New Silver had another record month, with total origination volume at $9mm in May. Looking at the macro economy, markets are still adjusting to the new reality with increased borrowing costs across the board, though wild swings in equity markets may have subsided. Further Fed increases are likely priced in. In US real estate, May housing inventory has seen its first increase since 2019, while total inventory is still very low, price appreciation continues, though a few local markets are reporting slower or even negative price growth. Our thesis for the medium turn is that real estate prices will cool, and inventory is going to increase, but markets will remain generally healthy, as long as unemployment does not become a problem. We are generally optimistic that the current trend will result in a “soft landing”, for the economy, and do not expect to see a real estate crisis reminiscent of 2007 timeframe. Lets dig in!
First, the May numbers from the Realtor report:
- The inventory of homes for sale has increased for the first time since June 2019.
- The national inventory of active listings increased by 8.0% over last year, while the total inventory of unsold homes, including pending listings, still declined by 3.9% due to a decline in pending inventory.
- The inventory of active listings was down 48.5% compared to May 2020 in the early days of the COVID-19 pandemic. In other words, there are still only half as many homes available.
- More new listings entered the market in May than any other month since June 2019.
- Newly listed homes were up 6.3% nationally compared to a year ago, and up 4.6% for large metros over the past year.
- Sellers still listed at rates 6.4% lower than typical 2017 to 2019 levels prior to the pandemic.
- Housing remains expensive and fast-paced with the median asking price at a new high while time on market is at a new low.
- The May national median listing price for active listings was $447,000, up 17.6% compared to last year and up 35.4% compared to May 2020.
- In large metros, median listing prices grew by 13.0% compared to last year, on average.
- Nationally, the typical home spent 31 days on the market in May, down 6 days from the same time last year and down 40 days from May 2020
Next, lets discuss the continued price appreciation in real estate. In our view, it is mostly a matter of low supply, but I believe there are at least two other factors driving this - institutional investors are buying up single family homes to rent them out, and the work-from-home trend has contributed to an increased demand for housing. Here is a paper from SF Fed economist John A. Mondragon and Professor Johannes Wieland talking about these trends (I only read the summary and not the entire paper), this is a key takeaway:
In this paper we show that the shift to remote work caused a large increase in housing demand. In turn, this increase in housing demand caused house prices and rents to increase sharply. Based on our cross-sectional estimates controlling for migration spillovers, we argue that remote work accounts for at least one half of the 24% increase in house prices from December 2019 to November 2021.
This is an interesting dynamic which we think about a lot. Traditionally, lenders in our space tended to regard cities and their suburbs as less-risky areas to lend in, because these areas tended to be close to business centers and jobs. Now, with WFH becoming a permanent part of the work culture, we think that smaller towns offering less expensive real estate may pose similar risk profile and might be good targets. And, this may partially explain the price appreciation.
Another interesting fact - lots of US cities home prices are still below their peak levels from pre-2007 crisis. With inflation and general price appreciation added in, this may mean we are not yet at the top of the cycle (personally, I think we are or very close to it)
The other trend we are watching closely is unemployment. Given that the current macro trends are driven by rate hikes and inflation-fighting, we feel that unemployment, should it arise as a significant issue, could cause a problem for real estate. However, employment remains very strong, as is evident by the recent report, and salary increases are running above 5%, helping folks keep up with inflation.
Another important note that some commodities, notably lumber, and to a lesser extent, metals, have decreased in price significantly over the past few months. Could this be the effect of the Fed increases? Time will tell, but it is a positive trend for now, we are watching this closely.
Overall, we are looking forward to a slowing in home price appreciation and more inventory, this should help our borrowers find great deals, negotiate better and add more value to the neighborhoods they work/live in. We continue to be positive on the future of the sector we operate in. Soon, we are going to be asking the community to allow the RWF team to allocate time and resources to work on structure and diligence of our upcoming DC increase request, will post that as a separate topic.
Loan Originations in Tinlake
based on finance date
New Loan USD Volume: $3.86mm
Average Originated Interest Rate: 9%
Average Tinlake Finance Fee: 6.33%
Average Loan Amount: DAI 241,000
Average Loan to Value: 71%
Average FICO score: 699
Average Term: 10.8 months
Loans Paid Back: 9
Current MakerDAO Debt Ceiling: $20mm with about $18.7mm used
90+ day late: 0
PS. Apologies if there are paywalls in some of the supporting articles I have posted, if anyone would like a full version, please respond with the request and I will see if I can download and attach it.