Private Money Yields, To the Moon?
On the Relationship Between Treasuries and Private Money Yields
With 6-month Treasuries yielding 5.5% today vs. 3% this time last year, what am I seeing today for rates on private money fix and flip loans?
Our fix and flip loan yields have expanded from about 10-11% in 2022 to 12% today. Why haven’t they followed 6-month treasuries in lockstep?
source: https://www.ustreasuryyieldcurve.com/b/rFB2uL
While there’s been a reduction in the institutional supply of capital, there’s been an even greater reduction in demand for private money. Demand for private money fix and flip loans is dictated by the economics of underlying deals and by the number of underlying deals.
The economics of each deal involves three numbers, the purchase price, the construction costs, and the After Repair Value.
Construction costs remain elevated. In the last few months, I’ve had a greater-than-usual number of deals blow up once my clients got renovation bids back.
After repair values remain strong. While higher mortgage rates are hurting consumer demand for housing, this reduced demand has—for now-been more than offset by low housing inventory levels.
What is the biggest problem hurting demand for private money? There aren’t enough motivated sellers. These are the people from whom my clients buy houses. I believe we will need rising unemployment and a weaker consumer to see:
Falling construction costs (as contractors do fewer jobs for consumers). This will help more deals pencil at seller’s asking prices.
More motivated sellers. This means more underlying deals for clients to buy (and therefore to borrow).