As many of you know, America Mortgages offers two main ways to qualify to purchase or refinance investment real estate in the U.S. – either using personal income or using only the properties’ projected or actual rental income. For two main reasons, most of our clients use the latter. One, their income may be extremely complex or documented insufficiently, or two, they plan to move quickly with a streamlined, minimal documentation approach.
Difficult times call for creativity and common sense.
At the beginning of the year, qualifying based on rental income, otherwise known as DSCR was easy. Rates were low, rental yields were stable, and properties cash flowed on paper very easily. Since the beginning of the year, rates have continued to increase. Overall, rates remain historically low when you look at the U.S. mortgage market over the last 20 years. Rental yields have continued to climb to record levels, however, documenting these rental yields through an appraisal, which is how we underwrite these loans, has become increasingly challenging as there is typically a lag in rental comps to support the higher rents.
This presented our team with a problem; In the current environment, in order to qualify for a “standard” DSCR loan, clients were required to put more money down to keep the underwriting numbers in line. In general a DSCR loan requires the rental income listed in the appraisal to be greater than or equal to the mortgage payment. Unfortunately, it’s going to take time for rental appraisals to correlate with the higher rental yields, to where DSCR will be a viable option again. However, we have a solution…
Rejoice Global Investors…Introducing America Mortgages’ No-Ratio Mortgage Loans!
“No-Ratio loans,” have recently been introduced as options to help clients with minimal down payments to leverage a higher LTV without the constraints of waiting for rental yield to catch up. You might ask yourself – why would someone want to go into a loan knowing the property cash flow doesn’t cover the mortgage payment?
It’s a good question! This is common sense underwriting and as mentioned previously, the rental comps mentioned in the home’s appraisal sets the cash flow target. Rental comps are hard to measure; they are dependent on when tenants in your area have renewed their leases, are the renewed leases at market rent, etc. This measurement is often not the rental amount the client is buying the property for. It is very common to review an appraisal and see rental comps being used where rents haven’t been raised in years; this is likely because it’s a stable tenant, the landlord isn’t in need of maximizing the yield and prefers to keep a stable tenant – a problem when trying to get the maximum rental amount on an appraisal and a cash flow loan to work.
Here at America Mortgages, we put a lot of emphasis on figuring out the client’s plan for the property. How do the rental comps in the area look versus what their realtor believes they can rent it for? Are they buying for long-term rentals or short-term rentals? All of these questions plan into the type of mortgage program they will utilize – and now more than ever, it’s the no–ratio loan that allows them to avoid the hassle of counting on rental comps in appraisals and still put minimal down into the mortgage as possible – they also understand the ability to refinance the loan when rates improve in the future – which they will.
Bottom line, America Mortgages’ clients are sophisticated and seasoned U.S. real estate investor. Our U.S. loan officer based in 12 different countries know and understand the market. Better than anyone else. We listen to all our clients requests, and if possible we find a solution which fits the market and “makes sense”. No Ratio Mortgage Loans is such a solution!
Contact us today at [email protected] to speak to our team of U.S. mortgage specialists today!
The “Bizarro World” references Bizarro Superman, a supervillain who lives in a world where everything is opposite. Here’s a great explanation from the TV show Seinfeld.
This reminds me of the world we live in now; mortgage rates double in 10 months, and yet, rental yields continue to increase double digits, year-on-year.
I have been telling our clients over the past few months that it is a great time to be owning a home in the U.S. for investment income. Most of us have lived through a few economic cycles, and for most of my career, 30-year fixed rates were between 6-7%, which is when I got my first mortgage in 2006, similar to where rates are now.
However, back then, you owned homes almost as leveraged equity, not like what it’s meant to be, more similar to a bond.
When academics say real estate is an inflation hedge, that is a peculiar concept since we have not really seen any inflation since the 70s, so not many of us know what that means in real life.
Till now….
This world is very different. Good or Bad, the fact is that there are significantly more people who need housing, millennials are unable to afford homes, and the rising rates have squeezed out the marginal buyer, and all of the above need to live somewhere.
My colleagues hear me say this ad nauseam,
“We will be in a world where 30-year fixed-rate mortgages are 7%, but rental yields are 10-15% very soon”.
I will try to explain why in this report.
A few days ago, on October 13th, Redfin reported that the Median U.S. Asking Rent rose 9% year-over-year in September to $2,002, the slowest growth since August 2021 and the first single-digit increase in a year. Sure the article makes it sound bearish.
Wait a minute? (sound of car screeching on the pavement).
Mortgage rates have doubled since the beginning of the year, and yet rents are still rising 9% a year. (As recent as May, rents rose +18% year on year!)
While visually, it does look like rents are falling, but that was from an outlier peak of 18% in May….my personal view is anything that has growth in this world is POSITIVE!
In some cities like Oklahoma City and Pittsburgh, rents rose by more than 20% year-on-year (not a typo). More below.
