SFR market was one of the best performing areas of real estate in 2020 as it mirrored the strong performance seen with single-family purchases. The thing with SFR is that it is a very attractive asset class for smaller-scale investors or even those looking to have supplemental income. It continues to be a great option for those that are wary of the stock market or investing in other avenues because it is a relatively safe and easy way to invest in residential real estate and has consistent long-term returns. So, let’s talk about what the second half of 2021 and beyond has in store for SFR.    Why Is There Such High Demand? Even pre-pandemic, this was an area of the market that was already experiencing rapid growth due to general demand from many demographics. Millennials that may have been looking for space and the comforts that come with living in a single-family home drove a significant amount of this demand. As this demographic started to get to an age where they are settling down and having families but were not ready or able to purchase a home, renting in the suburbs became a very attractive option. On the flip side, you also have retirees that were looking to downsize and potentially move closer to family as they get older. This was another large segment that was driving demand. Members of older generations who were not interested in owning a home and dealing with the maintenance began looking at single-family rentals to get the best of both worlds. One of the largest issues that continues to face the market is low inventory. There was a lack of supply of single-family houses throughout the country before the pandemic and that demand didn’t go away once the pandemic hit. In fact, it seemed to accelerate demand in this space because of the mass migration that occurred out of major cities to the suburbs when the pandemic hit. This migration of individuals out of cities has only exacerbated the problem. And in turn, it has caused home prices to skyrocket in many areas of the country because there is simply not enough supply to meet demand. How Will Prices Fair? The biggest question on everyone’s mind as home prices continue to climb is, how long will this last? In Q1 of 2021 alone, median home prices were up by around 10% year-over-year. As things look like right now, supply and demand are going to continue to drive home prices up in 2021 and there is no indication that price growth is going to slow down this year. According to a recent Zillow report (Zillow Economic Research) “annual home value growth will rise as high as 13.5 percent by mid-2021 and for home values to end 2021 up 10.5 percent from their current levels.” This forecast also predicted that sales volume will remain elevated throughout 2021, finishing the year at “6.9 million sales, the most since 2005.” It’s hard to say how far beyond 2021 it will continue, but unless there is a large influx of inventory, all signs point to home prices continuing to grow throughout 2021 and even potentially into 2022. And for those individuals that are predicting a flood of distressed assets once forbearance and government intervention is removed, that is starting to seem more and more unlikely. The difference between the Great Financial Crisis and any looming fallout from the pandemic is the tremendous amount of equity that homeowners have. According to Corelogic’s recent Homeowner Equity Report, “U.S. homeowners with mortgages (roughly 62% of all properties) have seen their equity increase by a total of nearly $1.5 trillion since the fourth quarter of 2019, an increase of 16.2%, year over year.” With these gains in home equity, it ensures that homeowners have a reduced risk of being underwater or in the event, they fall on hard times, there are greater options to sell rather than go into foreclosure. Where is the Inventory? So, if future distressed sales are not necessarily on the horizon, what other avenues will potentially play into housing inventory growth? While the home flipping industryis facing its own challenges due to lack of inventory and flipping activity continues to decline due to lack of inventory, new construction is having its moment. Investors looking to flip homes are running into stiff competition for properties and are also finding it challenging to find deals on properties that would provide a reasonable return on investment and are turning to new construction. While new construction is not without its own potential snags, such as constraints due to rising materials and lumber costs, single-family home starts are rising and are projected to continue to rise; thus, providing one of the best areas of opportunity to add additional inventory to the marketplace. There is also the thought that inventory levels may rise as more vaccines become available to the general public. While increases in vaccinations may cause some upticks in inventory due to people returning to cities and leaving the suburbs again for whatever reason, this will probably also not have that large of an impact. Since there was already a lack of supply pre-COVID, the best we can potentially hope for once more folks are vaccinated is for inventory to get closer to pre-pandemic levels. What About Commercial Real Estate? By all indications, many segments of commercial real estate should recover from the devastation that the pandemic caused. Areas of the market, such as the multifamily space, have already started to rebound, and look as though it will likely come out of the pandemic unscathed. In fact, multi-family housing is poised for remarkable growth throughout the remainder of 2021. Demand in this segment of the market shows indications of increasing as vaccinations increase and people and workforces begin migrating

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Investors Face Challenges Today, See Better Times Ahead

