The Federal Reserve has lowered their prime lending rate down 50 basis points or a half of a percent aiming for a target rate of 4.75-5.00 from 5.50. Initial reactions in the interest rate markets are neutral which indicates that the mortgage interest rate markets have factored this half percent move down in already. Mortgage rates are now in the low 6’s and high 5’s currently. The Federal Reserve also talked about the labor market, and this was the single biggest reason for moving rates down .5% rather than .25%
The labor market is probably the most under-reported and misreported number out of all of them. Jay Powell (the Chairman of the Federal Reserve) said this in his comment today. He made mention of the job creation rate of being wildly wrong (overrated) and this is why they didn’t move rates on their last meeting as they had the wrong data. Jobs are important numbers to look at as more people working means more people buying stuff and with fewer people working the less stuff people buy. This is directly proportional to inflation, which is what they are trying to control. I have echoed this for months now as a mortgage professional we have been the slowest in history due to high interest rates, so our industry has laid off hundreds and thousands of workers. In addition, without money flowing in the economy employers don’t need employees in a slow consumer market so layoffs have been happening across America for the last year or so and this has not made any news as we are in an election year.
With the lower interest rates, you will see a gradual lowering of mortgage rates as the Fed continues to talk about future rate cuts. What people don’t understand is that mortgage rates will continue to go down in anticipation of further rate cuts in the future. If you are ready to buy a home now would be the time to get started before mortgage lenders get bogged down in refinances. If you have an interest rate in the 7’s you should start the process now to lower your payments. If you have equity in your home and you have high credit card debt you might want to consider a refinance of your home to consolidate those payments and lower your overall monthly expenditures. You can refinance your home every 210 days with any repercussions so start enjoying lower payments today and then possibly even more in the future.
If you are reading this, you have a desire to out from a 40-year season Mortgage man what is going on with interest and the economy. We need to explore what the mortgage rates and the stock market are going to do when the Federal Reserve Bank lowers its Fed Funds rate. The Federal Reserve or the “FED” does not control mortgage rates, they control the rates that independent banks can borrow from the Fed and this in turn is the underlying cost of money. When the Fed lowers interest rates, they lower the interest rates that banks borrow from the Fed overnight or commonly called the overnight lending rate or the Federal Funds rate. This is not directly connected to mortgage rates it does lower the cost of money to the banks so the lower the cost of money to the banks the lower the costs can be pushed out to consumers in the form of Mortgage rates and other loans banks make.
That said, all indications from the Fed are that they are going to lower the Fed funds rate from a target range of 5.25-5.50% to a possible target range of 5.00-5.25%. This means that the rates banks borrow from the Fed will go down. The hope is that this will translate to lower mortgage rates. The Fed is expected to lower interest rates by .25%-.50%, and if this happens the mortgage market has already factored that into the current rates, so when they announce they are lowering interest rates and they lower them by .25%-.50% we will not see a major move downward in long=term Mortgage rates as the markets have already anticipated this move. If the Fed lowers the rate by .25%, we may see mortgage rates go up a bit and if it is .50% we may see a slight lowering of mortgage rates but no major moves downward. The most important part of the announcement won’t be the announcement of actually lowering the interest rates, it will be what they intend to do in the future and that will move the markets more than the actual move downward in September.
If the Federal Reserve sees strength in the economy, from the numbers given to them by the Federal Government’s Bureau of Labor and Statistics (BLS) they will probably only lower the rate by .25% if the BLS number indicates a weakening economy the initial move downward will more likely be as high as .50%. If the numbers look worse than they anticipated, they may lower the rates by a larger number and that would move mortgage rates lower significantly. I and others who have been watching the Fed for decades know that they are far quicker to raise interest rates than to lower them. This is why we anticipate a max movement of .50% which has been, for the most part, factored into the current mortgage rates.
Current conventional mortgage rates have lowered into the 6’s with the anticipation of the Fed moving to lower interest rates. FHA and VA home loans are in the low 6’s to high 5’s. I am not anticipating the Fed to lower their rate lower than .50% and the markets have factored that in as well so anything different from the Fed or an announcement that the trend will be to lower rates throughout the year will have an immediate lowering of mortgage rates anything less will immediately raise mortgage rates.
It’s Monday, August 5, 2024, and the Stock Markets worldwide have endured a significant sell-off. Why is this happening and what is driving this? How will this help Real Estate and how will this hurt Real Estate? What are the global ramifications here and how will it affect you and your finances? Those are just some of the questions I will be exploring.
The markets started the correction last week due to bad economic numbers. Those numbers were weak consumer goods orders and higher-than-expected unemployment numbers. These numbers are what the Federal Reserve looks to when they make up their minds on the direction of interest rates. Interest rates drive the flow of money for growth in an economy and they have been high for several years now. Higher interest rates have slowed the real estate market to crawl over the last several years. Fewer people have been able to afford a house with higher interest rates. So with less home ownership people are not spending money on goods and services for homes such as washers and dryers, home improvement items, and major remodeling projects. All the people who work for those support companies have been slowing down and now are laying off people due to a lack of demand for goods and services. The reporting numbers are severely lagged or even manipulated and when the markets finally woke up to the fact that things are not as great as the reporting numbers have said, then you have a correction and that is what we are seeing.