THE PROBLEM – HOUSING SHORTAGE
A housing shortage is not something you can really see. We hear it on the news or read it in the papers, and we think…how can that possibly be an issue.
Can’t homebuilders just build more homes?
The NABM/Wells Fargo Housing Market Index dropped three points to 46 in September, the lowest reading since May 2014!
Meanwhile, “Application to Build” declined to 1.52M units, the lowest since 2020.
Number of Building Permits (SAAR)
One could also conclude with higher borrowing costs, homebuilders are discouraged from starting new projects, which is not helping the undersupply situation.
Another aspect of this is the financial incentive.
Like many other issues in the U.S. economy, there has been a focus on shareholder returns, dividends, share buybacks, etc., and hence the underinvestment in housing development since the Financial Crisis in 2008.
In fact, fewer homes were built in the U.S. in the 10 years following the 2008 financial crisis than in any decade since the 1960s! Think about that for a moment!
In the normal world, high mortgage rates tend to bring down values, and of course, there are some parts of the U.S. that are seeing a relatively faster decline in home prices, like San Francisco. I would argue that is city-specific, as the local economy hollows out and the homeless situation and cost of living is untenable for most.
Across the nation, there are indeed fewer sales and more price cuts on listed homes.
However, in this “Everything-is-weird” economy, the doubling in mortgage rates hasn’t caused home prices to fall as much as you would think, all things equal.
In fact, I really don’t think we are going to see any substantial collapse in home prices in the coming years because many owners bought when mortgage rates were low and can simply stay put through this phase of the economic cycle.
Also, there was less speculation, and investors put more equity in the properties during a time of tight supply. This will keep many families locked out of homeownership and forced to rent.
Here are some mind-blowing data points: Around half of all mortgages outstanding are under 4% fixed for 30 years, and about 40% of all homes are owned free and clear. Think about that for a moment!
Last month, Philly Fed President Patrick Harker discussed his recent research report with most major news outlets, “Unpacking Shelter Inflation”, September 2022, that the housing shortage is a key inflation driver. Read: “…housing shortage…”
In another research report by the Fed, “Volatility in Home Sales and Prices: Supply or Demand?”, Anenberg and Ringo, June 2022, write:
“We find that a 30% increase in the monthly number of homes coming onto the market would have been necessary to keep up with the pandemic-era surge in demand. Since new construction typically accounts for about 15% of supply, our estimates imply that new construction would have had to increase by roughly 300% to absorb the pandemic-era surge in demand. This is a very large, unrealistic impulse to housing supply in the short-run, suggesting that policies aimed at reducing bottlenecks to new construction would have done little to cool the housing market during Covid-19.”
Read again: “…new construction would have had to increase by roughly 300% to absorb the pandemic-era surge in demand.”
Here is yet another report, this time by Freddie Mac. “Housing Supply: A Growing Deficit”, Kater, May 2022. I give a little more weight to Freddie Mac since they are actually buying the loans. Their thesis is that:
“As of the fourth quarter of 2020, the U.S. had a housing supply deficit of 3.8 million units. These 3.8 million units are needed not only to meet the demand from the growing number of households but also to maintain a target vacancy rate of 13%. Between 2018 and 2020, the housing stock deficit increased by approximately 52%.”
Read yet again! “…U.S. housing supply deficit of 3.8 million units.”
I always take stuff like this with a grain of salt because academics look at things from a 10,000 ft altitude and through the lens of an Excel spreadsheet, but the gist is that every Think Tank in the world seems to claim there is a shortage of housing supply and since they have a few more tools (and PhDs) at their disposal for this that I do, I will take their conclusions at face value.
Here is a neat graphic from The New York Times, The Housing Shortage Isn’t’ Just a Coastal Thing Anymore” Badger and Washington, July 2022.
The Housing Shortage has Spread to More Parts of the Country.
Source: Up for Growth analysis of U.S. Census Bureau and U.S. Department of Housing and Urban Development data. Shortage percentages reflect estimated housing units needed to meet demand as a share of existing housing units. Metros with a surplus have enough housing for existing residents.
Let’s look at recent city-specific rental prices:
Top 10 HIGHEST Year-on-year Change in Median Asking Rent (%) *
Top 10 LOWEST Year-on-year Change in Median Asking Rent (%) *
Top 10 HIGHEST Median Asking Rent *
Top 10 LOWEST Median Asking Rent *
* From Redfin News: “Rental Market Tracker: Rents are Growing Half as Fast as They Were 6 Months Ago,” by Lily Katz, October 13, 2022 Methodology – Redfin analyzed rent prices from Rent.com across the 50 largest U.S. metro areas. This analysis uses data from more than 20,000 apartment buildings across the country.It is important to note that the prices in this report reflect the current costs of new leases during each time period. In other words, the amount shown as the median rent is not the median of what all renters are paying but the median cost of apartments that were available for new renters during the report month. Currently, Redfin’s data from Rent.com includes only median rent at the metro level. Future reports will compare median rent prices at a more granular geographic level.