The RealtyTrac Investor Sentiment Survey™ by Rick Sharga Individual investors today face unprecedented challenges in the real estate market. Limited supply, soaring prices, and unprecedented competition from both institutional investors and traditional homebuyers. How do investors feel about market conditions today? Is the investment market better or worse than it was a year ago, and will it be better or worse six months from now? What are the biggest barriers to success for investors? And are they anticipating relief to come in the form of an influx of foreclosure properties? RealtyTrac recently completed its first RealtyTrac Investor Sentiment Survey™, surveying 150 individual real estate investors across the country to find out how they viewed the market, what problems and opportunities they faced, and what their impression was of today’s environment for real estate investing. These investors are representative of the majority of real estate investors—the typical mom-and-pop investors who purchase between 1-10 properties a year. It is these individual investors who exert the most influence on market conditions. Nearly 90% of the 19 million single family rental properties in the country are owned by these mom-and-pop investors, while the largest institutions—collectively— own less than 2%. The fix-and-flip market similarly is populated by thousands of small investors who average about one flip a month, but who now face competition from the so-called iBuyers like Opendoor, Offerpad and Zillow, who essentially do flipping at scale. The respondents to the RealtyTrac survey were almost evenly divided between fix-and-flip investors and those who purchased properties for the purpose of renting out these homes. How do they view today’s market, and what do they expect in the future? Some of their answers might surprise you. Three Challenges for Investors Today: Inventory, Rising Prices, and Competition from Homebuyers About 45% of investors believed that the investment market is worse or much worse than it was a year ago, but almost 40% believe that conditions will improve in the next six months. The investors cited three primary challenges in today’s market: lack of inventory, rising prices and competition from traditional homebuyers. The lack of available inventory was overwhelmingly cited by investors as the most daunting challenge—over 68% of the survey respondents listed this as one of the three biggest problems facing investors today, and over 60% believe this will still be a problem six months from now. Supply of existing homes for sale is at the lowest levels ever reported by the National Association of Realtors® (NAR). Similarly, the National Association of Homebuilders (NAHB) has reported that new home inventory is at its lowest levels since they began reporting this data in 1973. And even foreclosure inventory is at historically low levels according to RealtyTrac. Meanwhile, demand from homebuyers is growing rapidly. This demand is being driven by three factors. First, historically low interest rates, which improve affordability, and actually make it cheaper to pay monthly mortgage payments on a 30-year fixed-rate loan than it is to pay rent in many markets. Second, demographic trends. Millennials, the largest generation in U.S. history, have the largest cohort of their age group arriving at the prime age for 1st-time homebuying. And Gen-Xers are hitting their peak years for move-up buying. Finally, the COVID-19 pandemic accelerated the transition of urban renters to suburban homeowners, as tenants left high-cost cities (especially New York City, San Francisco, San Jose and Seattle). The unprecedented demand has created an unusual market dynamic for individual investors: instead of competing with larger institutional investors, mom-and-pop investors find themselves competing with more traditional consumer homebuyers. Over 36% of those surveyed cited this competition as one of their three biggest challenges, edging out the fourth most-cited challenge, the rising cost of materials, which was cited by just over 32% of the respondents. The increase in home prices was identified as the second-biggest challenge (over 58%) by the investors. Fix-and-flip investors found these prices to be more problematic than rental investors, which makes sense since flipper ROI depends to a great extent on the ability to buy a property at enough of a discount to be able to spend money on repairs and still turn an acceptable profit. And while investors generally expect market conditions to improve, they’re less optimistic about home prices. About 56% of those surveyed expect prices to continue to rise over the next six months, with 18% expecting the prices to go up by more than 5% during that time. Interestingly, investors don’t appear to be concerned with their ability to secure financing today, although they’re less certain about that in the future. Only 8% cited access to capital as a barrier today, while over 15% are concerned that it might be an issue six months from now. And, while just under 9% are concerned about rising interest rates today, almost 33% believe that rising rates are coming their way in the next six months. Will Foreclosures Provide Relief? Foreclosure activity today has virtually ceased due to the government’s foreclosure moratorium and the CARES Act mortgage forbearance program. Since these programs began, RealtyTrac data has shown year-over-year declines in foreclosure actions of between 70-80% a month. And the inventory of homes in foreclosure is now at the lowest level ever recorded in the RealtyTrac database. While it’s unrealistic to expect that default activity won’t rise somewhat after these government protections expire, the investors answering the survey aren’t expecting a flood of distressed properties. About 37% of the respondents believe that foreclosure activity will return to its normal, historical level (about 1% of mortgage loans in a given year), while 30% said that foreclosures will surpass normal levels, but remain well below the levels seen during the Great Recession. With a record $21 trillion in homeowner equity, it’s likely that most homes in default will sell prior to the foreclosure auction, and very few will ultimately be repossessed by the banks and subsequently listed for sale. Continued challenges with low inventory and rising prices, higher interest rates, and ongoing competition from homebuyers—and yet these investors

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