This correction is just beginning, unfortunately, as the stock markets have been held up artificially by certain big investment brokerages or bad government reporting numbers or both. The philosophy of the Stock markets of late has been to simply look to the government’s Bureau of Labor and Statistics that pump out unemployment numbers, Job Growth, GDP, and unemployment to name a few. When you don’t look out the window to see what’s really going on you can be manipulated. People and the markets are now realizing the truth and reacting to the truth. I fear that the monetary system is not far behind.
Traditionally, when the economy has little or no growth the Federal Reserve will lower interest rates to stimulate the economy by getting money flowing again. I firmly believe that the Federal Reserve will have to lower interest rates sooner than later. Although the next Fed meeting isn’t until September 18th I believe the Fed will take an emergency action by lowering interest rates before their next meeting. How much I can only guess l but I would guess by .25%-.50% to get money flowing again. The problem is that as stock markets crash and big companies have less money to work with they will have to start laying off people, which we have already seen in the large-cap companies and small-cap companies. As people lose their jobs, they will have less money to spend in an economy that has already been ravaged by inflation. Things will have to get a whole lot worse before it can get better.
The good news is that interest rates will start to come down again. This will allow people who have good jobs to refinance themselves to a lower payment. It will also allow businesses to borrow at cheaper rates to expand. This will not be immediate as Rates will not go down as rapidly as they probably should. In the meantime, we will all have to endure a correction that could be very painful for those who are retired or close to retirement. It will also affect those in the tech business with the invention of Artificial intelligence (AI) that will be cutting coding jobs for large tech companies. It will also trickle over to the monetary system affecting the dollar.
For now, sit back and enjoy the show, and don’t panic. If you are young, this will be a big deal for a short period of your life but over time everything will come back as history has shown. So, If you have a good job and stay employed through all of this you will have some of the best investment opportunities in Real Estate that we have seen in a long time. You probably will not see these opportunities until early 2025 so if you can save do so now you will need it. We are in for some very interesting times through this correction and the coming election cycle and the events unfolding in the world. Pray that our government doesn’t decide that War is the way out of this problem as that has been what our government has done for the last 100 years.
By the time you read this, I am sure you have read about what is happening worldwide with pending war. It appears that our own Government is provoking conflicts all over the world and at home for no reason affecting all aspects of business including the Real Estate Industry. At home, the Department of Justice now taking up a side against the Real Estate Industry. In addition, our own government, specifically the Department of Labor and Statistics is feeding us information on inflation and employment that is clearly wrong or manipulated. If you are not asking these questions you should be, as something is going on that is out of our control and is seriously harmful to all of us no matter which side of the fence you stand on politically.
Looking at the state of the world we must ask why is the United States provoking all of these conflicts all over the world? Our media has been telling Americans that it is Russia and China and that is just propaganda so why? The only conclusion I have for this is the US Dollar. The US dollar has been the world’s reserve currency since 1944 and is now being threatened by Russia and China as they are creating alliances with nations all over the globe to start a new reserve currency. You may have heard of the BRICS nations by now, which comprise of Brazil, Russia, India, China, and South Africa and many more nations have joined this movement over the last several years. Why would our government be concerned with this you may ask, it is simple, power and dominance is the answer. As it stands today, and it is changing rapidly, if you want to buy goods globally, specifically oil, you would have to convert whatever currency you have to dollars in order buy these goods. Those countries that have to convert are at an automatic disadvantage to the US Dollar. What Russia and China are creating is a system that would require the US to convert the dollar to another currency thus devaluing the dollar and creating a threat to the Central Banking system. This possibly is an explanation that makes the most sense logically. It makes no sense to make China our enemy when we literally import just about everything from China it is like we are biting the hand that feeds us. As for Russia they need Ukraine’s resources such as their gold and precious metals to back the new currency. Our government has been keeping all this from its citizens in an effort to hide the fact that all these conflicts are over money and that doesn’t fit their narrative. Again, this is not substantiated and is just a theory based on logic and what is going on in the world today. As we all watch to see what is unfolding the average American is being choked by inflation and is not being able to save or afford to buy a house with the high interest rates caused by the high inflation.
Another attack on the Real Estate industry, specifically of late, has been the lawsuits filed by prosecutors in certain states with regards to the way Agents are compensated. The National Association of Realtors (NAR) was recently found guilty of non-disclosure of buyer’s Agent’s commissions upfront as were several large National Real Estate Franchises and Companies. This has sparked confusion and frustration in the Real Estate community. The industry has been in the process of changing the way they disclose since the settlement by creating new forms and even more confusion for the consumer. Now the Federal Department of Justice, the DOJ, has begun to look at this further as they apparently don’t like the Real Estate Industry and we can only guess why. Yes, we are witnessing the weaponization of our government against its citizens or that’s what the actions look like. We are living in very trying times in the Real Estate Industry and these disruptions to our way of doing business is furthering the decline in the industry.
