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Category: Interest Rates (Page 1 of 17)

Marry the House…But Date the Rate

brides holding white bouquet of roses

I can’t take credit for the popular phrase “Marry the house…but date the rate”. It’s being posted by mortgage professionals and real estate agents all over the place.

What does this expression mean? 

It means that if you find a home you love, don’t let current interest rates prevent you from moving forward and buying it.

Essentially, don’t be afraid to buy the house you want right now because of external market conditions!

A mortgage does not have to be long term, in fact most people refinance their homes several times as mortgage rates improve or should they need to take cash out from their equity.

Is It A Good Idea?

Committing to the house doesn’t mean you have to commit to today’s financing forever. Buyers can always look for a better financing opportunity down the road and make a change when the time is right.

signages for real property selling

It is absolutely possible to change your financing to more favorable terms later, should better rates and products become available… and if rates only get worse, then you’ll be glad you married the house when you did.

Interestingly, the average tenure of a mortgage is under 6 years…meaning most homeowner’s either move or refinance their mortgages quite often.

Better Rates Down The Road?

I do think there’s a good possibility of lower rates in the future.  More on that hereand here.

Believe it or not, we might be in for an upcoming perfect storm – and in a good way for borrowers.

It does look a recession is around the corner, which almost always results in lower mortgage rates. I know that sounds counter intuitive, but mortgage rates actually fall during recessions.

Also, one of the few areas that seem relatively immune from recession is the housing market.  Historically, one of the safest bets during recession is real estate.

The chart below shows how housing stays quite resilient during and through recessions:

Looking back at eight of the nine recessions since 1960, home prices significantly increased or at least remained stable each time during and after the recession.  One of the reasons this occurs is because interest rates significantly fall during recessionary periods.

What Buyers Should Do Now

Essentially, all of these factors listed above should combine for LOWER rates later this year into 2023.

person with keys for real estate

Of course, things can change, but it sure is looking like a recession is on the horizon, which will undoubtedly bring lower mortgage rates.

Well, waiting to purchase a home and “timing the market” is one option…but it’s almost always a bad idea.  

Why?  Because no one knows exactly when rates will hit rock bottom – and home prices will continue to accelerate.

More importantly, buyers will miss out on the gains of owning a home. Homes increased in value over 15% last year in the west…and things aren’t getting any cheaper.  More on trying to time the market here…

Purchase Strategy

I recommend making your purchase now – and NOT paying extra discount points to lower your interest rate.  As a matter of fact, you could use “negative” points to help offset any closing costs.

Instead of paying discount points to access lower mortgage rates, borrowers can receive credits from their lender and use those monies to pay for closing costs and fees associated with the home loan.

More on that strategy here…

Yes, the interest rate might be slightly higher, but you will want to refinance this mortgage when rates drop later this year or next year!  This will also limit your out-of-pocket fees for the initial transaction.

In Conclusion

Although things look a little grim currently, the future is actually looking bright for mortgage rates later this year and into next year.

Would you like to find out more?  Contact me to discuss your current situation and how you might be able to take advantage of today’s market.  It would be my pleasure to help you!

Rents Hit All-Time Highs – It Might Be Time To Purchase Instead

a house for rent placard

Rents across the U.S. have risen above $2,000 a month for the first time ever…and that’s just the nationwide number.  Rents here in the west are rising at a much higher rate.

apartment architecture balcony building

In Arizona, for example, rents are up over 33% year-over-year…and in California, they are up nearly 25%, per Rent.com.

A new report from Redfin shows that nationally listed rents for available apartments rose 15% from a year ago. Again, that’s the national figure – and rents in the west have gone up even more.

In Los Angeles, the median asking rent is $3,400. Rents are up more than 30% in Austin, Seattle, and Cincinnati. Even in formerly affordable cities such as Nashville it’s now $2,140, up 32% from last year.

So, Should You Rent or Buy?

What all of this information is telling us is that housing is becoming more expensive, whether you buy or rent.

“Housing is getting less affordable for everyone at every level,” says Daryl Fairweather, the chief economist for Redfin. She says after the last housing crash we didn’t build enough homes for a decade. And that lack of supply is the biggest force pushing up home prices.

yellow concrete house

I’m linking from an NPR article – you can find the entire piece here…

Fairweather says home builders built fewer homes in the decade starting in 2010 than in any 10-year period since the 1960’s. “So I think it’s going to take at least another decade to dig ourselves out of this hole.”

On the lending side, I personally have been advising my clients to take a look at their overall housing expenditures to see if purchasing a home might actually be cheaper in the long run.

In many cases, it’s smarter to pay even a slightly higher monthly payment early on to take advantage of building equity instead of paying someone else’s mortgage.

