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52 naturally occurring market cycles (albeit triggered synthetically). Today, the early warning signs were true portents of things to come, and the full extent of the fallout has yet to be determined. THE DECLINE? Auction.com, a real estate auction site offering existing and aspiring investors access to (mostly) distressed assets, generated very revealing information about the state of real estate assets throughout 2022. Auction.com's end-of-year reports showed 6.5 million unique users active on the site throughout 2022. However, just a fraction of those ultimately used the platform as an auc- tion house to buy investment properties. Primarily populated by smaller, local investors rather than or private equity/debt funds, Auction. com's bidders and buyers are effectively com- munity developers buying properties, improving them, and investing in the areas they live. Typ- ically, the post-purchase cycle extends through three to six months of property renovation before renting the home as a long-term investment and cash flow vehicle, or simply flipping the property. e site's reports are a good barometer for what may be coming: a proverbial canary in the coalmine where the auction house's relatively small population acts as a proxy for the national home buying and real estate market. Over the year, buyer behavior began a subtle but dramatic shift. Between the first and third quarters, bid- ding became much more muted and conservative; buyers set their bids at around an 11% discount on foreclosures in Q1. at discount fell to 23% below the as-is value by Q3. is sign of things to come shows that if the trend continues and the aftershocks of rate hikes extend to the real estate market in toto, we may see a complete slowdown by March 2023. e data points to a comparison between public equities and the real estate market, albeit on a slowed timeline. As the first rumblings of quantitative tightening began, the riskiest high-P/E stocks with limited fundamental bases collapsed from their sky-high valuations as an initial casualty. Over time, the blue-chip and fundamental- ly-sound equities also saw a steep drop. It just took longer. So, much like high-risk/high-reward tech stocks suffered long before the aristocratic market mainstays, the foreclosures point to future turbulence in cornerstones like single-family homes and long-term rentals. A MATTER OF SPECULATION An eventual crash's beginnings aren't just evident in the foreclosure and physical invest- ment market. Speculative investors are managing their portfolios and positions as well, expecting a substantial leg down to come. Traders dealing in futures contracts of the Case-Shiller 20-City Composite Home Price Index traded the Index projecting a 327 high throughout the past year. Now, futures contracts peg the January 2024 price at 268. e Index trades, as of December 2022, were right around 306. e consensus surrounding a drop to 270 puts physical real estate investors in a bind. Roughly translated, a move close to this mag- nitude would bring home prices more closely aligned with pre-pandemic values. A fall that far makes a comprehensive portfolio with holdings and futures hedging flat, but a crash into the 230s that many analysts project profits from the hedge but is likely insufficient to offset the unrealized losses in property values. While financial engineering with these instruments may prove beneficial for purely speculative plays, the reality is that they serve a real and valuable purpose as a hedge for investors if the pessimistic outlook rings true. Investors' hedging, though, must be exhaustive in due diligence and modeling calculations that account for as many contingencies and likelihoods as pos- sible to ensure the most viable and cost-effective hedging strategy. NOTHING NEW UNDER THE SUN: VIEWING 2008 AS A PLAYBOOK FOR TODAY? Some in the industry see 2008 as a historical playbook to learn from, but the parallel may not hold up under today's real-life conditions. Institu- tional investors and portfolio managers used loans to compensate for 2008's property value losses. eir thesis that origination fees could wholly counteract or bridge property value losses proved legitimate, as many buyers with liquidity rushed to snatch up distressed or discounted housing assets. Today's environment is different, as the supply and demand curves are effectively inverted compared to 2008. Typical demand, expressed as "homebuyers per year," was pulled forward sig- nificantly during the pandemic. Rate cuts made dirt-cheap mortgages too good a deal to pass up. Not willing to wait until a planned 2023 or 2024 purchase, many snatched up a great rate near the bottom in 2021, or caught a mortgage on the upswing as 2022's tightening began. Instead of a typical demand pool over the next few years, many who would have filled those ranks were pulled forward, and a portion of the remnants can no longer afford a 7%+ mortgage rate, even if offset by a lower purchase price. is unwillingness to buy compounds further as rampant inflation and an increasingly shaky job market make future economic circumstances less predictable. Since psychology drives much of the consumer housing market, this confluence of fac- tors creates a spooked and psychologically fragile demand sector that is increasingly unlikely to buy. INVESTOR INSIGHTS Investor reactions vary based on endless factors, much like reactions to any disturbance in a market. Right now, most fall into two primary camps: First-to-Market and Long-Term Holders. Our "First-to-Market" class saw the writing on the wall, which, in hindsight, was clear but obscured by the overall market exuberance that typified 2020 and 2021. Much like warning bells sounded for some in 2006, letting them escape 2008's slaughter unscathed, our First-to-Market group moved to fractionally and strategically liquidate some or all of their portfolio over six to seven months. ese investors are also the likeliest to ride the market back up. True to form, they've been strategically sitting on a cash reserve to rebuild their portfolio. e second group, "Buy-and-Hold," is effec- tively "stuck" with their real estate assets. Whether intentionally as part of a long-term investing strategy, or caught unaware and underwater on the investment, these investors often have a much deeper bench of real estate assets to contend with, typically numbering in the dozens. However, hundreds of properties aren't uncommon, and these investors must weather the storm while waiting for the market to stabilize to reorient their strategies. RENTAL RELIEF? Even rental property investors can't escape today's new reality. e dependable cash flow that Feature By Louis Amaya

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