One thing is for sure: if housing prices keep rising at their current rate, many Americans will find it increasingly difficult to afford a place to live. This lack of accessibility could eventually lead to a housing market crash, as we saw in 2008.
This sentiment is not uncommon in financial media and the halls and offices of real estate firms and investment outfits. Knowledge is half the battle; but as a savvy lender, you will still need to find an effective way to hedge against the housing bubble.
There are several economic issues on the horizon that could lead to another housing crash in the United States. Of course, the most important is the state of the broader economy. If the economy weakens, job loss could lead to a wave of foreclosures, which would drive down housing prices.
Another factor is the rising cost of living and increased debt among most families. Significant debt leads to increased financial strain and a higher likelihood of loan default, which could also contribute to falling housing prices.
Additionally, the availability of credit is essential. If lenders become more cautious about lending, it may become more difficult for people to get mortgages. This could lead to fewer people buying homes, putting even more downward pressure on prices.
That’s not to mention a potential black swan event, like COVID-19, the War in Ukraine, or the oil shocks rocking the globe, from Paris, France, to Paris, Texas.
As we all know, the housing market is constantly changing. Some years, it’s a buyer’s market, while other years, it’s a seller’s market. Market volatility makes it difficult for lenders to predict what will happen in the future. That’s why it’s mission-critical for lenders to find an effective hedge against a housing bubble.
There are a few ways lenders can achieve this market-defying feat.
They can diversify their portfolio. Lenders should invest in a variety of different types of loans, such as fixed-rate loans and adjustable-rate loans. This way, if one type of loan doesn’t perform well, they’ll still have other types of loans that will offset the losses.
Finally, lenders can also purchase hedges. A hedge is a financial instrument that allows the lender to offset the risk of a loan. For example, if a lender has a loan that is backed by a house, they can purchase a hedge that will pay off if the value of the house decreases.
The mortgage-backed security market is incredibly complex. In many cases, lenders often turn to safeguards, like AXY Wrap™ by Axylyum, a custom market hedging solution purpose-built for retail and wholesale private lenders. AXY Wrap shifts the entire risk of default off of your books- giving you the ability to focus on bolstering your balance sheet and doing what you do best- lending with confidence.
This article does not constitute an offer to sell, or the solicitation of an offer to buy, any security interest in any jurisdiction. This material is distributed for informational purposes only and should not be construed as investment, legal, tax, regulatory, financial, or other advice. No assurance can be given that any investment objective will be achieved, or that an investor will avoid losses or obtain a return on an investment. While the information contained in this article is believed to be reliable, its accuracy is not guaranteed. Individuals should consult with their own professional advisors with respect to the legal, tax, regulatory, financial, and accounting consequences of any potential investment.