For investors, this looks like a good time to purchase, even with higher interest rates.  Rents are increasing, and because of supply shortages, valuations (and expected rents) should continue to rise.

Industry Trends

Here are a few key industry developments, per the Rent.com article:

1. Prospective homebuyers gain some hope in the housing market

person with keys for real estate

According to that Redfin report, more than one in five home sellers dropped their prices in the past month. It’s the largest drop rate since Fall 2019.

“The sudden surge in mortgage rates led to a sudden and significant cooldown in the housing market in May,” said Redfin Economics Research Lead Chen Zhao.

With interest rates continuing to climb, mortgage applications have gone down 14 percent when compared to last year. This housing market cool-down should give current renters a moment to decide their next steps in their home buying journey.

2. Along with interest rates, rent prices are skyrocketing in some areas

With cities like Phoenix and Los Angeles continuing to see dramatic increases in rent prices, it’s difficult to determine whether to move to a new unit, stay, or purchase.

That’s why it’s important to do your research to see if purchasing might be the most strategic move.

Fairweather thinks that landlords are less likely to raise rents by a significant amount for existing tenants versus a new one. Be sure to read over your lease for any restrictions in yearly rent increases and negotiate with your landlord on new terms, if needed.

In Conclusion

Although home prices and interest rates are up, purchasing a home might very well be the best option available, as rents are rising faster than home prices at this point.

Don’t hesitate to contact me to discuss your current situation and how you might be able to take advantage of today’s changing market.  It would be my pleasure to help you!

Housing Supply and Demand

As you probably know, the number one driver of economics is supply and demand…and it absolutely applies to today’s housing market.

judges desk with gavel and scales

Supply and demand is a true economic law.  Just like gravity is a physical law, supply and demand is an economic certainty – and it isn’t just a theory.  It’s truth.

With that in mind, supply and demand absolutely applies to real estate.  The less supply, the more demand…and as you probably learned in your Econ 101 class, prices go up.

Understanding Housing Demand

The easiest way to understand the dynamics at play here is to take a look at the demand side first…and this is best shown by the number of new household formations.

Essentially, household formations are number of new households that will be formed at a particular time.  They are based on projections of population by age cohort and age-specific headship rates.

Household formation is the underlying driver of long-term demand for new housing and thus new home construction.

As you can see in the chart above, there are 1.4 million new households being formed in 2022…and this number is a bit higher than average (the green line on the chart).

So, the market needs to account for these 1.4 million new households, either with rental properties or homes.

The Truth About Housing Supply

According to most reports, there are approximately 1.7 million new homes being built this year.  It’s also important to take into account that approximately 100K homes are destroyed annually, that leaves 1.6 million new homes available for the 1.4 million new households (for a surplus of 200K homes).  

This looks like good news! Well, let’s dive a little deeper…

As you can see by the chart above, there will only be 1.3 million homes actually completed this year (and that number seems to be shrinking every month due to labor and supply chain issues). 

And when you factor the 100K destruction number in, the net result is new home supply of only 1.2 million, leaving a 200K shortfall.

Secondly, as you can see by the chart below, there is record low inventory in home here in the US.  Only 1.03 million homes are available today. 

Compare that to 2019 and 2020, where there was nearly TWICE the inventory.

You will notice that there are rises and dips each year…and the increase is due to the spring buying effect, where families want to make sure they’ve found a place by the start of school each year. 

So, the fact that inventory is rising this year is completely normal and expected!

Finally, are there really 1 million homes listed for sale?  Well, yes…but not exactly.

When you consider the number of homes under contract (meaning they are currently showing as available but truly aren’t), the number falls to only 400K available for sale.

As you can see, we are still at near record low inventory…only 33K off of the all-time low, set earlier this year.

Is There a Slowdown Coming?

Well, inventory levels appear to be coming up slightly (much of that having to do with the spring buying/selling season), but not overwhelmingly so.

There will still be a lack of supply for the foreseeable future.  Sure, demand is being tempered a bit by higher interest rates, higher home prices, and stock market/economic instability.

However, there’s still plenty of activity to support price appreciation.  Think about it for a second, people still need places to live…even if they need to pay a bit more to do it.

The meteoric rise in appreciation and home prices may slow (and we are already starting to see that in the price drops of listings), but because of the supply/demand curve, there’s no way that prices will actually depreciate.

We can see this in the number of actual home vacancies to support this. 

As you can see, vacancies are at all-time lows – meaning that an increase in supply (because of 2nd home or investment property ownership) isn’t likely. 

Take the housing crisis of 2008 for example…where nearly 3% of all properties were vacant – because folks were literally walking away from their investments because the carrying costs of homes became too much.