To further make things seem like we are living in a bizarre world the Federal Department of Labor Statistics is putting out economic numbers that both the Stock Market and the Federal Reserve have used for decades to determine the direction of the economy. These numbers have been indicating that inflation is under control or is at least cooling down, but what they are not telling you is that those numbers take out Food and Energy inflation, both of which we know have been going up consistently. People are feeling this in their everyday lives and have taken measures to keep themselves financially secure. I might say, many Americans are steaming mad as their ability to save and live a happy life has diminished with these economic times. In the mortgage business, persistent high interest rates have taken the majority of people out of the real estate market as they simply can’t afford a $3,500-$5,000 mortgage payment as they would need to show $10,000-$15,000 in monthly income to qualify for those payments and those payments equate to a starter home in California of $500,000-$650,000. This economy is not sustainable.
To conclude, I have been in the Mortgage / Real Estate Business for 40 years now and I have never seen the business as slow as it is now. I have seen the Stock Market crash of 1987, 2008-2009, and the pandemic crash of 2020 but what we are experiencing now is far worse and has been lasting for a more sustained time and no relief in sight. This Real Estate market and high interest rates have been declining since 2022 and with war on the horizon and more misinformation being fed to us daily, I don’t see an end. I like to be a realist in life and a logical thinker, however, I have only seen negatives and nothing on the table to fix the situation. I see both political parties as compromised as well as our banking system and with more bank failures on the horizon due to bad commercial loans this is going to take a bit to get through and I pray that we all come out of this as better humans and realize that we are all better united as divided we will fall.
FHA Loans were born from the great depression in 1933. The idea of the government insuring a Real Estate loan, at the time, was groundbreaking. In today’s world, we expect the government to step in and try to fix things when the economy is sluggish or depressed. Back then our government was far less a part of the ordinary citizen’s life. So when the private sector was approached by the government to insure mortgages that were traditionally insured privately by large down payments was a groundbreaking concept. At the time Banks and Brokers were the only way to get a home loan and they required that a potential home buyer put 25-50% or more down to buy a home. So when the government said they would insure mortgages up to 95% of the value of the home, you can imagine how this changed the way Real Estate Loans were originated. It was designed to stimulate housing growth to get the country out of the grips of the Great Depression. It worked, along with a whole new age of people relying on the government to help them when things were tough. Out of the Great Depression, we also got a welfare system, unemployment insurance that the government collected from employers to help with displaced workers and a whole litany of other programs that expanded the scope of the Government. The Federal Housing Administration (FHA) was designed to be a short-term way to get the housing markets stimulated to get America out of the Depression. The program still exists today, and you can take full advantage of it.
Today FHA loans are still alive and well and are still used today to get people into a home with a small down payment of 3.5%. FHA loans are still viable loans for those who have a small amount of money to purchase a home. The way an FHA loan works is very similar to Conventional Loans in that a potential borrower must qualify for the loan with their income and current credit. When we say qualify there are several factors that a lender must review in order for a client to “qualify” for any loan. These factors are but not limited to having shown the ability to handle credit or in today’s word have a credit score that meets the criteria of an FHA loan (550 or better). Generally speaking, FHA loans are more liberal when it comes to having a good credit score than that of its Conventional counterpart. If a borrower has a low credit score due to circumstances out of his or her control and has shown that they are trying to take care of it and that is the only factor with regards to their financial situation they generally can get approved for an FHA Loan. There are several other factors that must fall into line before that can happen, however. For instance, a borrower’s house payment combined with their monthly bills should not exceed 43-50% of their gross monthly income. This brings us to verifying income and what is required by FHA. First, a potential borrower must have a two-year history of working which could be multiple jobs or a combination of school and a job and must be able to show that their income will be stable enough to maintain the mortgage payment. Next, a borrower has to be able to prove they have enough money for the 3.5% down payment. This money can come from savings or can be a gift from a relative a close family friend, or an approved Down Payment Assistance Program.
We talk about FHA loans being a federally insured loan, but what exactly does that mean when you have to pay the mortgage insurance on a FHA loan? Simply put there are two payments to the insurance fund a borrower will have to make; one the upfront insurance is 1.75% of the loan amount (Sales Price minus the 3.5% down payment requirement) this is added to the loan so you don’t have to come out of pocket for this; two the monthly payment of the mortgage insurance is a small percentage of the Loan amount every month. These insurance payments go into pools that are designed to protect the lender’s yield on the loan if there is a foreclosure allowing for the lower down payment. This insurance makes FHA loans more appealing to lenders and thus lenders have more flexible underwriting guidelines and can get more people into homes utilizing the FHA Loan.
When talking about flexible Underwriting guidelines your eyes probably just rolled to the back of your head. Not to worry I am here to help break it down to simple bullet points that you may not have heard of before. Being evaluated for loan approval seems daunting but that is why we have a team of folks to walk you through the whole process. Our highly qualified loan originators will walk you through the process. The Loan Officer will gather your pay stubs, tax returns, bank statements, and W2’s and they will do the analysis for you. Your loan officer will check your credit, check your debt-to-income ratio, and make sure you have enough money verified to close the transaction. The loan officer’s job is to paint your financial picture with your financial information and present it to the underwriter, who will approve your loan. Our Loan Officers do this every day, multiple times, so they are experts at what it takes to get an FHA loan approved, so when you are looking for expert advice and guidance please let us to walk you through this process.
