Housing – Red Deer Investments

Writer’s block this morning has me feeling like:

Onwards. Not too long ago I wrote about a potential fixed income investment in HELOCs to prime borrowers. As the Q1 deadline to fund comes up, I decided that we’re passing for now.

The loans are further leveraged with a debt facility to boost returns to investors. Currently, that line of credit is a warehouse line to be replaced with a longer term fixed rate facility. Given rates are moving around quickly and upwards for the most part, I think it’s prudent to wait for the long term facility to get in place and understand what the terms are. Especially since warehouse lines are typically short term and can have floating rate components.

Furthermore, on a more fundamental basis, whether warranted or not I’m not keen on adding more exposure to home values. While a combined LTV (incl. first mortgage) of about 70% seems reasonable, it equates to 100% LTV based on home values only 3 years ago:

70% of Current Medial Sale Price Equates to February 2019 Levels; Redfin

To that end, perhaps this investment may be more interesting at some point in the future, but doesn’t check the box on feeling good about the starting point for an investment today.

Housing

It’s clear that one of the best investments from the past decade has been real estate. Whether one’s own home or almost any type of real estate (perhaps excluding retail or mall retail specifically), since ~2012 it has been a straight line up.

This has only accelerated post-Covid as low rates combined with a shift of spend from services / experiences to “things.”

Here’s the dramatic price rise in housing just from 2020 to today:

But things are changing, namely interest rates. The mortgage payment to service the debt on these higher home values is rocketing higher:

And average mortgage payments will likely will continue to rise as the Fed has made it clear it is moving aggressively on rates. Citi is out this morning with a bold call on rates:

We now expect the Fed to raise rates 275bp (up from 200bp) in 2022 with 50bp hikes in May, June, July and September and 25bp hikes in October and December, reaching a policy range of 2.75-3.0% at the end of 2022.
Citigroup

What does that mean overall? I’m no prognosticator but I am a fan of getting out of the way of something that has gone up a lot over a short period of time, relatively speaking. We haven’t made any new real estate investments in a few years and are letting our existing real estate investments run off.