DEMAND IS DIFFERENT NOW
Single-person households accounted for 80% of the new household units that have formed since 2020. Think your one-man Crypto trader or Tik Tok marketer. Meanwhile, the number of Gen Z adults living alone almost doubled from January 2020 to early 2022 (sounds like a lot of COVID breakups), likely using the stimulus income to get started. The point here is that the way labour formation is defined now makes this current real estate cycle and how it interacts with the overall economy very different from past cycles.
Another quirk of the world we live in is Video Conferencing. While we can imagine a world where we go back 5 days a week but in reality, my view is that how we work has changed forever and there are clear benefits for being able to Zoom. What this has done is artificially increased the living space needed (globally). That is to say, adding a corner or a room just for Zoom calls etc, driving up demand for overall living space.
SUMMARY
In summary, the makeup of the labour market, as well as the supply demand imbalances in real estate, are very supportive of higher rental prices and rental yields over the long term.
As a non-resident buyer of U.S. real estate hoping to earn income, this is the perfect storm and has only happened BECAUSE rates are rising.
We may see rates come down in the future where borrowers can easily refinance into a lower rate, but what if prices do not come down or there is a sudden price surge next year? These are all crystal ball-type guesses but what I want to leave with you in this report is that the lack of supply is a major long-term driver of higher rental yields, which is positive for any U.S. real estate investor.
U.S. real estate is considered a safe haven for many – low entry price point, no stamp duties, ease of gentrification, available tax deductions, USD income, ease of travel, quality of schooling, and the list goes on.
If you have any questions about this report or about anything U.S. real estate or mortgage related, please feel free to reach out to me directly at: +65 9773 0273 or email me at [email protected].
A bridge loan is a type of asset-based, short-term loan, typically taken out for a few months to a couple of years pending the arrangement of longer-term financing or an exit, such as the sale. It is used to ‘bridge’ the gap during times when financing is critical but not readily available.
Bridge loans let homebuyers take out a mortgage against their current home to make the down payment on their new home. A bridge loan may also be a suitable choice for you if you want to purchase a new home before your current house has sold. This financing structure may also be beneficial to businesses that need to cover operating costs while waiting for long-term funding.
Introducing AM Bridge!
AM Bridge: A liquidity tool once reserved for the wealthy is now available for everyone!
Real Estate investors are often asset-rich but cash poor. On paper, their net worth may be significant, but their wealth can be tied up in real estate or other businesses. Accessing such funds might mean sacrificing a stake in their business or surrendering some influence over its future – neither of which may be appealing.
It is not always the case that a real estate investor has a few hundred thousand dollars just sitting in the bank readily available to fund a property immediately. Even if they do, they may not wish to tie all their cash upon one property. In today’s market, the property that investors want could be in high demand and needs to be acted on quickly; these could be higher-yielding investments that need immediate funding. Having access to large sums of cash quickly and easily is what HNW investors have had at their disposal for decades. America Mortgages has now made this powerful liquidity tool available to everyone.
– Filling the contingency sale of an old property before you can purchase the new property. You can take a Bridge Loan and use your old house as collateral for the loan. The proceeds can then be used to pay a down payment for the new house and cover the costs of the loan. In most cases, the lender will offer a bridge loan worth approximately 80% of both houses’ combined value.
– To purchase based on the asset value of the new build so the borrower can meet the final payment before delivery.
– For the initial purchase until entitlement or for refinancing after a cash purchase until entitlement.
– To purchase greenfield land to begin commercial development. Once certain stages of development have been completed, it’s easier to obtain traditional bank financing.
– Cash-out Bridge Loan for short-term personal or business use.
The Market
The pandemic has created a boom in the bridge loan market in several ways.
Firstly, it has created an economic environment filled with uncertainties, and as a result, more businesses need capital as soon as possible and can’t afford to wait for a traditional loan. They will thus turn to bridge loans.
Secondly, cash is king these days. With the current value of the U.S. dollar, it may be time to look at accessing liquidity quickly and easily. Normally regardless of your current financial situation, a bridge loan gives you quick access to up to 70% of your property value with simple, easy-to-understand terms.
Thirdly, there has been an accelerated trend of people migrating to Sunbelt cities due to greater job opportunities. This has driven up rents in these cities – the Phoenix area had the biggest rent increase in July, up 27% from a year ago. Due to the profitability of the rental trade, more developers and businesses are looking to acquire multifamily rental units. Short-term commercial bridge loans will provide them with the needed flexibility to take on such assets while they look for permanent financing options. This will help businesses get their assets to perform at maximum potential.
The Problem
When an American Mortgage bridge loan specialist gets a request for short-term financing, they ask three things;
Where is the asset?
What is the value and the outstanding debt?
What situation are you trying to solve?