We are nowhere near that point in today’s environment – meaning that our market is quite strong and should stay healthy.

I hope you find this helpful…and don’t hesitate to contact me to discuss your current situation and how you might be able to take advantage of today’s changing market.  It would be my pleasure to help you!

Change Is Around The Corner – May 2022

a close up shot of letter dice on an open notebook

It looks like the housing market is showing signs of change.

The last 2+ years have seen huge increases in prices, historically low interest rates, and extreme inventory shortages.

couple passing carton box to each other while unpacking car

Today, however, we seeing the early signs of a housing market change.

Home Prices and Inventory

Home prices have skyrocketed over 35% in the last 2+ years…and even more in some parts of the west.  This has to do with increased demand and low supply (you might remember this from your Econ 101 class).  Couple that with low interest rates, and you have a true barn burner on your hands!

Recently, though, it looks like more homes are coming to market.

Phoenix, for instance, has been one of the hottest markets in the US. Inventory has been at near all-time lows over the last year-and-a-half.

However, in the week of 5/16 through 5/22, more than 3,000 active listings have been added to the ARMLS residential database. That’s more than any time since 2010. Home inventory is now growing at the fastest rate since 2005 in the Valley of the Sun.

As another example, the mountain communities of Southern California have seen inventories essentially double in the last 3 months…and buyers are now starting to see price reductions on homes that haven’t sold as quickly as sellers would like.

That’s something that market hasn’t seen for years.

Home Sales and Starts

Per data from Redfin, April had a 9% year-over-year decline in homes for sale — the smallest annualized decrease since March 2020 and the first single-digit drop in supply for any month since the COVID-19 pandemic started.

And as you can see in the graph above, housing starts are increasing as well, but not quite as fast as demand.

While the inventory issue may be showing signs of easing, homes continue to sell quickly.  The typical home that sold in April went under contract in only 18 days, Redfin reported. That’s six days faster than the same month last year and the shortest average time on market ever recorded in April.

What most industry analysts are forecasting are that prices will likely go up more slowly than they did in early 2021, but they will keep rising, just at a slower rate.

Industry Analysts

From Justin Pope at The Motley Fool“Home prices will likely peak when supply and demand meet in harmony, which doesn’t seem to be the case yet. It’s hard to make that case until I stop coming across mobs of people trying to squeeze into an open house showing. When sellers no longer can turn away buyers offering thousands over the asking price.”

decorative illustration of money box and arrows

“There could be a recession coming, and mortgage rates might keep rising, like buckets of water trying to calm the raging fire of home prices in the U.S. Nobody knows for sure what will happen next, but I don’t see enough evidence that prices will be plunging anytime soon”

David Crown in Forbes for investors – “Multifamily also appears poised to remain on the incline. In fact, CBRE expects a record-breaking 2022 for the sector: “We forecast multifamily occupancy levels to remain above 95% for the foreseeable future and nearly 7% growth in net effective rents next year.”

Julie Vincent from Mashvisor“Though the housing market prices are expected to jump at the beginning of the year, experts predict that towards the second half of the year, prices are to stabilize. It is due to more inventory being available and, therefore, more choices for buyers. Property values are expected to remain more consistent.”

In Conclusion

It does appear that there’s change on the horizon in the housing market. It looks like things are beginning to move back towards a “normal” cycle, with increased supply and single digit valuation increases anticipated later this year.

Would you like to find out more?  Contact me to discuss your current situation and how you might be able to take advantage of today’s changing market.  It would be my pleasure to help you!

Financing Strategy, Recession, and Mortgage Rates – May 2022 Edition

white paymaster ribbon writer adding machine placed on tabletop

Many experts are warning of a potential recession later this year, which has many questioning if it’s a good time to purchase a home…and worrying about mortgage interest rates, in particular.

We know that inflation is at 40-year highs – and as a result, mortgage rates are up over 2% in the last 4 months.

This is one of the most rapid increases in mortgage rates we’ve seen in recent memory.

With all of this in play, what’s the outlook for the future of mortgage rates and housing – and what’s the best strategy to navigate these rough waters?

Let’s take a look at a what’s happening today and also consider a little history of Federal Reserve rate hikes and recession.

Believe it or not, we might be in for an upcoming perfect storm – and in a good way for borrowers.

Inflation

Mortgage rates are primarily driven by inflation, which erodes the buying power of the fixed return that a mortgage holder receives.  When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of their buying power.

When the Federal Reserve increases the federal funds rate, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will indeed decline.  History proves this during rate hike cycles for the past 50 years.

Here’s a quick look at what’s happened historically when the Federal Reserve raises the federal funds rate:

Notice how rates actually DECREASE after inflation starts to slow. 

