On March 13 Twenty Twenty Analytics hosted a free webinar “Double Bubble” Understanding the Impact of a Correction in the Real Estate Market. Click here to download the webcast. Here are the cliffnotes from that presentation in regards to the Real Estate Market:
- The United States real estate market has recovered to approximately 10% below historic highs
- Interest rates are currently at historic lows and appear to be destined to go up
- Increases in interest rates will decrease purchasing power pressuring home values downward
- Increases in interest rates will increase payments on current variable rate payers, pressuring defaults
- When markets are performing exceptionally well, as they have been, it is more important to conduct scenario analyses and stress testing to understand the impact of a market shift, not less important
Twenty Twenty Analytics’ loan portfolio analyses include a tool to set customized stress testing parameters for your entire portfolio, applied at a loan level. Below is a video walkthrough of how we do that (best viewed in full screen mode using highest quality settings, which can be selected at the bottom right of the video screen):
Now, it would be a stretch to say we were the cause for this, but since our March 13th Webinar, there has been quite a bit of talk about a potential second crash, including:
- CU Realty Services – CU Housing Market Insights: Recovering Prices or Red Flags for a Coming Crisis
- Huffington Post – Terrible Feature of the Housing Bubble Makes a Comeback
- Wall Street Journal – Adjustable-Rate Mortgages Make a Comeback
Different portfolio compositions and loan types react differently to changes in real estate values. If a first lien is 1% underwater, the second position on that property is 100% underwater. Identifying those superior positions on junior liens are also important and can be challenging.
The purpose of our webinar was not so much to preach doomsday or convince lenders to stop lending. It was to illustrate that understanding your portfolio’s risk is at least as important, if not more important during times of improvement than during or immediately after a recession.
Failing to proactively consider and understand how a correction in the market would affect their net worth was the worst and last mistake many leaders of financial institutions ever made. Avoiding making that same mistake is paramount to avoiding concentrations of risk and ensuring your survival through the good times, but also the bad.