Number 3 is the most crucial and often the hardest to rationalise. Even the wealthiest people have used short-term bridge financing to access liquidity even when “conventional” options are still possible. This is mainly due to the time and effort required to obtain long-term financing. Cash flow, credit issues, or asset use may prohibit a “conventional” bank loan. When time is a factor in a transaction, it is important to see the opportunity cost of not closing quickly or obtaining a simplified equity release.
Our Solution
Typically, the timeline for traditional bank loan processing from origination to closing is longer than most borrowers prefer for a time-sensitive funding solution or if the project lacks sufficient stable cash flow. The short-term nature of bridge loans generally allows alternative lenders to provide an approval decision and funding with greater speed than a more traditional lender. At America Mortgages, we’ve funded loans in as little as a couple of days since the initial contact.
To allow for such a speedy funding process, the sponsor’s expected property value and experience in executing the business plan are the determining factors in the decision-making process. For this reason, the loans are commonly non-recourse, which is another benefit to the borrower.
Bridge loans are often the preferred funding option for uses such as:
– Highly structured transactions
– Discounted note payoffs
– Lease-up stabilisation
– Redevelopment of existing properties
– Repositioning of a tired or underperforming asset
– Property acquisitions with a short closing timeline (or challenges on the property or sponsor)
– Recapitalisations/Debt Restructuring or Partner Buyouts
– Other uses on a case-by-case basis depending on borrowers’ specific funding needs, where traditional funding sources like banks or insurance companies will have a hard time approving such loan requests.
– Lending to foreign nationals with a “same-as-cash” basis
Short-Term vs. Long-Term
Unlike short-term financing, longer-term financing is susceptible to the regulatory hurdles associated with securing long-term fixed-rate mortgages. This is why bridge loans are often provided by unregulated lenders, family offices, or in some cases, HNW investors. In addition to the regulatory scrutiny, banks or insurance companies require, the sponsor’s credit history and financial strength also take a front seat in the credit decision for long-term loans. Keep in mind America Mortgages will never work with “lend-to-own” investors and lenders. Our goal is to find you a solution that works with your situation with a long-term solution and exit from the bridge loan.
While bridge loans are the preferred option for many specific financing needs, several downsides come with short-term financing that is meant to fund projects. When assets need work, lenders will consider these higher risks and, therefore, charge higher interest rates.
Additionally, bridge lenders generally do not exceed 70%-85% of the property cost basis to limit their financial exposure. However, this leverage is higher than traditional lenders would advance for the same project. This is because bridge lenders rely on the sponsor to fix the issues, which made the property ineligible for long-term financing in the first place. This enables the asset to become stabilised and ready for exit through a sale or by refinancing the property through traditional channels.
As a company America Mortgages‘ only focus is to provide U.S. mortgage financing for foreign nationals and U.S. expats. 100% of our clients are working and living outside the U.S. For more information on AM Bridge, please connect with us via email at [email protected].
Did you know? Non-U.S. resident investors purchased $59 billion worth of home purchases in the past year, a 9% leap from 2021, according to a report from the National Association of Realtors.
We asked 387 of our U.K.-based readers their top 5 questions regarding purchasing an investment property in the U.S.
Below, we answer those questions.
1. Can U.K. citizens buy property in the United States?
Yes, U.K. citizens can purchase property in the United States. It’s very straightforward. U.K. citizens can qualify for a mortgage in the U.S. with America Mortgage’s F.N. Investor + loan program. Borrowers can get pre-approved for a loan within 24 hours of application! What makes the U.S. unique from many other countries, the U.S. does not have any laws which prohibit or limit the ownership of U.S. real estate.
2. What documents are required for British citizens to apply for a U.S. mortgage?
The loan document requirements are based on the loan program the client qualifies for. America Mortgages’ approval rate is 97%, so we can almost certainly find a solution for our clients. Below are a sample of two of our most popular loan programs for non-resident U.S. real estate investors;
America Mortgages Investor +
Income letter by either the borrower’s employer or if self-employed, accountant (purchase, equity release, cash-out, or refinance).
Credit report from client’s home country (must be translated to English). U.K. credit report is perfect; however, if the client has credit in another country, that will also be okay.
Two months’ bank statements (foreign bank accounts allowed).
Passport.
America Mortgages Investor
Qualify ONLY on the rental income of the property (purchase, equity release, cash-out, or refinance).
Credit report from client’s home country (must be translated to English). U.K. credit report is perfect; however, if the client has credit in another country, that will also be okay.
Two months’ bank statements.
Passport.
3. Where do U.K. Citizens buy property in the U.S., and what do they use it for?
U.K. citizen property ownership in the U.S. is evenly split between suburban/resort areas (45%) and rural/urban areas (55%). Top states include:
U.K. citizens use their U.S. properties as investments, second homes, and Airbnb:
4. What is the average purchase price of houses in the U.S. purchased by U.K. citizens?
5. Do U.K. citizens pay the same mortgage rates as U.S. citizens?
Non-U.S. citizens may face slightly higher mortgage rates with a minimum down payment of 25%. What makes the U.S. unique from many countries is there are no age limitations on a mortgage. This means a borrower, 19 or 99, gets to take advantage of the same long 30-year tenure (fixed or adjustable).
