[Issuer] UrbanGate Capital July 2023 Update

Now that we are halfway through 2023, I wanted to reflect on the current housing market in Nashville Tennessee and mention how we are preparing for the second half of the year.

This update focuses on three main topics:

  • Supply & Demand for Housing in Nashville
  • Single Family Mortgage Rates and Delinquencies
  • Our Game Plan for the Remainder of 2023

Supply & Demand:

Due to most people using a loan to purchase a home, the housing market is heavily influenced by interest rates and capital markets. Therefore, with the sharp increase in interest rates it is only natural that the demand for housing decreases as debt becomes more expensive. The question is how much is the demand decreasing in ratio to its supply? This is a difficult question to answer accurately but let’s look at the charts below to use our best estimates.

Here we can see that Nashville, which is where we do nearly all of our lending saw a large increase in active inventory over the last year, however it’s month to month growth in inventory is quite slow. This chart was sourced from calculatedrisk.substack.com.

Obviously, no one can predict the future, but the trend is obvious here. Supply is increasing and demand is slowing, which means that prices will most likely trend down.

Mortgage Rates and Delinquencies:

One of the great things about debt is that we can get an understanding of the health of a market by tracking the default rates.

In an article written by Bill McBride at Calculated Risk he states “Freddie Mac reported that the Single-Family serious delinquency rate in May was 0.58%, down from 0.61% April.” So, delinquencies on Freddie Mac’s single family mortgage loans are actually down which is a sign of health for the single family market.

While this is good news, The Federal Reserve has been very clear that they expect to continue increasing interest rates and I am a BIG believer in “Don’t Fight the Fed”. In today’s environment, we don’t know what the Fed is going to do however it is in our best interest to assume that rates will go up from here. In addition to that, rates on mortgages have slowly crept up the last few months. See the chart below. This chart was sourced from calculatedrisk.substack.com.

Conclusion: Our Gameplan for the rest of the year:

Nashville is still one of the top job markets in the country with a 5.50% job growth from 2022 to 2023 and has shown impressive strength**.** However, I think the main trend to pay attention to is the fact that higher interest rates are reducing the demand for housing while at the same time the supply of housing is increasing.

This will most likely cause the value of housing to decline for as long as this trend continues. Because of this we are being very diligent on our leverage positions and making sure we are only lending to great borrowers. I believe in environments like this it is better to be conservative in our approach rather than too optimistic.

Some good news though is that we are seeing the pace at which inventory is increasing slow due to people not being willing to sell their house with their current 3% rate. This will be a trend to watch because if the active inventory starts to decrease that will be a sign that valuations should start increasing. It’s all about supply and demand.

For now we are operating under the assumption that a slow increase in interest rates will lead to a slow decrease in housing values and that is the framework are using to underwrite our loans.

Thanks for reading!

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