Our Firm
Resi Wrap - Credit Is King
April 2021

Friends of ResiShares -

“Cash Is King,” according to Wikipedia, is a phrase originally attributed to Pehr Gyllenhammar, the CEO of Volvo during and after the 1987 stock market crash. Whether in ‘87, during the value-stock rally post 2003, or the dash for cash in 2008-’10, the king, tautologically, reaffirms its royal legitimacy after deflationary shocks.

In today’s stock market, one might instead say that “growth is king,” or even “the perception of the ability to grow in the future is king.” In the housing market, however, we would argue that the credit, or more specifically, creditworthiness, sits atop the Iron Throne.

Famously, a single family home is the only piece of collateral on which an individual consumer can get leverage and financing terms on par with corporate credits. What enables this are the GSEs and other federally-backed home lending institutions, who have come to completely dominate the market. Their dominance, combined with the secondary market’s interest in liquid, fungible exposures in their portfolios, means that the GSEs’ lending standards are effectively the market’s lending standards.

Given the backdrop of a national housing undersupply finally facing a wall of pent-up demand after a 10 year hiatus, that demand is thus rationed by the degree to which a prospective buyer’s financial profile matches the market’s prevailing credit box. Tough luck, then, if you fall outside of it.

Cash does still retain some of its monarchical qualities, however, as long as its paired with this access to credit. One aspect of rapidly growing markets of which new homebuyers are becoming aware is that their loans often fall through when appraisals can’t keep up with market pricing. (ResiShares lives in the SF Bay Area, Denver/Boulder, and Dallas, so the rest of America is finally feeling our pain).

There is one group of buyers that has both cash and creditworthiness to spare, and that was not a factor in the 2008 boom: institutional investors. Finsight tracks and publicly distributes data on the asset backed securitization (ABS) market. A quick scan of Finsight shows that a deal was priced yesterday, 4/8, by Pretium Partners. Clicking into the deal and about 2 minutes of Excel work shows a Weighted Average Coupon (the effective interest rate the issuer pays) of 2.39%. I then went onto Bankrate and looked up what a top-quality consumer credit would pay for a 5/1 ARM (ABS nerds: I’m sure it’s not an apples to apples comparison to the terms of an SFR ABS deal, but bear with me), and it showed a rate of 2.79%.

In other words, institutional buyers of single family homes are not just flush with cash, but they (we) are borrowing 10’s of bps cheaper than consumers against the same collateral. For better or worse (I think better, but I recognize that opinion is both self-serving and non-mainstream), it looks more like a rentership society every day.

Voters are King

Real estate is the most immobile of assets, and that means the invisible foot of the government plays a constant role. Here in the US, housing is a salient example of the extreme federalism (small F - the kind Jefferson would have liked, for all you Hamilton fans). That is, local government is king. This is what makes it so hard for well-meaning statewide initiatives, as in the article above, to penetrate the wall of NIMBYism blocking development. And if the states find that their remit ends at the city walls, good luck to the federal government if they think a $5 BN incentive program spread across the entire country is going to accomplish anything.

One thing that local governments control of great interest to homeowners is property tax rates. So if homes are increasingly owned by institutions who don’t vote in local elections, is there any danger that the homeowner voting block will lose political clout in certain cities? If renter-heavy cities like NY and San Francisco are any guide, we would see that manifest itself with regulations that touch tenants directly, such as rent control or lengthier eviction processes, rather than higher taxes or more supply growth.

The Rest of Resi

Have a great weekend,

Michael Greene

Co-Founder and CEO

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