Overall, with America Mortgages’ Foreign National loan programs, clients do not need U.S. credit to apply for a U.S. mortgage for foreign investors. We accept international credit reports from your home country or country of residence.
As a company, America Mortgages’ only focus is providing market rate mortgage financing for foreign nationals and U.S. Expats. 100% of our clients are living and earning their living outside of the U.S. We have loan officers in 12 different countries speaking your language, in your time zone. If you’d like to learn more about our loan programs, please email us at [email protected].
The worsening energy crisis in Europe has taken the front page of most media channels this week as the Nord Stream 2 pipeline, a 1,200 km natural gas pipeline from Russia to Germany, remains close, which is driving the Euro to a 20-year low vs. USD. The BBC reports that the annual energy bill for a typical UK household is £1,971. From 1 October, however, that’s due to rise 80% – to £3,549!!! Can you imagine paying USD4,000 a month for electricity?! The new incoming PM, Ms. Truss, will certainly be making this a top priority. We really hope for a mild winter in Europe for everyone’s interest.
Meanwhile, the Yen is now close to a mind-boggling ¥145 vs. USD, a 24-year low! Oil at $82 is a very critical level and, technically speaking, could break lower, which could give some breathing room to the economy. Seeing Oil go from $120 a barrel in May 2022 to $85 now shows how volatile the world is and also how quickly demand can fall for the most popular commodities.
In the US, Nonfarm payrolls were +315,000 in August (seasonally slow) vs. +526,000 in September, slightly lower than expected but a big month-on-month decline. Meanwhile, unemployment is at +3.7%, slightly higher than expected. The tight labour market while companies are announcing hiring freezes is peculiar. Could this be a recession where employment is less affected? ISM Manufacturing for August was 52.8, unchanged from July – not the decline I was hoping for to give us a little breathing room.
US Rates
30-year fixed 6.12%
15-year fixed 5.32%
30-year jumbo 5.10%
5/1 ARM 5.95%
* Reference only. These rates are Conforming rates, not applicable to Foreign Nationals.
Ex-ante
I’m really keeping an eye on oil prices…I have a sinking feeling that Oil is such a consensus overweight for most hedge funds (and institutions) that technical breakthrough support (say $80) will see a further decline in oil prices which is good news for everyone! European energy prices are now generally 15-20% of GDP, and someone has to pay for it – the public or private sector. If the public pays for it, it will have to run a fiscal deficit of 15-20% of GDP, so more debt on top of the already growing debt problem. The private sector gets tricky, especially for countries that have piled on loads of debt in a short period of time. One country that sticks out is Sweden, with over 150% of private debt to GDP. Nationally, Sweden’s debt service ratio is 27% (highest on record). It appears Sweden, France, and South Korea are the most interest-rate sensitive countries, relatively speaking, according to BIS data. Watch this space. The negative soundbites on the European banking sector are going to get louder and more frequent.
Buy now! Why now?
We are in a perverse cycle where rising rates are actually squeezing up rental yields. The marginal buyer cannot afford to own given rate rises, and the Millennials also cannot afford and must rent – AND, to add to that, there is a 3.8M housing shortage according to the Fed. If you read last week’s “Ex-post, Ex-ante,” places like New York are seeing double-digit percentage increases in rents, BUT 39% of residents are looking to move given the high cost of living. It won’t be long where we are in a world where rates are 7-8%, BUT rental yields could be 15-20% (some parts of Texas can net you low teens yield already).
Look at this chart below from a Bloomberg article (7 September) US household debt service ratio has fallen from around 13% at the time of the last housing crisis to 10% now, according to the Fed. The amount households are spending to service their mortgage debt has been cut almost in half, from 7.18% in 2007 to a recent 3.89%!
LOANS OF THE WEEK!
1. Indonesia family uses bridge loan to purchase $5.4M Retail/Office to maximize cash flow
Location: San Diego
Price: $5,400,000
Property: Storefront Retail + Office
Loan Amount: $3,500,000
Cap rate: 4.05% / 100% leased
Loan to value: 65%
Use: Investment
Rate: 8.5%
Loan: AM USA Bridge+
Term: 3-year interest only
– Client was offered a bank loan at 5.75% but given that it is cash-flow based he would not be able to cover the 1.25x cash flow coverage typically required and would be able to get around 40% LTV. Our knowledge was valuable. We knew that California is a tough market as it is with very low CAP rates but the added increase in interest rates is making it even harder to achieve higher loan amounts.
