Recent Federal Rate Cuts
After interest rates rose a total of 9 times since December of 2015, the Federal Reserve made the decision to cut rates 25 basis points again in September. This represents a downward trend as the last Federal rate was cut a quarter of one percent in July, just two months ago.
Climbing interest rates are a positive for the banking industry and those with money invested tied to interest-bearing accounts; however, as the rates fall anxious investors can look to the distressed real estate market for some active investment opportunities.
While back-to-back quarter pointcuts in themselves do not indicate a true economic recession, the signs are currently in place for an economic slowdown and a possible recession if the trends continue. Many traditional real estate investors still have the bad taste of 2008 in their portfolios when the housing market and economy went crashing downward. Many homes went into foreclosure, workers were laid off and wages were reduced. Few sectors were left standing where savvy investors could still actively see profits steadily increase, one such market was the distressed note industry when 2008 was one of the most profitable years for most note investors.
Housing Industry Trends
If the economy slows and wages become stagnant or even decrease, delinquency rates on mortgage loans will inevitably increase. It is likely that financial institutions, ranging anywhere from smaller credit unions to large Top-Tier banks, will look to increase the quality of their holding by getting rid of some of these underperforming notes. With the writing on the wall of another Federal rate cut, some estimate that over the course of the next 12-18 months, many financial institutions will look to sell off these lesser performing notes.
Recession Investment Opportunities in Distressed Real Estate Industry
In the downturn of the housing market in 2007-2008, the investors that took advantage of distressed real estate investment opportunities often did well, while traditional real estate investing took the biggest hit. By holding onto distressed notes, investors can typically expect neither time nor financial investment in the upkeep of physical property by taking a less hands-on involvement. If a recession occurs, supply is expected to increase. Following the recession, during an economic expansion the value of notes (even lower-value notes) are expected to increase in value.
While every investment opportunity incurs some level of risk, the acquisition/management/sale of underperforming loans is generally a less-risky opportunity, especially in the event of a recession. By purchasing a real estate note and choosing to work with the homeowner, you can even assist the borrower with staying in their home by renegotiating their terms, which will avoid displacing families and ultimately help those same families avoid foreclosure.
As we see fluctuations in the housing industry and the continued Federal rate cuts, there is a likelihood of subsequent increases in delinquent loans. Investors who focus on purchasing underperforming bank notes historically can strategize by “riding out” the wave of the changing economy and expand their investment portfolios. Continue to look for distressed inventory releasing from banks and credit unions to forecast a possible upcoming recession.