The benefits of using an FHA Loan are:
Now that we have explored the history and the benefits of using an FHA loan you may ask: “How do I apply for an FHA Loan?” At MAE Capital Real Estate and Loan, we have over 39 years of experience working FHA loans, so we should be your logical choice, not to mention our interest rates are better than the rest. Simply click on this link and you can start the process or call us at 916-672-6130 and we can do it for you over the phone.
As this article is being written Congress is still sending our money overseas. What does this mean for the Real Estate market? I will break this down in this article to hopefully shed some reality on the situation. First, we all must remember what drives interest rates today and that is inflation. The Federal Reserve (the Fed) or our Central Bank has only one way to regulate inflation, and that is through raising and lowering interest that banks borrow from the Fed. When the Fed raises its overnight interest rates Banks will raise their cost of money to the consumer through interest rates it lends to its customers. This will lead to higher interest rates for everything Banks lend on including Real Estate Loans.
Real Estate Loans or Mortgage rates directly affect the buying power of consumers when they go to borrow money from their home. If you are a first-time home buyer, then you know what this does to your power to purchase a home. With 30-year fixed-rate loans in the 7s now it will take a combined income of over $120,000 a year to qualify for a starter home in California and that home is nothing to write home about. These homes are in the $500,000 range and depending on where you are in California there may be no homes in that price range and if you find one it might be in a neighborhood where you don’t want to live.
With housing costs being high due to inflation it is making it really tough for the average American especially in California to buy a home. With a house in the $500,000 range, you will have had to save up for the down payment minimum of 3% which will be between $15,000-$20,000 and that does not include any closing costs. In a market like this where the cost of everything is rising daily it makes it difficult for the average family to save for that down payment. Rents are so high as well and that makes it even harder to save. It is legal to tap your retirement account to use for your down payment and closing costs, however, this may take everything you have saved. If you have high-interest-rate credit cards that you are carrying a balance on this may be a further hindrance to saving for the down payment.
The question I get every day is “When are interest rates going to come down?”. This question can be answered if you follow the money. As our government spends more money on foreign aid it is essentially creating a greater money supply. If our government prints more money the less it will be worth as this is an oversupply of money. This concept is similar to a store having too many of one item and to sell those items they have to lower the price to sell them. The same concept holds true for the supply of money, more money in circulation makes it less valuable. Less valuable money means inflation and inflation means the Fed will raise interest rates. When the Government spends more money than it takes in through taxation there becomes a deficit or a debt and this is called the National Debt. Currently, the National Debt is over 34 trillion dollars and we the people hold that debt. To get this money, the government has to borrow it, and to do so they issue Treasury bonds at higher interest rates. As the government borrows to spend, it must pay interest on the debt, and as the debt rises the more interest they have to pay. Currently over 40% of all income taxes brought in, are covering the interest on the debt and that number is rising daily. This is why I can’t see mortgage rates coming down in the near future.
The next step is that the government will have to raise taxes on its citizens to cover their spending habits and this will further hinder Americans from being able to purchase a home. My advice to potential home buyers knowing the state of our economy is to buy now if you can. If you buy a house now and you have to struggle to do so in the beginning, in the long run, your income will go up, and if you have a fixed-rate mortgage that mortgage payment will remain the same over time. If you buy a house in an inflationary time the value of that house will also increase over time. This is one way to build personal wealth. If you wait in the hopes interest rates will come down, you may never be able to afford a home as the cost of living will continue to increase and you will be chasing the housing prices and interest rates. If you have the means to purchase a home now you should be buying not waiting or if you wait you may miss the opportunity to own a home. I understand that things are not ideal but if you wait it could become a lot worse.
By now you may have heard that things are changing in the Real Estate world with regards to commissions. In a landmark decision, the National Association of Realtors (NAR) has lost a lawsuit that stated that Real Estate Buyers should be able to negotiate commissions with their agent and or Seller. The lawsuit further states that Real Estate Buyers have the right to negotiate how their agent is paid and by whom. We will discuss some of the pros and cons of this landmark case and how it will affect buying and selling real estate in the future.
Currently, Real Estate commissions have been paid by the seller of a property and is negotiated upfront prior to their property hitting the open market. The traditional commission structure has been 5-6% of the sales price and if another Agent other than the agent who procured the listing called the buyer's agent generally splits that amount with the listing agent. For example, if you are selling a home with a 5% commission in the listing agreement when another Agent brings a buyer to the home the commission to that buyer’s Agent has already been negotiated with the seller and that has traditionally been half of the total amount and in this case, it would be 2.5% to the Buyer’s Agent and 2.5% to the Listing Agent. With the new ruling against the Real Estate industry, it now states that the buyer will have to pay for the commission when represented by an independent Agent. It still can be asked that the seller pay this amount but now the Buyer has to be notified that it is their responsibility to pay their Agent.
