So What's the Deal With These Subprime Lenders?

When I was sitting with my CPA on Monday she asked me, as she always does how the real estate market is, but the moment she mentioned the demise of the subprime lenders and its recent effect on depressing both the domestic and international equity markets, I knew it would be less a conversation about real estate and more of one explaining "headlines" in the news.

Subprime lenders, as many of you know, lend money in the subprime market. The subprime market are those individuals who have checkered or nonexistent credit histories and/or questionable income. Basically these are the borrowers that are likely to default more but ones you can charge a higher interest rate to, hopefully to offset their foreclosure rates.

In the recent past, mortgage companies and banks have done very well with these type of borrowers because in an appreciating real estate market, a foreclosure is a nearly no risk proposition since the property value is almost definitely going to be there. Move forward a few years to the present and with property values falling in some areas of the country and not increasing in others, these subprime loans no longer look like such a sure bet.

However, while I'm not saying that the fall of subprime lending is good news, chances are is that it is not the straw that will break the camels back. Most of those companies in serious trouble are almost all 100% subprime, whereas the banks who have conventional portfolios as well generally have tighter underwritting guidelines and only keep a small percentage of subprime loans, which while not negligible, will not substantially impact their balance sheets. Think of it as a natural market cycle cleaning out the junk. In the intermediate and long term we'll all be better off for it, though in the next cheap money cycle, many of us will have forgotten this lesson we've learned and some will have to learn it all over again.

Hot Rental Market

With interest rate and home price fears greater than they were a couple of years ago (whether justified or not is for another blog), many would be home buyers have remained or returned to being renters. While the residential rental market languished, not nearly keeping pace with the quickly appreciating home prices in our area, renters had the best of both worlds, nice homes to rent at relatively affordable prices. Newer investors and landlords had to bear the grunt of higher mortgage payments and possible negative cash flow.

Enter 2007 and a reinvigorated rental market. With fewer people buying, that invariably means more people renting thus increasing demand while supply is still low. Recently we posted a rental home in Foster City and within 24 hrs. we had six inquiries without doing any advertising whatsoever. Was it the property itself or the overwhelming demand? Probably a little bit of both. The 4br/2ba home had been remodeled just a year and a half ago and the clincher for most is that it's a single story ranch (I guess a lot of renters don't like stairs).

So what's the upshot? Better days ahead for landlords and perhaps bringing the economics of renting and buying back closer together.