Banks and real estate go together - Review and Forecast, Section III

As a small to medium sized real estate investor you may have wanted to scream when you read the head-line of this article.

"How can banks and real estate go together," you might ask, "... when I can't find decent financing for my property."

The real issue is that the state of the banking industry and the real estate business move in the same direction.

Even if you look over the past 20 years, you'll see the connection. During the middle seventies we had high inflation in all parts of the economy including real estate. Consequently in the late seventies Paul Volker of the Federal Reserve restricted the money supply to combat this inflation and the prime rate soared to 20 percent. But banks were healthy and loans were available as long as properties could carry high rate debt service.

During the 1980's, regulation, coming on the heels of a real estate market which had enjoyed decent appreciation, created a huge amount of mortgage money. In fact during the peak of 1986-1987, the Federal Reserve reported a net inflow of capital for income producing property of approximately $108 billion. Those years were not too long ago for us to remember how rapidly real estate values rose, and the flurry of new construction which took place.

The Federal Reserve reported that during 1990-1991, we had a mortgage debt net outflow of $25 billion. In effect that is a decrease of $133 billion as compared to 1986-1987. How's that for explaining why property values have softened, and new construction was virtually non-existent during that same period.

During the past six months the availability of mortgage money has improved slightly. Mortgage financing for cash flow real estate has been reasonably priced in the 9 percent range for small to medium sized loan requests. Even a few construction projects are finally being funded.

The real challenge has been finding the lenders which are active, as most banks are still out of the market.

The Federal Deposit Insurance Corporation reported that the nation's commercial banks earned a record $7.6 billion during the first quarter of 1992 (New York Times, June 11, 1992). That certainly helps explain why mortgage availability has somewhat improved.

You may not want to deal with any traditional lending sources today because applying for a mortgage loan can be frustrating. But do not neglect relationships with brokers, lawyers, and appraisers, who are in daily touch with institutional lenders. Besides mortgage money, banks have troubled real estate they'd like to sell at a discount. Just picture this scenario. You purchase an apartment building for $800,000 with a new bank mortgage of $550,000 from a lender which originally had a $1 million mortgage in the property. I told you banks and real estate go together. Your job is to find the institutions which are either in the selling mode or the lending mode.

A word of caution from the F.D.I.C. chairman, William Taylor who says that, "a sudden change to a less favorable interest rate environment could produce problems that are not currently part of the landscape." (New York Times, June 11, 1992.) What that means to the small to medium sized real estate investor is that if rates go up sharply, bank earnings would suffer. If banks get hurt again, they won't lend. So if you are considering refinancing or an acquisition, obtain your financing now. Rates are reasonable, enough banks are healthy to lend, and the Federal Reserve is cooperating keeping the money supply adequate to make sensible real estate transactions.

It does not matter if you like or dislike the idea that banks and real estate go together. The fact is that examining the state of the banking industry provides clues on how to act in the real estate market.

COPYRIGHT 1992 Hagedorn Publication
COPYRIGHT 2004 Gale Group