Homeownership is the foundation of the American Dream. Because it is also a durable and reliable long-term investment. The proven resilience of home values over the years underscores the importance of home equity to American households and to residential real estate investors alike.
However, this type of wealth (often an individual’s largest single asset) very often remains illiquid. Homeowners are now more “home rich but cash poor” than ever before, with their homes becoming more and more valuable, but with less real income and lower borrowing costs to meet life’s challenges and opportunities. will be higher.
In today’s environment, homeowners are looking for new answers and financing platforms to solve their puzzles. Alternatives to traditional financing have been sought and, in parallel, startups have created avenues for capital to participate in an efficient and rapidly emerging fintech-driven asset class. .
Home equity investing (HEI) is undergoing a real transformation as a result of the convergence of homeowner requirements and investor incentives. What we need now is to realize that potential.
Could home equity investing be the answer?
Simply put, home equity investing offers homeowners a way to release equity without making monthly payments or taking on additional debt. In return, they share a predetermined portion of the home’s future value. Investors seek returns through HEI vehicles that pool these home equity shares, allowing them to increase U.S. home prices without the costs, inefficiencies, and complexities traditionally associated with large-scale residential real estate investments. It provides a scalable way to reap the benefits of upward mobility.
This explains how HEIs evolved from a niche idea to an up-and-coming market. Robust housing equity is double the amount since the global financial crisis. It currently exceeds $30 trillion, and the addressable market for higher education institutions is conservatively estimated at hundreds of billions of dollars. And with its growth potential, HEIs are on the verge of wider adoption as platforms bring this market together.
Why the third way?
It all starts with the homeowner’s state of play. High inflation and rising interest rates have significantly increased the costs associated with traditional second-lien products such as home equity loans, lines of credit, and refinances.
With borrowing costs approaching double digits, many homeowners are hesitant to make new monthly payments and will not be able to cope if the economy slows further, especially if many have already refinanced. there is a possibility. Lenders are also exiting due to the cost of capital, resulting in a growing number of underserved homeowners, who often include small business owners and individuals with non-traditional incomes. However, they still have strong personal balance sheets and large housing assets.
The same applies to personal finance. Total household credit card debt recently exceeded $1 trillion, and despite the average annual interest rate on card accounts of approximately 27.9% as of April 3, 2024, nearly half of cardholders maintain a balance. There is. Considering all of these circumstances, it’s understandable that homeowners are focusing on: We view our homes as assets and are looking for stress-free ways to leverage our assets to pursue our financial or life goals without the stress of selling or taking on new debt.
Proven properties
From an investment perspective, HEIs are no longer esoteric, but rather a growing and proven asset class. HEIs and other asset-based investment vehicles have performed well during the market turmoil over the past 18 months. HEIs outperform core assets such as equities while providing stability through diversification and structural downside protection.
The result is a risk premium and Sharpe ratio (a way to measure risk-adjusted returns) that is comparable to other asset-backed investments. Furthermore, historically these returns have not been correlated with changes in other asset classes such as stocks. During periods of high inflation and volatility, HEI vehicles can enjoy the value of residential real estate without the occupancy and rent payment risks, or the costs of property management and direct ownership.
Investors are also paying attention, and confidence in higher education institutions is increasing. Diverse allocations from several investor segments, including insurance capital, institutional credit and alternative product managers, asset-backed buyers and lenders, and family offices, all demonstrate the maturity of this model. HEI vehicles may include traditional funds for accredited investors, institutional joint ventures, and forward flow arrangements. Additionally, sophisticated capital market solutions are emerging, including warehouse credit facilities, asset ratings, bilateral debt financing, syndicated securitization, secondary sales, and more.
capture the moment
To maintain this momentum, higher education operators are demonstrating adaptability, focus, and innovative approaches to attracting capital, ultimately reducing costs and providing homeowners with more You need to provide a lot of value. As more investors explore this space, HEI platforms are meeting several important criteria, including homeowner centricity, service expertise, product structure innovation, portfolio integrity, and a commitment to regulatory compliance. will be evaluated across.
Additionally, HEI platforms must offer innovative product structures that can differentiate them in the market. With features such as built-in risk mitigation mechanisms and flexible investment options, these platforms cater to the diverse needs and preferences of investors and provide unique opportunities for diverse investors to participate in the HEI space. .
Finally, these carriers prioritize adhering to a strong ethos of regulatory compliance, ensuring that all aspects of their operations comply with industry regulations and standards. Authenticity is in the details. For example, some institutions of higher education have capped the rate of home appreciation that can be repaid in a settlement, demonstrating a commitment to equitably serving the interests of both homeowners and investors. Good operators also go above and beyond what is legally required, recognizing that the ultimate goal is to help people, not create wealth.
Not “if” but how big?
In today’s environment, it is imperative that the investment community supports new ways to make home equity an asset that Americans can leverage to finance their financial goals. Higher education institutions’ structured exposure, unique characteristics, and long-term viability make them more attractive than ever as a vehicle for capital to deliver on that promise, creating new assets in the process. You can benefit from classes.
The question is not whether higher education institutions will enter the mainstream, but how quickly this asset class will expand. As the HEI market expands, investors will have further avenues of entry into residential real estate. At the same time, higher education institutions benefit homeowners by making homeownership more accessible and less stressful, allowing them to leverage the value of their home without having to sell it or increase their monthly payments. Masu.
Jeffrey Glass, CEO and Co-Founder Hometap Equity Partners.
This column does not necessarily reflect the opinion of HousingWire Editorial Department or its owners.
To contact the author of this story:
Jeffrey Glass [email protected]
To contact the editor responsible for this article:
tracy belt [email protected]