One should know Real Estate law states that any Agent in a Real Estate transaction must take the seller’s best interests into account during the Real Estate transaction. The exception is that if a Buyer contracts with an outside Agent to represent them their Agent can look after their best interests, not the seller's. This is done with a contract between the Agent and the Buyers they choose to represent them, this is called a Buyer Broker Agreement and from this day forward this form will become mandatory for all Agents that represent home buyers. Although this may seem like just another disclosure form in the already sea of forms a home buyer and seller must sign it and it has far-reaching consequences for the Buyer notwithstanding the cost of representation. A potential home buyer may be forced to come out of pocket to pay for representation similar to an attorney-client relationship with a contract upfront stating how they will be paid to represent them. If a potential home buyer chooses to use the listing Agent that buyer will not have the same representation as the Listing Agent has to look after the seller’s best interest before that of any potential home buyer. This type of representation in California is called Duel Agency where the listing Agent represents both the buyer and the seller. This is not legal in a lot of states so it will leave home buyers having to contract with another Agent.
The intent of the lawsuit other than the enrichment of attorneys was to allow potential home buyers to negotiate the commissions in the transaction. This ruling missed the mark for home buyers as now they may have to come out of pocket with money for representation where before the seller has paid the buyer’s Agent. In typical fashion, something that was spun to help home buyers will end up hurting them in the long run as it could dramatically raise the cost of buying a home. A potential Home Buyer could now end up paying more for a home to get their Agent paid so they don’t have to come out of pocket to pay them. If they go directly to the Agent who has the listing on the house and try to negotiate without an Agent representing them they too could pay more for the house without representation.
All is not lost however, here at MAE Capital Real Estate and Loan, we have a solution to the problem of buyer representation. We have been using this method to help our Home Buyers over the years and have been very successful and that is where we represent the home buyer and do the mortgage for them. Yes, our Agents are licensed for both Real Estate and Mortgage which allows our Agent to negotiate with a home Seller for a commission which we also give a portion back to the Home Buyer for their mortgage. In this scenario a home Buyer will not only get representation on their purchase, but they will get representation on the mortgage at the same time. This method has proved to be far more convenient for a Home Buyer as they only have to make one call to their Agent to get information on the home as well as the progress of their mortgage as opposed to having to make 2 calls one to their Agent and One their Loan Officer. Not only will this save them time it will also save them thousands in having to pay the new Buyer Broker it will save them on their costs of the mortgage and in some cases our Buyers get a lower interest rate as we have successfully negotiated all the fees to be paid by the Seller and we contribute some of the commission on the sale to the new loan. In some other cases we have helped our clients Sell a home and Buy another home and we do their mortgage for them, in this case, we negotiate a far lower commission for our Seller and when they buy our contribution saves them now on both brokerage fees as well as mortgage fees. If you are considering Selling and buying another home this way will save you thousands and thousands of dollars when you work with MAE Capital Real Estate and Loan. We call this service bundling which is similar to the way insurance companies work when you give them the opportunity to cover your house and cars. Bundling Services in Real Estate now makes more sense than ever. If you are looking for the best way save look no further than Mae Capital Real Estate and Loan.
Today’s topic might be a bit confusing to some, but rest assured if you know, you can make the right decisions with your money. We are all seeing a tightening of money lately due to inflation which is where prices of goods and services go up faster than income does. Inflation is the worst possible economic effect on any society as the people who are affected by inflation have less disposable income left over after they pay for housing, food, gas, and services. In America, there is a significant amount of people that live paycheck to paycheck meaning that they spend every dollar they make on housing, food, fuel, and services every month. When these prices go up and their income does not follow then people have to go to other sources to make those essential payments such as credit cards and this puts the average American in a deficit. Although this is not good for the average American it is also not good for the banking system as the banks rely on the deposits of Americans so they can lend out that money to keep the banks in an income stream.
This brings us to the banking system itself and most see the system as confusing and have no idea how banks actually work. In America and other Western countries, the banking system is what is called a Fractionalized Banking system. That is a big word that means that the banks can lend out most or all of the depositor’s money. For example, if a bank has $100,000 in deposits from 5 customers ($20,000 each) and it pays 3% interest to those customers the bank then can lend out a good portion of that money at higher interest rates. Remember that the banks have to keep cash on hand in case their customers need cash and in the past banks have held back about 10% of that money for cash. The other 90% is lent out at a higher rate than they are paying the customers that have savings in their bank. In our example, there is $100,000 from 5 people paying them a 3% return to keep their money in the bank. The bank can lend out $90,000 and only keep $10,000 for cash reserves and when they lend out the money they collect say 6% on the money they lend out. This process should leave the bank positive in income and has throughout the history of fractionalized banking.
Here is the problem with the system. Banks currently have no reserve requirements meaning that in my example the banks can legally lend out every dollar of your savings. This should not happen, and most banks will not lend out 100% of their customers’ deposits as they want to stay open in case there is a day when there is a heavy amount of withdrawal money. Banks are in charge of regulating themselves based on their lending models and most banks do a good job of regulating this. Here is the biggest problem facing the banking system today and that is inflation. As we talked about earlier when prices go up faster than incomes the bank’s customers are spending more than they make and they do this with credit cards and equity loans. There will come a point where the average American can no longer pay their debt due to inflation. Human nature is to make sure they have food on the table first and foremost. When the consumer can no longer pay their debt, they default. This means that if Americans can’t pay their credit cards they go into default and the bank receives no money. This holds for mortgages as well.