– Our solution: Use a bridge loan with higher leverage, interest-only payment to get into the property. Then position the tenants for renewal of their lease agreements and refinance when rates come back, allowing for more leverage to be supported by the cash flow. Good news is the client is using this strategy to purchase more yielding assets in the US. Loan managed by our Head of Sales, [email protected]
2. Canada tech entrepreneur buys $1.25M condo in Miami
Location: Miami
Price: $1,250,000
Property: Condo
Loan Amount: $875,000
Use: Investment
Loan to value: 70%
Loan: AM Foreign National+
Rate: 6.875%
Term: 30-year fixed
– Client wanted to start building rental portfolio in the US to earn income and to begin developing a credit footprint for future family and business opportunities. Given the nature of his business, he was not able to find bank financing in Canada and we were able to find a mortgage which used his Canada credit and income to qualify. Funded in 43 days with the help of our Canada-based loan officer, [email protected]
3. UK family buys $850K Boston condo in son’s name to develop credit
Location: Boston
Price: $850,000
Property: Condo
Loan Amount: $595,000
Use: Investment
Loan to value: 70%
Loan: AM Foreign National+
Rate: 6.875%
Term: 30-year fixed
– Client bought condo in son’s name to rent out while his son attends boarding school on the East Coast. The intention is for him to stay in the condo upon graduation from university in 4-5 years or continue to rent out to bolster his income while starting out on his career, meanwhile developing US credit for himself. Our UK-based loan officer provided a hassle-free experience throughout their mortgage journey, [email protected]
Biden cancels $10,000 in student debt – timing before the mid-term elections are interesting, but no one can deny that it is a big problem that is stifling growth in many ways. The main event was Federal Reserve chairman Powell’s speech at Jackson Hole, which was a reminder that inflation is being treated more seriously than we are expecting. Risk assets have been correcting ever since – yet bonds haven’t moved with the same intent indicating smart money had priced in the Fed’s response. While 10Y treasuries do not dictate mortgage rates, they 2 are correlated, and we expect some upward pressure on rates.
Ex-ante
Over the next week, we will be paying attention to the Case-Schiller index as a gauge year-on-year home prices, and the big one is August ISM manufacturing index, which consensus has at 51.8 (under 50 is a contraction). If this is lower than consensus, it may portend to be something more recessionary. As we highlighted in last week’s “Ex-ante, Ex-post,” there is historically a big contraction in manufacturing output when rates rise to a certain extent.
U.S. HOME PRICES
We reiterate the underlying fundamentals of housing are very supportive, with an abundant amount of equity and well-known shortage.
In an article written by the Fed, on 7 May 2021, “Housing Supply: A Growing Deficit”, The claim in 2018, the housing shortage was 2.5 million units, and now, more recently, in 2020, the U.S. has a housing shortage of 3.8 million units.
That is to say, 3.8 million units are needed to not only meet the demand from the growing number of households but also to maintain a target vacancy rate of 13%. Between 2018 and 2020, the housing stock deficit increased by approximately 52%
Elsewhere, In Bloomberg’s article published, 5 August 2022, “Almost Half of Mortgaged Homes in U.S. Now Considered Equity-Rich .”This would be the 9th straight quarterly rise, according to the article, fuelled by strong house valuations during the pandemic area. The article definition of Equity-Rich as owners having over 50% in home equity. Some of the highest equity-rich states are Florida, California, Washington, Utah, Idaho (surprising), and Vermont.
LOANS OF THE WEEK!
Singapore citizen purchases new development in Manhattan, New York
Location: New York City
Price: $1,000,000
Property: Condominium
Loan Amount: $600,000
Use: Investment
Loan-to-Value: 60%
Loan: AM Foreign National+
Rate: 6.875%
Term: 30-year fixed
Singapore client attended a presentation by an international realtor on a New York condo launch. America Mortgages was attending the event and helped the client discuss the financing options available.
Philippines businessman purchases home in Florida
Location: Fort Lauderdale
Price: $650,000
Property: Single Family Home
Loan Amount: $455,000
Use: Investment
Loan-to-Value: 70%
Loan: AM Foreign National +
Rate: 6.875%
Term: 30-year fixed
Referred by his local private bank, the client wanted to own a retirement home for the future (he’s only 58) but liked how rental rates have been rising in the area and also wanted more USD income.
Swedish National purchases home in Texas
Location: Austin
Price: $9,500,000
Property: Single Family Home
Loan Amount: $5,225,000
Use: Investment
Loan-to-Value: 55%
Loan: AM HNW+ (Super Jumbo)
Rate: 7.25%
Term: 5-year fixed, 30-year amortized
Swedish client saw our ad on LinkedIn and reached out to discuss the financing options for a Texas property. He was surprised at how easy it was to qualify and close for direct U.S. lending option.
Interested in releasing equity? America Mortgages has a 97% approval rate for both U.S. Citizens & Foreign Nationals. As a company our only focus is providing market rate U.S. mortgage financing for foreign nationals and U.S. expats.
Welcome to our newly revamped weekly product, where we do a quick summary of salient news over the past week and what to expect the following week and beyond. It took a while to think of a catchy name for our weekly and we hope you like it. We also plan to include our house view of the major macro events and, of course, how it all relates to the global real estate markets, in particular the US.
