How will competition affect the sector?

Private lending is more competitive than ever, and that’s good news for real estate investors. Why? There are far more choices where one can obtain financing today compared to five years ago.

Lenders operating in this hypercompetitive marketplace must be on their toes and offer fast and innovative products—or risk losing market share to a nimbler competitor.

Private lenders are no longer only geographically-based hard money lenders, although that certainly remains a significant part of the private lending marketplace. Over the past five to six years, the private lending sector has expanded, adding a variety of national online peer-to-peer lending platforms, many with institutional backing.

New capital in the alternative private lending space has served to raise private lending’s profile over a period that has seen tremendous growth in fix-and-flip and buy-and-hold residential real estate investing. These resources have also increased interest from full-time investors as well as non-real-estate professionals looking to diversify their portfolios.

So, what’s in store for private lenders through the remainder of the year and into 2019?

Insight into the future of private lending can be drawn by looking at the state of the current housing market and where it is headed, along with a long view of the economy. Finally, it’s always important to gauge the health and the competitiveness of the private lending sector and the mortgage market as a whole.

Moderating Housing Market

Since the housing market bottomed out in 2012, home prices have risen sharply over a six-year period amid tight inventories. Now, some housing and mortgage experts believe the market may be in store for a cool down, or possibly a sharp price correction.

“The housing market today has too much highly leveraged demand from investors and buyers chasing available supply,” according to Lynn Fisher, Edward Pinto and Paul Kupiec, in an opinion piece in The Hill. “As a result, real home prices have increased 25 percent since the early 2012 low, a pattern mirroring the early years of the last price boom. So long as this price boom continues, the risk of a serious correction increases.” Fisher and Pinto are the directors of the Center on Housing Markets and Finance at the American Enterprise Institute. Paul Kupiec is a resident scholar there.

Zillow made headlines in mid-2018 when it released a report saying that almost half the economic experts it surveyed expect the next recession to begin sometime in 2020, with monetary or trade policy as the tipping point. The expectations for the timing of the next recession are in line with a prior survey of the same panel, published in August 2017, when experts said there was a 73 percent probability of a recession by the end of 2020.

Since then, a variety of subtle statistics indicate the housing market may be cooling. First is home price data. While still rising, prices are beginning to moderate. Certainly, some price moderation could be viewed as a positive for a healthy housing market where affordability issues have priced some would-be homebuyers and would-be investors out of the market.

Home prices in June were up 0.2 percent over May, according to the Federal Housing Finance Agency’s most recent House Price Index. For the second quarter, prices were up 1.1 percent over the previous quarter—the slowest pace in four years. They were up 6.5 percent from the year-ago period.

Next, let’s look at inventory and sales. Existing home sales subsided for the fourth straight month in July to their slowest pace in more than two years, according to the National Association of Realtors. At the same time, the supply of homes in the second quarter rose at three times the rate of last year, according to Trulia.

Large institutional real estate investors were credited with lifting housing off the floor in 2012 when they swooped in to buy up foreclosed homes at rock bottom prices and turn them into single-family rentals. Their actions reduced huge backlogs of inventory that were suppressing prices. We’ve seen these buy-to-hold institutional investors pull back from the market over the past three to four years as the availability of distressed housing at discounted prices declined.

Although institutional interest has leveled off, interest in single-family housing acquisitions among small, midsized and regional real estate investors remains high. ATTOM Data Solution’s most recent statistics bear this out: Home-flipping hit a six-year high during 2018’s first quarter.

Concerns about a cooling housing market may also weed out real estate hobbyists and thus lessen the competition for housing stock for experienced investors who are well-equipped to handle the correction.

In the latest data available at press time, the 48,457 homes flipped in the first quarter represented 6.9 percent of all home sales during the quarter, up from 5.9 percent in the previous quarter and unchanged from a year ago—matching the highest home flipping rate since the first quarter of 2012.

“iBuyers” Add Element of Competition

Several new venture-backed “iBuyers” have entered the fix-and-flip market and have grown rapidly. Companies such as Opendoor, Offerpad and, more recently, Bungalo, allow consumers to buy or sell homes in a digital transaction without a traditional realtor. These firms provide a new and different type of competition for private lenders and real estate investors.

In May, Phoenix-based Offerpad secured $150 million in funding, and it has raised more than $410 million in equity and debt in less than two years. Based on current monthly volume, OfferPad is projected to purchase and sell more than $1.5 billion of single-family homes over the next year, according to Forbes.

Opendoor, the first iBuyer to launch a platform in 2014, nabbed a $325 million “megaround” round of funding in June, according to Pymts.com. Opendoor is looking to spend $2.5 billion to purchase homes over the next year or so.

Bungalo, a newer entrant, is financed by Amherst Residential, one of the nation’s first large investors of single-family rentals back in 2009. Even Zillow, which built an online platform that caters to realtors and consumers, is testing a direct-buy digital program in a couple of markets.

What Private Lenders Can Expect

The good news for private lenders is that more real estate investors than ever are financing their flips. In addition, institutional investors are interested in placing capital into alternative origination platforms.

Homes flipped in Q1 2018 that were originally purchased with financing by the home flipper represented 35.7 percent of all homes flipped during the quarter, up from 35.3 percent in the previous quarter and up from 33.5 percent a year ago to the highest level since Q3 2008—a nine-and-a-half-year high.

The nation’s economy, however, could face some headwinds that could affect private lenders. Although the economy was firing on all cylinders in the second quarter, it is expected to slow due to the trade war, according to a Reuters poll of economists. In addition, the short-term boost from tax cuts is expected to wane by the fourth quarter.

Today’s regulatory environment is also changing. The growth in alternative lending came to the fore in part due to tight credit that resulted from a host of new regulations on traditional banks in the wake of the financial crisis. Now Congress has loosened some of those regulations. Does that mean that private lenders will soon face more competition from traditional banks that were hampered from offering the innovative lending products that private lenders have provided? Not necessarily, and actually not likely in the real estate investor-financed space, but it’s a developing storyline that will need to be watched.

No one has a crystal ball that will tell the private lending industry exactly what’s in store for the coming year, but housing, economic, mortgage and regulatory indicators will provide guidance on whether the path ahead will be rocky or smooth. At the same time, as competition increases within the private lending sector itself, each lender must constantly be vigilant that they are up-to-date on technology and offering the best service, products and prices. ∞