Buying High And Selling Low, Rinse And Repeat

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When interest rates were pushed to record lows from 2000 to 2022, credit-enabled buyers drove real estate valuations to record highs all over the world. Capital flooded into the space, and the finance sector rolled out ‘hot’ new products to ‘help’ retail investors pile in.

Few stopped to consider that most people already held the bulk of their net worth in real estate via their home(s), so adding even more exposure was undiversified and high-risk. Worse, borrowing against homes to “invest” (Smith Maneuver-style) was all the rage. Time and again, buying high and then selling low is a predictable nightmare on Main Street.

A new report from HUD shows a massive spike in mortgage delinquencies among FHA first-time homebuyers. These mortgage delinquencies are likely to lead to more foreclosures at the end of 2024. Here is a direct video link.

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Delinquencies are also mounting in commercial real estate. Investment funds in the space have been freezing redemption requests to try and avoid selling properties at a loss. But the more they freeze redemptions, the more people want out, and so the panic to cash out builds. See, A $10 billion real estate fund is bleeding cash and running out of options:

Sreit was one of the most prominent real-estate funds launched between 2017 and 2022, second in size only to Breit. These funds, known as nontraded real-estate investment trusts, invest in commercial property similar to publicly traded REITs. In all, these vehicles raised about $95 billion, mostly from individual investors, according to Stanger.

The funds also were very popular when interest rates were low because they paid dividends in the 5% range. Sold through financial advisers, they also gave small investors the opportunity to participate in what was then a hot commercial-property market.

But investors started to bolt as interest rates jumped and commercial real-estate values fell. In late 2022, Sreit and others began limiting redemptions to as much as 2% of their net asset values a month and up to 5% a quarter.

New fundraising also has dropped sharply as some analysts have criticized the structure of the funds and financial advisers have raised warnings. Sreit’s new fundraising has dwindled to about $15 million a month, down from more than $600 million a month in the first half of 2022.

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