Contents:
Ex-post; Ex-ante
Will rates decline? Yes, starting in March!
Why US home prices will not collapse
Buyer’s Guide to California
Loans of the week!
Ex-post
Last week saw major headlines with UK printing a 10% inflation number and Europe continuing to see hefty price increases in energy costs, with Germany at €700 ($696) a megawatt-hour, up from under €50 in January.
In the US, mortgage applications dipped slightly for the week ending August 12, 2022, down 2.3% week on week. Things are generally slower in all areas of the economy in August, and this is no different.
30-year fixed rate 5.45% mortgages are down 50 bps from June 2020 highs of 5.98%
* This reference rate is for conforming Fannie Mae loans, not applicable for overseas borrowers.
Ex-ante
This week, all eyes will be on Jackson Hole, where Fed chair Jerome Powell will speak on the economic outlook at 10 am Washington time. We cannot see Powell becoming incrementally dovish at this stage, while there could be an outside chance of being less hawkish. As a firm, our house view is that given the fact that the “reputation and credibility as an institution” is under pressure, the Fed will risk over-tightening in this economic cycle – right or wrong. To us, tightening into a recession is extremely heavy-handed, but Powell certainly does not want to be remembered as Arthur Burns 2.0.
The Trillion-dollar question is IF rates will be cut, and if so, how much?
If you look at the Eurodollar implied futures curve, you will see that the market is expecting rates to peak in March 2023 at 3.93% and then start to decline to 3.51% by December 2023, and drop to 3.03% a year later. That is to say; the market is expecting 90 bps of decline in Fed Funds by December 2024! The charts also imply that rates are expected to stay under 3% thereafter.
3-month Eurodollar Futures Yield Curve
Credits: Barchart.com, GMG Macro Research
ISM Manufacturing Index – US 30-Year Mortgage, YoY%, 18-Month Lead Inverse”
One area of potential concern is US industrial production, which is at risk of significant contraction (below 50 on ISM Manufacturing Index is a contraction). If so, this could trigger deeper recession concerns. The next the Institute of Supply Management (ISM) report will be out September 1st.
If you look at this chart, it appears that the ISM Manufacturing Index (black line) lags the inverse of the US average 30-year mortgage rates (red line) by about 18 months. If the US manufacturing economy pans out in this manner, the Fed may be forced to make deeper cuts and we could see a bigger decline in rates than the market is pricing in, giving another opportunity for US home buyers who are waiting for lower rates!
Credits: TradingView, GMG Macro Research
Home Prices
There is no impending collapse. We see strength in housing prices.
As we read in the media that home prices are softening, housing starts declining, home prices are falling, and it paints a doom and gloom picture, but we cannot see a collapse in housing prices and a repeat of 2008.
Did you know that 40% of all homes in the US are held free and clear without a mortgage?
The average outstanding mortgage is 33% of home values. There is simply too much equity in the market for a collapse. Since 2008 underwriting standards have been significantly more stringent with more regulatory oversight. More importantly, most of the outstanding mortgages were printed when rates were below 4%!
Sure, in some cities, there will be softening as residents gentrify out to lower cost of living areas. It’s no surprise that San Francisco, Los Angeles, and New York City are at the tops of those cities where there are significant outflows of residents.
According to a Redfin article on July 18, 2022, here are the:
Top outflow cities in 2Q2022:
San Francisco
48,718
Top destination: Sacramento
Los Angeles
40,632
Top destination: San Diego
New York City
48,731
Top destination: Philadelphia
Top inflow cities in 2Q2022:
Miami
12,614
Top origin city: New York City
Tampa
7,939
Top origin city: Orlando
Phoenix
11,464
Top origin city: Los Angeles
Buyer’s Guide to California
Over the past 2 weeks, we have published a Deep Dive into what drives overseas buyers to California. In Part 1 – Education.We look at the top 50 public and private high schools in the state, average SAT/ACT scores, Median Income and Average Home prices and conclude the cities with the top schools tend to have the strongest property price appreciation and rental reversions.
In last week’s Part 2 – Demographics.We look at the Asian population in each of these schools and conclude the schools with the highest Asian population is another driver of home prices where the top schools are located.
This week, in Part 3 – Taxes and Benefits. We will conclude the report with a tax guide for overseas investors, how rental income is taxed and various deductions that are allowed.
Finally, to wrap-up our Buyer’s Guide to California, we will be hosting a webinar with Susan Kim, our Private Client US Concierge Partner and top real estate experts in San Francisco, Palo Alto, Los Angeles, and Orange County to give you an on-the-ground discussion on the respective cities, where the value is now and in the future. Stay tuned!
Loans of the week!
1. Switzerland Family Office purchases luxury condo in New York
Client wanted options outside of their private bank which did not require pledging assets.
