Jarred Kessler is the CEO of EasyKnock.
As it pertains to the current market, making the connection between the housing dilemma and greater contributing factors is sometimes not as simple as one may hope. For six years, I have examined and discussed the prevalence and surge in the problem in the housing market, or as I call it, the trapped equity crisis.
In 2008, subprime lending practices led to massive fines, more oversight and changes to lender qualifications. In my opinion, the government was right in the choice to clamp down on subprime mortgages as some lenders took advantage of customers who evidently were not able to pay their loans. Partly through this issue, the Great Recession was born, and the unintended consequence was the trapping of massive equity.
For example, if someone has what would be considered a low FICO score or their stream of income is unconventional or complicated, that person will most likely be excluded from obtaining a mortgage refinance, HELOC or HECM loan. While some may still qualify, these tight restrictions leave very few options for the rest.
This leads many of those who invest in real estate to feel stuck. As the housing market jumps and the value of a house appreciates, often the only way to access that equity is to sell. All things considered, potential home investors who confront complications, especially those with a FICO score under 680, often cannot even qualify for financing.
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Equity in homes and property is at a record level, not only because the cost of housing continues to rise but because the equity is trapped without the owner’s ability to access it. This leads real estate investors to turn to options such as high-interest credit cards in a rising interest rate environment. The toughest part of this for me personally is to witness the frustration and defeat that those in this predicament are facing. They have worked hard to build their wealth, and their real estate has gone up in value, yet they find themselves in debt with little flexibility.
Anyone who states that property is not an ATM may not understand the concept that investments are fungible, leading me to this comparison: Is your stock portfolio not an ATM machine? What happens if it went up by 50% and you weren’t able to sell while you increased your debt load and experienced higher rates?
There are various new platforms that serve as additional options and help with affordability, including home equity agreements (HEAs), sale-leaseback programs and rent-to-own models. Choosing the best option depends on the individual investor’s needs. These programs are beneficial to the economy as they allow people to get into a better financial place where they can spend more freely and enjoy their lives.
Particularly for commercial real estate, investors’ options include commercial equity loans, CELOCs and sale-leasebacks. Commercial equity loans generally offer a one-time, lump-sum amount and a wide variety of term options, which is the best choice for some, while a CELOC may be a better option for others as it offers a line of credit that may be used at any time during a specific, predetermined timespan. When investors need to access equity to make repairs, or multifamily property owners need additional funds to pay bills, these are the typical solutions that they turn to. However, investors may still be held back by strict regulations in order to access these options.
While the trapped equity crisis is complicated, the solution is simple: Find a way to help investors and homeowners enjoy their equity, keep their properties and have proper education on what their options are. The U.S. housing market is the biggest asset class in the world and deserves better and more solutions.
Some food for thought: if Americans could tap one to three trillion dollars of equity, their lives would drastically improve, and the economy would thrive. Those who are opposed to this logic argue that people should not be allowed to access their own equity due to outside factors. My response is, who are you to tell people what they can do with their own hard-earned equity?