💼 House Hacking 2.0
briefcase | invest smarter | Issue #151
FANNIE MAE + HOUSE HACKING = 💖
Story: Fannie Mae has introduced new loan guidelines. Starting November 18th, owner-occupiers can now purchase up to 4 units with 5% down. This presents a whole new world for house hackers, who can live in one unit and then rent out the remainder to cover costs.
Big Picture: : Previously, if you wanted to buy a 2-, 3-, or 4-unit home and live in one of those units (a.k.a. house hacking), you'd need to fork over a down payment of 15-25%. However, Fannie Mae has slashed this requirement to just 5%.
This reduction in the down payment requirement significantly lowers the barrier to entry for prospective owner-landlords. In essence, Fannie just turned the multifamily property game into a less exclusive club. What is the maximum loan amount for these properties? A cool $1,396,800.
The Prospective Owner-Landlords' Cheer: This is like hearing your favorite jam at a party. It’s an open invitation for disciplined buyers to consider investment properties before traditional single-family homes, especially with current interest rates affecting buying power.
Market Shake-Up: Current owners of small multi-unit properties should be smiling. The buyer pool is expanding, which could mean higher bids and valuations for these properties. Traditional investors might feel the heat from owner-occupants who aren't as focused on immediate cash flow.
The Developer's Dilemma: Will this policy shift nudge developers towards building more 2-4 unit subdivisions instead of single-family homes? Only time will tell, but we’ve consistently argued that we need to build more of this asset type, also referred to as missing middle.
Accessibility Avenue: The program makes real estate investing more attainable for a broader demographic. It could usher in a wave of first-time investors and young professionals into the market, exploiting the unique benefits of multi-unit properties.
Risk Radar: There's a cautionary note, though. The high loan-to-value ratio poses risks, especially in an uncertain market. If demand skyrockets and pushes prices higher, we could see housing-based inflation and challenges in the rental market.
So What: This little-mentioned policy change could be a game-changer. It opens the market for 2-4 unit small multifamily units and presents aspiring investors with a unique opportunity. Stay tuned; the multifamily property party just got a little livelier!
Mic drop 🎤
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REAL ESTATE HEADLINES
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WeWorked: The bankruptcy of WeWork will send ripples through the commercial real estate sector. This event might lead to a significant number of lease breaks, potentially flooding the market with available office spaces. This could mean a temporary decline in commercial property values for real estate investors, especially in urban areas where WeWork has a strong presence. On the flip side, it may present an opportunity for investors to acquire commercial properties at lower prices, betting on a future market recovery (Fortune).
NAR Lawsuit Fallout: The National Association of Realtors (NAR) commission lawsuit has the potential to alter the real estate brokerage landscape fundamentally. If the lawsuit leads to major changes in how commissions are structured, it could affect both the earnings of real estate agents and the costs for buyers and sellers. For investors, this might mean recalculating transaction costs in their investment models. Additionally, a shift in the commission structure could influence how properties are marketed and sold, potentially affecting market liquidity and pricing (Business Insider).
Inflation Station: In October 2023, U.S. inflation moderated to 3.2%, down from 3.7% in September. Shelter costs continued to rise by 0.3% month-over-month and 6.7% year-over-year. Despite new residential construction activity ramping up in 2023, a decline in new construction permits could slow down the housing supply, potentially increasing rents in 2024. This easing inflation is leading investors to anticipate no further rate hikes by the Federal Reserve, with expectations of mortgage rates decreasing to around 7% in the coming months and possibly into the 6% range by spring 2024 (Housing Wire).
BY THE NUMBERS
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7.4%: The recent drop in mortgage rates from 8% to 7.4% creates a more favorable environment for homebuyers and real estate investors. This decrease in rates can significantly reduce monthly mortgage payments, enhancing affordability and potentially stimulating demand in the housing market. For real estate investors, this environment could lead to increased competition for properties, as more buyers are able to enter the market (Reuters).
7 or 9: Will housing prices take a nosedive in the next recession? History shows us that housing prices have increased in 7 of the last 9 recessions. This year, however, is throwing a curveball with skyrocketing mortgage rates and a housing market more jittery than a caffeine addict. That said, the smart folks over at J.P. Morgan and NAHB are hedging their bets on a stable, if not entirely upward, housing price trajectory (JP Morgan).
Chart: According to Redfin, real estate investors are taking a nap, with purchases from this group dropping 30% in Q3 2023.
