I. The New Appraisal Form (UAD 3.6) Is Nothing To Worry About.
I blogged about it in August, but I am touching on it again because we have been getting questions.
TLDR: The new form will provide more consistent data sets and formats – and be easier to read by non-appraisers, e.g. buyers and agents.
It is meant to facilitate third-party inspections (by parties other than the appraiser) and, eventually, foster more appraisal waivers (with superior data).
This, in turn, helps our aging appraisers, as they will not have to go out in the field and can make more money by cranking out write-ups.
One drawback of the new form is that inspections will be more thorough, so more condition issues will likely be called out.
Appraisals may also be a bit more expensive at first.
Permit issues will NOT be more common – which is a rumor going around; permits, or a lack of permits, will be handled the same way they are now.
Non-permitted space will be given minimal value unless similar unpermitted space is common in an area and comps with similar space corroborate value.
II. 2 Credit Crises That Will Bring Rates Down – Guaranteed.
Around 2005, I knew at least a dozen people who saw the Great Financial Crisis coming.
They were all students of economic history, and they knew that ridiculous credit standards (100% financing with no income or assets verified) would foster a housing bubble that would pop, bringing on a financial crisis.
Almost all bubbles are fueled by excess credit or overly loose lending standards. The thing is, NONE of those people knew WHEN the crisis would hit. They just knew it would.
1. Credit Crisis #1: Commercial Loans
In 2013, two office towers sold in Denver for $175 million, per this tweet. They just sold again for $5 million. Thank you, COVID and work-from-home policies.
During COVID, when rates were rock bottom, apartment developers took advantage of the cheap financing, oblivious to the fact that everyone else was doing the same – and we saw a near-record number of unit starts (529,000 in 2022).
And – now there is a credit-fueled glut. Worse, all those apartment construction loans have to be refinanced at 3% higher rates.
Similarly, commercial loans for existing properties are typically short-term (5-, 7-, and 10-year balloons), and they, too, must now be refinanced at much higher rates (just like the few poor schlubs in residential who took out ARMs during COVID).
TLDR: We now have TRILLIONS of dollars of commercial loans outstanding, and many are upside down and/or non-performing for the reasons I set out above. Lenders have been “extending” these loans to avoid taking the losses, but they can’t extend forever…
2. Credit Crisis #2: Private Credit
After 2008, regulators pushed banks out of riskier corporate lending, and non-bank funds (Blackstone, Apollo, Ares, Blue Owl and others) filled the gap.
The market grew from about $2 trillion in 2020 to over $3 trillion. The non-bank funds are not as good at underwriting as banks, and worse – many loaned money to software companies that are getting crushed by AI.
And worse – there is a ton of fraud in this space. And worse, many commercial banks loaned money to the funds that made those crappy loans – so our banking system is exposed too, making this even more serious.
Neither of these two crises will come close to the GFC, but they will be enough of a problem to bring rates down for several reasons:
(1) The Fed will likely cut the Fed Funds rate to mitigate problems when the crises surface.
(2) The bond market will respond with falling rates, as it well recognizes the seriousness of a credit crisis.
(3) Credit crises are deflationary, as “debt is money.” And when debts go bad, that money dries up.
So yeah, these will come to a head at some point – and bring rates down. However, nobody knows when – but today’s high rates make crises that much more likely.
FINAL POINT: Rates could easily keep trending upward, but the examples above show why rates will dip along the way.
Rates never move in a straight line – which is why it might be OK to “date the rate” after all. There are almost always opportunities to break up…