Type: Luxury Condo
Price: $20M
Loan Amount: $11M (55% LTV)
Use: Second home
Loan type: America Mortgage HNW+
Qualification: Using borrower’s liquid investment portfolio as a reference without encumbrances. (Example Fidelity account)
Term: 5-year fixed / 30-year amortized
Interest-only: Fixed for 5 years
Rate: 7.875%
2. UK technology entrepreneur purchases home in Atherton (near Palo Alto)
UK-national client attended Stanford and plans to move their children there in 3 years to attend high school. His goal was to rent out the home to tech executives or AirBNB in the interim.
Type: Single-family home
Price: $10.9M
Loan Amount: $6M (55% LTV)
Use: Investment
Loan type: America Mortgage HNW+
Qualification: Using borrower’s liquid investment portfolio as a reference without encumbrances. (Example Fidelity account)
Term: 5-year fixed / 30-year amortized
Interest-only: Fixed for 5 years
Rate: 7.25%
3. Singaporean family purchases home in San Antonio for rental income
Father attended the University of Texas and, after reading our Deep Dive report, decided to own a home where he could take advantage of the strong USD and rental income currently in San Antonio and potentially will move there for retirement.
Type: Single-family home
Price: $350,000
Loan Amount: $245,000 (70% LTV)
Use: Investment
Loan type: America Mortgage Foreign National+
Qualification: Based on overseas income and credit
Term: 30-year fixed
Rate: 6.875%
Thank you and feel free to contact us if you have any questions.
In that report, we looked at the top 50 Public, and Private high schools, average ACT/SAT scores, Median Household Income, Average Home Prices, and Rental Yield.
We argued that when looking at where to make your U.S. property investment, the quality of education in the nearby city/area is a factor in the decision since there is always a notion of “can I live there one day” and “maybe my children can go to school there“. Popular cities in the U.S. will undoubtedly have good schools in the city or in the vicinity.
“Popularity as a living destination” in turn drives demand, home value appreciation, and strong growth in rental income.
This week we focus on Demographics.
An under-appreciated factor in determining where to own is what city has the most culturally similar population. It’s much easier when you have neighbors that speak your language and share similar cultures and values.
We will answer these questions (and much more)!
Which high schools in California has the highest Asian population?
Which cities have the most Korean-born residents?
Which cities have the highest total Asian population and the respective top schools?
Does the highest Asian population determine how home prices will behave?
Which California cities have the highest: Hong Kong, China, Taiwan, India, South Korea, and Philippines-BORN residents?
Demographics matter!
In this study, we solely focus on the Asian population in schools. Asians have been the biggest group of immigrants over the last 60++ years, spurred mainly by the Immigration Act of 1965 but also the Taiwan Relations Act of 1979, the Luce-Celler Act of 1946 as well other obvious political issues of the time.
In addition to the above reasons, many immigrants just wanted a better life for their families, they studied hard, and slowly communities grew around the top education destinations.
Here is the Asian population (>40%) for the top 50 Public and Private Schools in California.
You can also see that these cities have the highest Home Price to Median Income ratios, highlighting the center of attraction for Asians moving to the U.S.
Note a common rule for affordability is for a home price to be UNDER 3x your income!
Public High Schools
Private High Schools
Takeaway – You can see cities where the top schools are located have very high Home Price to Income Ratios which highlights the property value growth driven by families moving to these cities, in particular Asians.
The next study is very interesting!
Our team looks at which California cities have the highest overseas-born residents, specifically from: China, Hong Kong, Taiwan, South Korea, Philippines, Vietnam, and India.
You guessed it, many are in the cities where the top schools are
We only used cities with over 20,000 population.
*Refer to full chart below
Here is same chart in Alphabetical Order
Illustrating popular cities ranked by multiple demographics
As you may observe in this report, the cities with the highest Asian immigrant population tend to be where the most demand is, especially when compared to household income, and it’s no surprise it’s also where the top high schools are.
While this study is not meant to be a rigorous analysis by any means, it is close to my heart since I moved from Singapore to San Francisco when I was 16. My parents had the same thought process…strong Hong Kong population and good schools. I ended up finishing high school in San Francisco and attended UCLA.
Stay tuned for the final part of our Buyer’s Guide to California, where we take a quick look at the general carrying costs for a rental property, including taxes, deductions and other administrative costs.
Finally, we will be hosting a webinar with our California Partner for a real “on-the-ground” discussion along with a panel of real estate experts for the Bay Area, Palo Alto, Los Angeles, and Orange County. We are still finalising the exact details, but this will be in September.
Have a good weekend! If you want a copy of the spreadsheet with the data from our research, please contact us. We are happy to share our findings.
America Mortgages Inc. is a mortgage broker focusing only on U.S. Expats and Foreign Nationals living overseas. We offer over 150 U.S. bank and lender programs direct to our international clients. America Mortgages is wholly-owned by Global Mortgage Group Pte. Ltd. an international mortgage specialist based in Singapore.
