What Borrowers Need to Know About Various Economic Factors and Their Effects on Real Estate and Lending

Whether or not the United States is in a recession seems up for debate, depending on who you talk to and whose numbers you use. What’s not up for debate is that borrowers and lenders of all stripes and types are watching with growing interest how various economic factors are affecting real estate, lending, inflation, and other aspects of the economy.

Borrowers and lenders (including Enact Partners) are watching with growing interest how various economic factors are affecting real estate, lending, inflation, and other aspects of the economy

Here is a brief look at some of the economic issues most pressing to borrowers right now.

Interest Rates and Property Values

For much of 2021 and 2022, property values skyrocketed. For property owners, this was a good thing as real estate gained equity.

Because so many bought up properties before prices got too high, availability of housing and commercial properties in many markets became scarce. This saw a corresponding rise in construction in the form of commercial properties, single-family homes, and multi-family dwellings.

However, as people bought up real estate, the Fed raised interest rates, which cooled the market. For borrowers relying on loans from traditional lenders to build or acquire properties, this was not such a good thing (it wasn’t so great for mortgage-seeking consumers either).

Normally, having low availability would drive property values up even further. However, in an effort to curb inflation, in November the central bank announced a fourth consecutive rate hike of three-quarters of a percentage point. The increase means the cost for consumers to borrow to buy a home has more than doubled compared to what it was last year. This spike in interest rates has dampened rising property values and made mortgages less affordable, which seems to have plateaued real estate prices for the moment.

As a result, borrowers and traditional lenders are proceeding with caution, uncertain what the next year or so will bring and whether interest rates will continue to rise, remain steady, or fall.

With banks typically taking anywhere from 3 to 6 months to close a business loan, and sometimes a year or longer for more complicated deals, it’s no wonder there’s been a significant slowdown in new construction. Banks are nervous. They seem content to shut off their “lending tap” no matter how good a deal might be. Many builders are nervous too. They don’t want to build at high prices and high interest rates only to have to sell low in order to pay off construction loans.

It’s More Than Just Interest Rates
Interest rates and property values aren’t the only economic factors affecting lending

Interest rates and property values aren’t the only economic factors in play. Rising gas and diesel fuel prices are affecting construction and real estate in ways much broader than the very real “pain at the pump” experienced by consumers, truck drivers, manufacturers, and others.

In construction, rising fuel costs impact acquisition costs, running equipment, transportation, manufacturing, warehousing, job sites, and even sales and marketing.

While we’ve seen the cost of wood and aluminum prices drop after the supply-chain-related issues of 2021 eased and demand decreased, the cost of manufactured items such as windows, appliances, and specialty construction materials has actually risen this year. Fuel costs have certainly played a major role, as have staffing and labor shortages.

Labor shortages are also causing delays in construction project completion and a higher risk of injury on the job. A February 2022 analysis by Associated Builders and Contractors estimated that the U.S. construction industry needs to hire an additional 600,000 workers to meet industry labor demand.

Housing Demand Remains Strong in Many Areas

Despite increased interest rates and cost to build, housing demand remains strong in many markets, due mainly to an undersupply of affordable housing.

For example, in California, consulting firm, McKinsey & Company, estimates the state will be short 3.5 million housing units by 2025 and that 50% of California households cannot afford the local cost of housing. As a result, new or existing California residential projects are viewed as safe and sought-after investments.

California’s affordable housing shortage has also created very strong, growing markets in areas such as Boise, ID; Salt Lake City, UT; Denver, CO; Seattle, WA; and most of Texas as Californians leave the state seeking a lower cost of living. Coincidently, many areas experiencing housing demand growth also have favorable regulatory environments for lenders, such as Enact Partners.

Put Enact Partners to Work for You

While no one can predict the future with certainty, Enact Partners remains confident in our ability to provide borrowers and builders the capital they need to acquire and develop property.

With roots in real estate, land development, and construction, we bring a deep understanding of what it takes for borrowers and builders to be successful. Our goal is to fund projects whenever and however possible, not pump the brakes like most traditional lenders are doing right now.

Our loan rates are not determined by what the Fed is doing. Instead, our rates are closely tied to actual equity in a property, so they haven’t moved much as a result of recent fluctuations. What this means is that while banks are taking more of a wait and see approach, worried whether interest rates will continue to climb or if they’ll drop again over the next 12 to 18 months, we find ourselves in a far more enviable position. We’re big enough to be able to leverage capital on hand, while as a boutique-sized firm, borrowers get to interact directly with our lending decision makers, not a nameless, faceless loan bureaucracy beholden to burdensome regulations, processes, and paperwork.

Contact Us About Your Borrowing Needs

Enact Partners specializes in quick turnaround times, flexibility, and providing access to decision makers who can provide the capital you need to buy and develop property.

(760) 516-7776 | [email protected] | www.enactpartners.com

Related Blogs

The Power of Relationships in Private Lending

The Power of Relationships in Private Lending

By prioritizing trust, communication, and long-term partnerships, Enact Partners has become a trusted ally invested in the success of clients, and in today’s ever-changing lending environment, that’s critically important.