Non-Financeable Buyers
By: Ron Orr Jr.
From 2012 until 2022, we maxed out peak financeable buyers in the real estate market with easy money, easy credit standards, and easy rate/term and cash-out refinances before the daily inflation world that we now live in today.
Let's Fast forward to 2025
Let’s review how it’s far different today and how the ratio of financeable buyers is going to shrink a lot from what we saw from 2012-2022.
As we now see, lenders tighten standards:
They raise rates and keep them high
Inflation causes many things to go up:
-Insurance costs have skyrocketed
-Property taxes have skyrocketed
-Property maintenance has skyrocketed
-House supply costs have skyrocketed
-Gas prices have skyrocketed
-Grocery prices are skyrocketing
This is the consequence of easy low rates for 10+ years. Inflation has gotten out of control.
The ultra-low rates for 10+ years allowed for an inverse in home price appreciation with loose appraisals for 10+ years. This allowed for easy rate/term and cash-out refinances, which allowed many to live off their home equity, much like a credit card with a high available credit line.
Now, as inflation and rates stay high, and we see more homeowners miss their debt payments, causing homeowners’ credit scores to go down, with little or no equity left, plus add to that high-interest rate credit card debt, job losses, foreclosures, and missed student loan payments. Even the debt-to-income ratio doesn’t pencil any more with the home loan process. Look at the default rate, near 14% on FHA loans.
Can you now see how the number of people who need to move or sell may increase, but not the number of finance buyers, that will decrease into the future for many years.
Fewer buyers mean the ratio of home sellers increases, and that means sellers must update houses even if they don’t have much money left to update them.
Sellers who need a home cash-out equity option are running out of options quickly. Sure, they can rent it out, but with job losses, houses eventually sell cheap for cash from bank-owned properties, and Airbnb isn't cash flowing as long-term rentals that are going to add to the overall property inventory.
The cash buyers who have money to fix all the deferred maintenance will wait around until prices drop and factor in a very big discount when buying. Some say we are looking for a repeat of 2008, but much, much worse. Are you ready for the crash? Are you the investor buyer with deep pockets, or the motivated seller?
Right now, inventory is just sitting for well over 1/2 a year in many situations. The sellers will be forced to drop their prices a lot as they chase down in the market.
Job losses and layoffs should keep stacking up. The foreclosures should start to stack up now that the moratoriums are done. You can now see the line of motivated sellers adding up.
In this future market, liquidity is going to get tight as access to equity will start to vaporize, lenders will be forced to have their own reserves, lenders will tighten lending standards, Airbnb’s that are not in high demand areas will bleed out cash flow with their high vacancy rates.
Deferred maintenance rentals will stay vacant and not attract large down payments from contract for deed and lease option buyers as that money will be applied to the nicer homes instead, where the six-figure earning homeowner recently got laid off and unemployed and ran out of savings. REO and short sales will continue to add to the inventory for a very long time.
The big over leverage of 2012-2022 of living off easy liquidity and equity is now unwinding. Watch how this housing market unfolds. There will be great opportunities to help people. We don’t know how and when right now, so don’t try to control it so that you can leave space and energy to be creative.
Let’s review an example of how the real estate economy can reverse after a very liquid 2012-2022.
Imagine an investor bought 3 houses at $400,000 each. They were purchased to be used as Airbnb and thus the investor put 25% down on each. $100,000 x 3, so $300,000 which was almost all his life savings, invested as down payments on all 3 properties.
These are nice homes that you don’t think of as long-term rentals but seem to be a great fit for Airbnb. Boring areas, boring lots, but they are boxes with bedrooms and square feet, and the economy a few years back was hot with people spending money on vacations. Consumer spending was loose back then with all those cash-out refinances.
Let’s say the investor had a few good years with nice cash flow that allowed him to quit his job and live off these 3 properties and the cash flow that it provided. It was often booked 6 months ahead of time, vacancy was rare, cancellations were rare.
