Interest Rates, September 2024 Rate Cuts, and Groundfloor’s Stock Offering: A Private Credit Catalyst
In this Monthly Market Trends series, we offer you our interpretation of current trends through the eyes of our VP of Market Risk, Patrick Donoghue, and provide you with his balanced commentary so you can make the best investment decisions today for the highest returns tomorrow.
We're also excited to announce our Weekly Market Trends podcast hosted by Patrick, with new episodes releasing every Monday. Take a listen to our latest episode here!
First, I want to express that my thoughts are with everyone affected by Hurricane Helene, particularly those who have been displaced by the storm’s devastating impact. At Groundfloor, we understand how challenging it can be to rebuild in the aftermath of such a disaster, and we stand in solidarity with the communities in Asheville, NC, and the eastern Carolinas as they begin the long process of recovery. Our hearts go out to the families and individuals who are navigating these difficult times, and we are committed to supporting efforts that aid in rebuilding homes and restoring hope. Please know that you are not alone, and together, we will work toward brighter days ahead.
Resilient Housing Market Persists
The residential housing market remains resilient as we move into the final quarter of 2024. Recent developments, such as the Federal Reserve’s 0.5% rate cut from 5.25% to 4.75%, and an additional anticipated 0.25% reduction in November, suggest that the tightening interest rate cycle has ended. According to the Fed’s own projections, the rate is expected to fall to 3.35% in 2025, and by 2026, it's projected to be around 3.09%. This suggests a continued easing of monetary policy as inflation cools and the Fed aims for a soft landing in the economy. (Source: Chatham Financial & YCharts)
Home Prices Stable and Inventory Improving Year Over Year
According to the most recent FHFA House Price Index, U.S. house prices increased by 4.5% from July 2023 to July 2024, while the S&P CoreLogic Case-Shiller Index shows a 4.93% year-over-year increase for July 2024. These year-over-year consistent gains help illustrate a relative balance between housing supply and demand, even though inventory in general remains below pre-pandemic levels.
The chart above shows the national weekly inventory of single-family homes in the U.S. from January to October, comparing the current year (2024) to previous years, including pre-pandemic levels (2017–2019) and post-pandemic years (2020–2023). The relatively flat inventory line for 2024, compared to the seasonal peaks and troughs of pre-pandemic years, suggests that inventory growth has been subdued but is slightly improving. But clearly, inventory still remains below the pre-pandemic levels.
Renovators On The Move
One emerging trend from the supply-constrained market is the renewed focus on the renovation of existing housing stock. We are realizing this primarily in our recent uptick in loan applications on such projects. The rise in applications makes sense given the clear outlook for lower project costs ahead.
At Groundfloor, we subscribe to the fact that the U.S. housing stock is aging rapidly, with about 80% of homes now at least 20 years old and over 40% more than 50 years old, according to the Joint Center for Housing Studies of Harvard University. This aging housing stock requires significant upgrades and repairs allowing Groundfloor Borrower’s continued, long-term supply of projects to renovate.
Groundfloor’s short-term loan fix and flip loan products are crucial in supporting these types of projects because we know that the banks won’t lend on them. It’s these projects geared towards the renovation of the aging housing stock that supports our long term bullish outlook on lending in this space.
The New Build Investor Experience Coming into Focus
Builder sentiment which peaked in March of this year has since been on a steady decline. However, we have recently seen signs of renewing optimism, post the Fed rate cut in September.
“The NAHB/Wells Fargo Housing Market Index in the US rose to 41 in September 2024 from 39 in the previous month and above forecasts of 40. This breaks a string of four consecutive monthly declines," according to the National Association of Home Builders. “The gauge for current sales conditions rose one point to 45, sales expectations in the next six months increased four points to 53, and traffic of prospective buyers posted a two-point gain to 27. Meanwhile, the share of builders cutting prices dropped in September for the first time since April, down one point to 32%."
We support the renewed optimism! When optimism is not optimal by consistently offering smaller builders solutions for their New Construction projects, we have a commitment to non-bank lending to offer both borrowers and investors a platform for growth. This is because our track record is growing and has shown great promise in this type of financing.
Groundfloor Construction Loan Performance
The labels used here differentiate between ground up construction (New Construction) projects, which consists of a project with a new foundation improving a vacant or recently cleared lot, while a Heavy Rehab project has an existing structure/foundation and where the renovation/construction budget exceeds the as-is value. The Heavy Rehab for purposes of demonstration typically are the most complex segment of the fix and flip loan set we offer.
When comparing Groundfloor's New Construction loans to Heavy Rehab loans, the differences in performance may reflect the differing complexities of the projects. New Construction loans have a lower delinquency rate (2.96%) and lower loss ratio (0.09%) and slightly higher returns at 9.99%. In contrast, Heavy Rehab loans have at 6.93% a higher delinquency rate and 1.30% loss ratio, yielding a 9.12% return.
But as savvy portfolio investors, we are concerned not specifically on parsing out risk per loan but instead with the combined risk and return of a broadly diverse portfolio of loans to gain the desired return profile. The good news is: We just launched the product that does that for you.
The Flywheel Does It All
By leveraging Groundfloor’s Flywheel Portfolio, investors can gain automatic diversification across both product types without having to actively select and manage individual loans. This balanced approach enhances portfolio stability by spreading risk across as much as 200–400 diverse loans, mitigating the need to weed out distinctions that could arise from managing LROs individually. The Flywheel’s automation offers a hands-off way to capture returns from both new construction and rehab projects, improving the overall investment experience.
That’s it for this month’s edition. If you have any thoughts on the topics raised here or would like to see other topics discussed please feel free to drop a comment. The fall is setting up to be an active one for our platform, and if you haven’t done so, please check out the Groundfloor Flywheel Portfolio and our 2024 Stock Offering.