This is where things start to get crazy so hang on. Remember, that Banks will lend out around 90% of depositor’s money and if those loans start to go bad there is only 10% of cash left for banks to operate. So, a bank’s reserves may get eaten up quickly if there is a high default rate. Banks lend out money for Credit Cards, Residential Mortgages, and Commercial Real Estate loans and lend to other banks. When customers start to default on their loans the income stream to the bank is greatly diminished and they still have to pay interest on the deposits they have for their customers. If the bank has not held enough in reserves to account for this then the bank will fail. Or as we saw in 2008 when this started to occur the government stepped in to save the larger banks not through the use of the Federal Deposit Insurance Corporation (FDIC) but actually printing money to put back into the system. The smaller banks were bought up by the bigger banks. In 2008 we had other factors going on to bail out the system as we were not in an inflationary time it was more of a recession meaning the economy was retracting with no inflation. Real Estate values during this time went down the stock market sold back and there was high unemployment due to the recession. Interest rates went down during this recession as there was no real inflation so with lower interest rates those who had the means bought homes and commercial real estate as the cost of money was cheap and this brought the economy back.
Fast forward to 2020 when the COVID crisis hits. This was a forced recession by the government telling people they could not work. We had never seen anything like this in American history and the result was that the Government and the Banking system were faced with something they had never dealt with before. The mistakes that were made have led us to where we are today. The biggest mistake was to shut everything down that was not essential. The next mistake was that the government did not take into consideration where we were in the business cycle with a healthy economy at the time before they shut the economy down. The Government printed and sent out money to every American and it may have helped some in the short run the long run is what we are paying for today. The Government also lowered interest rates to stimulate the economy and it sure did with people buying houses and freeing up equity to buy more stuff. The money was flowing through the economy and people were buying things at a crazy rate until inflation hit people had to slow their buying habits and in addition to that the Federal Reserve saw the inflation and the only tool they had to slow inflation was to raise interest rates and they did.
Today all that stimulus money is gone, however, the government has continued to spend money by sending it overseas and starting foreign wars. I can guess that the reason for the wars is to get the economy moving again as war requires a lot of money to flow. We could go into the problems of this all day long, but this is not the forum for now. The problem is, currently with the high interest rates and high inflation the more the government spends the less the dollar is worth on the world stage. That coupled with the BRICS system that threatens to remove the Petrodollar on the world stage is further devaluing the dollar. The banks are starting to see their default rate climb with inflation and this is diminishing the bank’s liquidity as this continues to happen, we see a tightening of the availability of money. Today March 11, 2024, the Bank Term Funding Program (BTFP) which is a way for banks to secure funding from the Federal Reserve will be ending. This will force the banks to go to the discount window to borrow short-term funds. This will lead to money being tougher to borrow. We are also beginning to see defaults start to rise and that coupled with the already tight money supply for Americans high interest rates and rising inflation it is a wonder why this is being done. Is it being done so deliberately? You can’t help but think there is some master plan to change the monetary system in America or to create a global currency minus Russia China, Brazil, India, South America, and countries in the Middle East (the BRICS nations). But why?
I am beginning to think that all this stuff we have never seen before such as wide-open borders, money being sent to some foreign war nobody seems to want, money given to illegals, civil disruption, and propaganda being spread all over, is all part of a plan to make America weak. The reason is to change the monetary system and move to more globalization that not many Americans want. I see the UN helping in this destruction of America in that they are funding the illegal migration and to make it worse the US is the largest supporter of the UN. I mention this not to scare you but to open your eyes to the great sellout of America and a move to the International Monetary Fund or something else, instead of the Central Banking system we currently use and enjoy independently of the rest of the world. Before this can happen the Banking system in the US must collapse and it appears from someone who has watched and studied this for the last 45 years that this is what is happening. I don’t want to scare people and I might be stating the obvious, but things are changing fast. I am not holding out much hope for the Federal Reserve to lower interest rates any time soon as we still have inflation, and this is known not by the numbers the government feeds us but by simply going to the grocery store and filling up my car. The mortgage business is the slowest I have ever seen, even worse than 2008. This is also true for the Real Estate market and as things get tighter we should start to see more inventory hit the market as people are having a tough time paying their mortgages even if they have a 2 or 3% mortgage. I am also seeing more people defaulting on their mortgages creating a higher foreclosure rate. We as Americans can only do one thing to fix this crisis and that is to vote correctly, although I live in California and the system has been corrupt for decades it’s all we have to save our Constitutional Republic.
What is going on with Real Estate and Interest rates? This is a question that many are asking right now, including myself. I started in the mortgage business while I was in college in the early 1980s, so I have seen a lot about the industry. My father was in the mortgage business before me so you could say I grew up in the business. I received my bachelor’s degree in economics and started full-time in the mortgage industry in 1986. Things have changed over the years in the business, but the core of the business has remained the same. When I started in the business there were no computers and everything that is now printed by a computer was hand typed and there were no fax machines or cell phones at that time either. From a technological standpoint, there have been many changes but the way we qualify a potential home buyer for a home loan has not changed. The Stock Market’s DOW Industrial average was around 2500 in the early 1980’s so things have changed there as we are over 38,000 today. I have observed many changes, some for the good and some not so good but overall up to this point in my life I can say the business cycles have been pretty consistent.
