How Market Volatility Affects Real Estate Lending

It was summer 2008 when the bottom fell out on the real estate market in the lead up to the Great Recession. Both residential and commercial property owners found themselves underwater. Foreclosures skyrocketed, property values plummeted, and the general real estate market was set back 10 years.

Volatile markets, like what the U.S. experienced in 08-09, are enough to make real estate investors pull their hair out. Investors like steadily increasing property values. They like tenants in their rental properties and contractors building up their development projects. They do not like volatility.

Volatility causes a lot of problems. Among those problems is the effect it has on real estate lending. Whether you are the lender or borrower, volatility creates a condition of uncertainty. That is never good when you are talking about loan deals that could be worth millions of dollars.

Acting Quickly in a Volatile Market

A key thing to remember in a volatile real estate market is that prices move quickly. As such, real estate investors have to be able to adapt just as quickly. They have to be able to jump on a good deal as soon as it presents itself, otherwise they risk losing out or paying too much. Property developers face a similar scenario.

A developer might be looking at an attractive property that currently sits below market price. If he can jump on it right away, the property instantly becomes more valuable for development. So what does he do? He probably turns to a hard money lender capable of funding his loan in 24 to 36 hours.

These sorts of loans are available from private lenders like Salt Lake City, Utah’s Actium Partners. Private lenders that specialize in hard money and bridge loanstend to base their decisions primarily on collateral. As such, they can make approval decisions very quickly. Where it might take a bank weeks to come up with a decision, a private lender can do it in hours.

Volatility and Portfolio Value

Being able to act quickly is just one aspect of doing business in a volatile real estate market. There is also the question of how volatility affects portfolio value. For example, consider a company that owns a portfolio of commercial rental properties.

Falling real estate prices do not necessarily spell doom and gloom if that company is expecting to hold on to the majority of its properties for 10 to 20 years. After all, property markets are cyclical. Every fall is followed by a commensurate rise. Today’s low-value portfolio is tomorrow’s high-value gold mine.

On the other hand, imagine a company that makes its living flipping properties. Market volatility is a curse to that company. Why? Because they depend on buying low and selling high. The whole point of flipping is to spend as little as possible to acquire a property, invest in rehabbing it, and then sell it for a high enough price to cover your expenses and put money in your pocket.

Both kinds of businesses approach volatility differently in terms of the value of their properties. But the one thing they both have in common is that volatility affects their ability to borrow. Volatility does not discriminate based on the size or value of a borrower’s portfolio.

The sum total of all of this is that volatility is generally not a good thing for the real estate market. Not only is it bad for property values, it makes borrowing more difficult. Hard money lenders rely on real estate values to support their lending. So if the market is in flux, so are their businesses.