Most experts hope that the Federal Reserve is aggressive at tackling inflation, as they are really late to the game.  Better late than never, I guess!

By the way, don’t be fooled if you see inflation numbers come in lower over the next few months.  Many in the media have talked about “peak inflation” as right around the corner.  I don’t buy it. 

Federal Reserve Chairman Jerome Powell

Peak inflation will be in September/October of this year.  Just watch.

Also, it does look like some of the supply chain issues that have plagued us (and has contributed to inflation), might be worked out by this fall.  Or at least, we can hope for that!

Recession

The first quarter US Gross Domestic Product (GDP) reading came in at -1.4%.  That means the US economy actually shrunk by nearly a percent and a half.  Not good news, to be sure.

The definition of a recession is back-to-back negative GDP quarters.  So, if the April-June numbers are negative, we will officially be in a recession.  And this seems likely. If not now, it will be soon.

The Fed has stated that they will be moving the federal funds rate higher in the coming months – possibly even 3 percentage points this year.

The thick grey bars in the chart below demonstrate recessionary periods…and they correspond very closely to the Federal Reserve interest rate hikes.

Secondly, when you take a look at the combination of high inflation and low unemployment, a recession always follows:

Finally, another great barometer of a coming recession has to do with the difference in yield between the 10-year treasury bond and the 2-year treasury bond.

Investopedia: An inverted yield curve describes the unusual drop of yields on longer-term debt below yields on short-term debt of the same credit quality. Sometimes referred to as a negative yield curve, the inverted curve has proven in the past to be a relatively reliable lead indicator of a recession.

As you can see by the chart below, we are nearing that point now where we have an inverted yield curve.

So, when you take a look at negative GDP growth, the combination of inflation/high-employment, and the inverted yield curve, it is most likely that we will see recession very soon.

Mortgage Rates

As stated earlier, mortgage rates generally FALL during recessionary periods.

This might seem counter-intuitive, but history bears this out.  Take a look at the chart below:

Notice that mortgage rates actually fall during recessionary periods.  You can see the recessions are pictured in the dark blue verticals, and mortgage rates are highlighted inside of them.

Also, one of the few areas that seem relatively immune from recession is the housing market.  Historically, one of the safest bets during recession is real estate.

The chart below shows how housing stays quite resilient during and through recessions:

Looking back at eight of the nine recessions since 1960, home prices significantly increased or at least remained stable each time during and after the recession.  One of the reasons this occurs is because interest rates significantly fall during recessionary periods.

So, things look to be lining up for lower rates ahead!

Potential for Perfect Financing Storm

Essentially, all of these factors listed above combine for LOWER rates later this year into 2023. 

lightning and gray clouds

So, what’s a buyer or home owner to do now?

Of course, things can change, but it sure is looking like a recession is on the horizon, which will undoubtedly bring lower mortgage rates.

Well, waiting to purchase a home and “timing the market” is one option…but it’s almost always a bad idea. 

Why?  Because no one knows exactly when rates will hit rock bottom – and home prices will continue to accelerate.

More importantly, buyers will miss out on the gains of owning a home. Homes increased in value over 15% last year in the west…and things aren’t getting any cheaper.  More on trying to time the market here…

Today’s housing market is extraordinarily strong, as there is record low inventory:

On the other side, there are more new households than ever – and these are competing for fewer homes:

Strong demand and tight supply should continue to be supportive of home price increases, so prices are not coming down.

Again, what’s a potential buyer to do? Fortunately, there’s a great solution here.

Purchase Strategy

I recommend making your purchase now – and NOT paying extra discount points to lower your interest rate.  As a matter of fact, you could use “negative” points to help offset any closing costs.

Instead of paying discount points to access lower mortgage rates, borrowers can receive credits from their lender and use those monies to pay for closing costs and fees associated with the home loan.

More on that strategy here…

Yes, the interest rate might be slightly higher, but you will want to refinance this mortgage when rates drop later this year or next year!  This will also limit your out-of-pocket fees for the initial transaction.

Refinance Strategy

selective focus photo of stacked coins

If you are considering refinancing, now might be a good time to do a “cash-out” refinance and take advantage of all of the equity that’s been built over the last 5 years and pay down debt.

Rebates can be good for refinances, too, as loan’s complete closing costs can be “waived”. This allows the homeowner to maximize the amount of money received from the refinance transaction.

Then, refinance in early 2023 when rates come down.  That means you can have the cash now, and a more-than-likely lower rate later.

In Conclusion

Although things look a little grim currently, the future is actually looking bright for mortgage rates later this year and into next year.

Would you like to find out more?  Contact me to discuss your current situation and how you might be able to take advantage of today’s market.  It would be my pleasure to help you!

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