What I am seeing now is something I have never seen, nor did I think I would see in my lifetime. Like I said above the business cycles have been pretty consistent over the decades until now. With all the economic data I see and more importantly, what I am observing is happening right now is scary. I have always trusted the economic numbers that have been spoon-fed to us from the government until now. Yes, I have lost confidence in the system I helped create throughout the years. When the executive branch of our government stands in the public eye and lies directly to us I have to believe that everything that doesn’t fit their agenda is a lie and that is very sad for America. When I hear the powers at be say that Bidenomics is working and America is thriving I have to call B.S. We all know that things cost more than ever at the store, at the gas pump, and with housing so why is it that the powers at be say otherwise? I try my hardest not to get into politics on this blog but is has gotten to the point that I have to bring it into the conversation as this is why the Real Estate markets are sluggish and interest rates remain high.
My observations in the Real estate markets are that people want to buy but with prices so high and interest rates that are too high, they can’t buy. Inflation has made the cost of everything go up and the value of the dollar goes down. So, when prices of Real Estate should have gone down with higher interest rates and lower demand, we have seen Real Estate values stay the same and, in some markets, continue to go up. The reason for this is that inflation has caused the dollar to go down so much that housing prices have stayed the same which means that they have gone down as inflation has eaten away the buying power of consumers. To put in in other words as inflation makes the price of things increase it also devalues them in that fewer people can afford to buy them. What higher interest rates should have done without inflation is to cause fewer people to be able to afford housing thus slowing the demand and making sellers of real estate have to lower prices in order to sell. As we have observed with the higher interest rates over the last 2+ years Real Estate prices have not reduced as they should have or were intended to do. They have stayed steady or have gone up and this is due to the inflation or the devaluing of the dollar which is the same thing.
What is going on here, you ask? It is pretty simple from my standpoint, but I am not sure our education system is actually teaching these concepts for the younger generation to fully understand. To be clear, how the dollar devalues is simple economics. The government is spending more money than ever, thus putting more dollars into the world economy. When you have an oversupply of anything the value of that item will go down and that is what we are seeing with our US Dollar. The national debt has risen over the last 3 years from $30 trillion to north of $34 trillion consumer debt (Revolving debt credit cards) has risen to historic highs of over $1 trillion in the US alone. This means that every Citizen of the US bears the liability of government spending. When we send Billions and Billions of US dollars overseas this becomes a double whammy in that there more dollars are in circulation but no benefit to the American Citizen. Ironically a lot of the money the US is sending overseas is to protect the borders of other countries while our borders are wide open. This poses many problems for our economy, the most obvious problem is that as more dollars are pumped into circulation the value will continue to decline, thus inflation. You may have heard that” core inflation” has come down which we all know to be a lie, however, core inflation is the price of those goods that exclude energy (gas and fuel) and food prices which is what most middle-class Americans use the most. When your cost of living goes up so high that you can only afford food and housing you have lost wealth and wealth potential.
How do we get out of this cycle of lies and deception from those we used to trust to give us the truth and who are constantly lying to us? I would say vote them out and start over, however, deception, lies, and corruption have taken over the media, social media, and the voting booth. You see when the average citizen loses confidence in the voting system, we have lost our constitutional Republic. When you hear that the United States is a democracy it is not, it is a Constitutional Republic, that is the kind of rhetoric we are hearing that is either a lie or something they want you to believe. I am tired of people blindly believing everything they are told; we need some real changes quickly or our way of life we grew up with will be gone forever. We as a nation are as close to a tipping point as ever before in our history and my fear is that with spending for foreign wars, out-of-control illegal immigration, and corrupt leadership we are very close to something we all should fear. What we need to do is to come together to see what is happening right before our eyes and collectively do something about it. If we don’t stand united, we will fall divided.
To conclude, the Real Estate and Mortgage Markets are being drastically affected by the ridiculous monetary policies put forth by the current administration. With out-of-control spending outside of our own country, cutting oil production in our country, and starting foreign wars we stand to be in this type of crazy economy for a long time without some significant changes. My next big concern will be a crash of the stock market due to American companies not being able to profit like they have been able to in the past. We must also watch the emergence of the BRICS monetary system that Russia and China are spearheading this could cause further inflation by the devaluing of the dollar on the world stage and if the BRICS system replaces the US Dollar as the world’s reserve currency, then we have more problems than I can write here. This has not been covered in the media and is one of the biggest threats to the US Dollar in our lifetime. This could also be one of the underlying reasons it seems we are marching into World War 3 to prop up the dollar. To think how many people will die in a war so the US Dollar is protected when other moves could have been to avert this situation. This is a very pivotal time in our history, and it seems that our media is more concerned about who’s feelings are getting hurt rather than the hard-hitting stuff we all know is going on and we should be concerned about. So, if you are reading this I hope you understand the magnitude of what I have written and I pray it doesn’t get censored in our so-called free society.
PS
I fear we may have gone too far with out-of-control corruption to the point where the economy as a whole is suffering from incompetent leadership. If we don’t get immigration under control we will have too many people trying to get the same jobs and the same housing that American-born people need. As it is those same immigrants are getting government checks or taxpayer money to compete with natural Americans for housing, food, goods, and services not to mention that these people have not been investigated properly at the border so there may be bad people that could hurt Americans or damage property or worse we don’t know. This is causing a higher demand for housing and the longer it goes on the more it will hurt the American people. Crime is also rising in the cities where these migrants have gone and is getting worse every day.
