|First and foremost, we’ve had a number of inquiries as to how Aloha is performing in this challenging environment. Regarding Aloha LTD Fund’s outstanding loans, we have not seen a meaningful increase in missed loan payments or defaulted loans since the pandemic began. In fact, we have collected 95% of the interest on our loans for both March and April; this figure is in line with pre-pandemic expectations. Thus far, we have not experienced the ratio of non-performing to performing loans diverge from our five-year average. |
Given current conditions, maintaining our excellent default ratio is a point of pride and a testament to Aloha’s underwriting and servicing processes. The Fund will post positive returns for March and April when the final accounting is complete. We are, of course, monitoring the situation closely and will communicate as things unfold going forward.
There’s no doubt about it, it’s been a tough couple of months since the pandemic hit. Over 86,000 have lost their lives to COVID-19 in the U.S. alone. The country has gone into lock-down and the economy has ground to a halt. The drumbeat of bad news continues nonstop. And the real estate world is certainly not isolated from the anxiety and outright panic that’s all around us.
As we attempt to make sense of this unprecedented, uncertain environment, let’s try to moderate the pessimism and fear surrounding the current state of the economy and real estate, and focus on some facts. Here are a few worth noting:
Home prices have historically risen during recessionsWe are in a recession, the length and depth of which are unknown. While every recession is unique, they are a fact of the business cycle. Since 1945, the average recession has lasted about 10 months. The U.S. has survived dozens of recessions in its history, and typically emerges stronger.
Recessions have rarely resulted in plunging home prices. Since 1997, excluding the Great Recession, there have been 1,039 instances of US states having recessions in a given month, according to Zillow. Home value appreciation occurred 81% of that time, and averaged 4%. Impressive resilience.
The Great Recession of 2008-09 was an exception, but that recession was a direct result of excesses in the housing sector. Unlike that financial crisis, which began in 2007, most homeowners today can afford to wait it out this bad stretch. Heading into the current crisis, mortgage credit quality was excellent. Today, most owners have enough equity to sustain price declines. In other words, far fewer homeowners this time around risk being “underwater” on their mortgages, where their home values fall below the amount they still owe. That equity makes all the difference in an owner’s decision to sell a house versus “give it back to the bank,” as many owners did in the Great Recession.
Home prices have held up since March
The median list price for houses for sale on Zillow at the end of April was actually 1% higher than it was the same time last year.
When home buying does begin again in earnest – maybe later this summer — we’ll get a better idea of how the Covid-19 crisis affects housing. Zillow’s forecast-which assumes a 4.9% decrease in U.S. gross domestic product in 2020 and a 5.7% increase in 2021-calls for home prices to fall 2% to 3%, from pre-coronavirus levels through the end of this year.
However, as we all know, real estate markets are local. Those cities and states where industries like leisure and hospitality account for a large proportion of jobs may see substantial price declines. Meanwhile other regions of the country less affected by coronavirus-related unemployment may see stable, or even rising housing prices.
The housing shortage hasn’t gone awayWhile much has changed over the last couple months, one thing hasn’t: There is a severe shortage of housing. Before the pandemic hit, demand for housing greatly outstripped supply. While demand has been temporarily constrained, keep in mind that there are 72 million millennials in or near their peak home-buying years. Sooner or later, they’ll be looking for houses to buy.
At the moment, the housing market is in something of a timeout. Demand for housing is falling, but supply is falling even faster. People aren’t shopping for houses during the lock-down; but few homeowners are listing their houses.
Despite 14% unemployment, the vast majority of renters and mortgage holders are making paymentsCertainly, the sudden loss of so many jobs is a problem for the economy. As a result, one might expect a surge in rent and mortgage payment delinquency. However, up to this point, relatively few renters are delinquent on rent. So far in May, the percentage of rent paid is only down about 1.5% from the same week last year, according to the NMHC.
The share of home loans overdue by 30 days or more rose to 4.36% of all mortgages in the first quarter, according to the Mortgage Bankers Association, up 59 basis points from an all-time low in the fourth quarter. However, the MBA’s survey counted instances of forbearance as late payments. Mortgage forbearance over the next year may help stabilize real estate prices, preventing a wave of distressed sales/falling prices.
And the fact is, for the great majority of households, paying the rent and mortgage comes first when deciding which bills to pay during hard times.
There will be distressed situations and distressed situations lead to opportunitiesDuring times of upheaval, the initial reaction might be to hunker down, play it safe. However, for enterprising real estate investors, the months ahead may offer something not seen for many years: distressed selling.
Despite the economic uncertainty, the current environment may present the sort of circumstances that risk-taking property investors live for. For people with dry powder, it’s time to hunt for real estate bargains. Certainly, no one wants to capitalize on anyone’s misfortune, but distressed selling in some markets will present opportunities for would be sellers wanting to raise cash and astute investors and fix-and-flip operators to make a deal.
The Fund’s sixty-two month run of positive performance since inception continues. We greatly appreciate our investors and put much time and effort into producing the best results possible on your behalves.
Current and prospective investors are encouraged to reach out to us with questions or concerns during this extraordinary period. In the interim, please stay well and safe. Aloha Capital appreciates the opportunity to serve you through this excellent investment–Aloha LTD Income Fund.