This investor was excited about his 3 Airbnb properties and was thinking of being a financeable buyer shortly. He couldn’t imagine being a non-financeable buyer. He’s got equity, cashflow, his credit score is high with low vacancy and life is great. He wants to expand his Airbnb business. In the big picture, he feels in control of his economy within the big real estate economy.
Now let’s say there isn’t all this money printing, rates stay high, inflation remains high, and the money from home equity lines is spent and monthly debt for consumers remains at an all-time high with credit card debt.
Lenders tighten up, lenders cut available credit lines, and we’ve reached peak consumer spending, peak easy lending, and companies’ stocks are going down, so to be more efficient companies lay off employees, which cause fewer people to vacation, and we know they maxed out their home equity lines and credit cards.
Now back to that investor with 3 Airbnb properties, he suddenly sees his Airbnb’s are only booked out 3 months vs. 6 months. He’s concerned, so he lowers the daily rate. That helps some with lowering vacancies, but six-figure employees get laid off, so they are forced to downsize and put their big houses on the Airbnb platform for similar prices, much nicer than the $400,000 homes. Now with more inventory on Airbnb and the competition driving down daily rates to compete for the few consumers still spending on vacations.
Eventually, a few Airbnb owners are getting any cash flow, vacancies increase, cancellations increase, daily rates plummet from low demand, repairs add up, replacing furniture costs a lot, there is now negative cash flow. The investor takes it off Airbnb as he’s losing money now. To be clear, I think Airbnb in a super-hot high-demand area with great lots and areas is a solid idea, but it’s got to be unique.
Back to this investor, he works hard on his math, and he now realizes too late that he bought his homes too expensive to be used as long-term rentals. So, he can’t do long-term rentals. He knows if he lists them for sale, he will have to discount the houses a lot as inventory is adding up, plus he will have to discount them each $50,000 to factor in the updates needed to get them back into good marketable shape.
In a bit of a panic, he considers the idea of fixing the repairs, as his final savings have been depleted from the months of hanging onto the negative cash flowing Airbnb’s. He considers doing a cash-out refinance, but realizes that lenders on investments often do 70% of loan to value, he was at 75% LTV when he bought them with the 25% down payments. He knows with negative cash flow they won’t appraise well based on the income approach.
He knows that when needing repairs, it won’t be appraised well when sold as a regular home sale with comps. Due to the falling economy, the lenders are cutting appraisals with the market quickly sinking in value. The amount to pull out on cash-out refi feels more like 50% LTV on that original $400,000, it’s at this moment his heart sinks into his stomach as he realizes that his $300,000 retirement savings evaporated. The cash flow from the property evaporated, so his job evaporated.
The available credit on his credit cards evaporated. This Airbnb investor has run out of options. He has now recently missed credit card payments and mortgage payments. He may consider a short sale; his money is gone and credit score tanked. He went from living the dream, working part-time with 3 Airbnb’s to having no income, no properties, and a low credit score. He over-leveraged himself in retrospect. He went from being a financeable investor wanting to expand to a non-financeable buyer.
This is what’s happening when an investor isn’t dependent on his connections and knowledge, but instead dependent on lenders, the property, the consumers the economy, and the consumers having jobs and available credit.
As you can see, this goes many levels deep, and the investor can’t control all of those levels. As this process was reversing in front of his eyes, he could find creative alignment with another investor with seller financing as a win-win.
Some investors have assets, some equity, some space, some time, some good health, some knowledge, some great credit capacity, some great connections, some lots of money and it’s just a matter of creatively rearranging those until it’s a win-win. When that investor is knee-deep stuck in the problem, he’s not creative and he can’t perceive the potential options and solutions.
That’s when he calls an experienced investor who can provide clarity. FYI, Stats came out in early March that the top 10% of Americans are paying 50% of all consumption in the U.S. economy. If you’ve been using your intuition and self-awareness to stay ahead by reading my articles, then you are very smart.
Utilize your creativity in real estate investment to make win-win connections in any economy.