Remote work created ‘abnormal demand’ for housing: Broadmark Realty Capital CEO

Broadmark Realty Capital CEO Brian Ward joins Yahoo Finance Live to discuss demand in the housing market during the pandemic, exercising more caution with home financing, and the outlook for the economy as home and rental prices rise.

Video transcript

BRAD SMITH: Housing prices skyrocketed during the pandemic, and the shift to remote work may be to blame. A new report from the Federal Reserve Bank of San Francisco found that housing prices shot up 24% in the two years ending November of 2021, with 60% of that rise correlated to the dramatic shift to remote work.

Broadmark Realty Capital CEO Brian Ward joins us now. Brian, thanks for hopping on with us. Just to go a little bit further, the study had also found that the share of work being done from home, it's stabilized near 30% as of August 2022. And so with the stabilization at around 30%, even at a time where mortgage rates are increasing, where does that net out in terms of the net impact, perhaps, that remote worker working from home or hybrid work will have more long-term on the housing market?

BRIAN WARD: Look, I'm not an expert on societal moves because of pandemics. Certainly, there was a ton of abnormal demand that occurred over the last two years because of the pandemic. Whether that translates into long-term impacts on real estate yet to be known for sure. I mean, we are starting to see a return to work. And different cities are having different results as a result because of it. Let's see where it translates. We've seen these types of momentum moves in housing in the past, in past cycles. So I'm not yet convinced. But let's see what the next two years bring.

One of the things, though, that I do think is important is there is still a long-term trend towards demand for housing. So even if we see short-term impacts here because of the cost of capital and broader economic moves because of what the Fed is doing on the Fed funds rate and the like, I still think short-term, you're going to see disruption, but long-term housing remains an interesting play. Whether or not remote work impacts that, difficult to say.

JULIE HYMAN: Brian, you guys do financing. So let's talk about the financing trends right now. Have you guys been tightening your lending standards? Have you been tightening, you know, who you're going to give capital to in this kind of environment? That's effectively what the Fed wants. I'm curious if it's actually happening.

BRIAN WARD: Yeah, it's tricky out there right now. So we are taking a more cautious approach to how we're making our investments. We're in a time where rates have moved incredibly quickly. I think there's a ton of inertia still in, for example, the housing discussion. I think that inertia will ultimately get disrupted, at least for the near term. Again, I'm bullish long-term. But short-term, I think it's going to be super tricky. So at Broadmark, we are starting to become more cautious.

One of the advantages I should also mention, though, about Broadmark that I think is particularly compelling, amongst publicly traded mortgage rates, we are the lowest levered REIT by a long shot. We have about $0.085 of debt per every dollar of equity, compared to most REITs are in the $3 to $6 of debt per every dollar of equity. That's very purposeful on our part right now, as we go into this part of the cycle.

We really felt like it was really necessary to be unlevered and to really pick our battles very carefully. I think this market is in for more trouble. And coming in with this unlevered balance sheet, I think, positions the business very interestingly for opportunity, as we get into 2023 and 2024.

BRIAN SOZZI: Brian, we've seen some real volatile moves in global currency markets in wealth overseas. What role is the international real estate shopper playing in US markets right now?

BRIAN WARD: Well, it feels to me like the international markets are way less of an influence today than they were two years ago. Obviously, Asian markets were a major, major player in that space. It feels like they've pulled back significantly. In my world, the foreign markets, the foreign investors really are not impacting as much at all.

BRAD SMITH: Brian, just lastly while we have you here, I mean, there is a net impact that rental prices have had to take on as well when you've got even more of the housing market that's seeing less bids or more buyer pressure. So with that in mind, on the rent side, because rents are also going up, that's going to continue to impact some of the discretionary spending, and it's going to be a long time before those rents start to come back down. How much of a net effect do you believe that what we're seeing in the housing market will have on some of the discretionary spending that consumers are comfortable with?

BRIAN WARD: Well, I mean, renters are under real pressure right now. Not only because of this inertia that I've talked about, but just core inflation. When you see the cost of gasoline, the cost of food moving the way that it has, that really starts to impact renters. And I think that elasticity to-- that ability to absorb price increases is waning quickly. And so I would envision pressure starts to really build further in 2023. Let's see what happens with employment, with wage growth, because everything, to me, seems to be suggesting that renters can't absorb those types of price increases. And similarly, housing buyers can't either. And so hence why I'm a bit bearish right now.

JULIE HYMAN: Broadmarket Realty Capital CEO Brian Ward, thank you so much. Great perspective on what's going on out there right now. Appreciate it.