2024 has started off with a bang with earthquakes and Tsunamis. On the first business day of 2024, the bond market gave back some gains from the last couple weeks and the Stock market was flat but still positive. If the first few days of 2024 are any indication of the year we will be in for some turbulent times. 2024 is also an election year so prepare yourself for a political ride that we have never seen before in history except for possibly in 1861-1865 (the Civil War).
This year will start off with a slow economy, and a slow Real Estate market as interest rates are still too high for the average person to afford to buy a home, especially in California. The Federal Reserve (The Fed) has vowed to lower interest rates if they see the economy start to decline. The Federal Reserve's Chief, Jeremy Powell, stated that there could be 3 times they consider lowering interest rates in 2024. This would be a great thing for Real Estate as more people could afford to buy a home. If the Federal Reserve does lower interest rates and you did buy a house in the last 2.5 years you would have an opportunity to refinance and lower your monthly mortgage payment. If you have a $500,000 mortgage at 7.5% and the rates move down to 6.5% this could save you $336 a month in your mortgage payment and for most families every penny counts in this economy.
Watch the election antics as this will also drive interest rates. If it looks like people will be electing more of the same types of people to Congress and the Senate and the Presidency be prepared for more oddities like we have seen since the current administration has taken office. We the people in the Real Estate and Mortgage industries know what has been done to the Real Estate Market over the last few years due to inflation caused by giving away taxpayer funds to other countries and stimulus checks and the general devaluing of the US Dollar. You will not hear the truth on your TV or radio about what has really happened to the economy, so I am glad you found this article to see what has been done to the Real Estate Industry due to the mismanagement of the monetary system by our government. This election will probably be the most pivotal election of your lifetime to determine the direction of the United States States. I am not going to tell you who to vote for as I still believe people have the right to choose but some don’t as you see playing out in current news.
One giant issue that is failing to make the news that is affecting the dollar is the advent of the BRICS money system which has vowed to take the US dollar out of being the world’s reserve currency. BRICS is Brazil, Russia, India, China, South Africa, and now many other nations have joined this movement powered by China and the Yuan (Chinese money) to become the new world’s reserve currency. This is slowly gaining traction as most countries are tired of Americans running the show and flexing their power all over the globe. The BRICS system is poised to bring the US Petrodollar down which is how all oil has been forced to be purchased over the last almost century. This means that until now all other countries had to convert their currency to the dollar to purchase oil which has made the dollar dominate and has allowed America to thrive over the years. This is also a major reason why our military is in the Middle East currently and could spark World War 3, which is another topic that could have strong implications for the US economy. If the BRICS money takes over as the world's reserve currency the US will be forced to convert the dollar to the Yuan to buy oil which could further devalue the dollar causing even more inflation for the U.S..
This is one reason why with the high interest rates we have seen we have not seen Real Estate values crash as inflation or the devaluing of the US dollar is keeping Real Estate values high. We should also be aware of the debt the country has accumulated as America has over $33 Trillion in debt and until now it has not been a big issue as the US has controlled the world markets, if that changes then the dollar will be further devalued and we will have more inflation and with inflation comes higher interest rates. Some would argue that America just needs to print more money and if that happened it would further devalue the dollar and cause even more inflation and more inflation means higher interest rates. At this point in American economics, we are at a tipping point, and with the current path we seem to be on a collision course with monetary disaster unless we get spending and money giveaways under control, if not we could run into serious economic problems that I don’t want to get into in this piece.
The economy is going to be the biggest issue of 2024 and that will directly affect the Real Estate markets if it is not managed properly. Real Estate values will be in line with inflation this year and interest rates will have little effect on Real Estate values as inflation drives interest rates. Interest rates are the Federal Reserve’s only way to combat inflation. The theory is that as inflation increases the Fed will increase interest rates to slow consumer and business spending and thus slow the demand for goods and services. What is not being addressed is the devaluing of the US dollar by other countries which makes all the goods we get from other countries more expensive, especially oil. To conclude, I believe that 2024 will be a very volatile year for Real Estate and we can pray rates come down enough to get more first-time home buyers into homes.
What is an assumable mortgage? It is a mortgage that another person can pay the difference in the current equity position and assume the underlying mortgage. In this piece, we discuss the advantages, disadvantages, the process, and how to get it done efficiently. This is not for everyone but if you are having to sell your home and you have one of those nice home loans with interest rates in the 3's or 2’s your home is more marketable than someone that may not have that available to them.
To define what happens when someone assumes your home loan you need to be armed with the right information. Realtors that have been in the business less than 10 years will probably have never had to deal with an assumable mortgage but those who understand how to market it for their sellers can end up getting the Seller more money on the sale of the house. An example of an assumable mortgage in a Real Estate transaction would look similar to this: Take someone who wants to sell their home and have an assumable FHA loan. They Owe $490,000 and the market is selling homes in that neighborhood for $550,000 to $600,000 and the potential seller has an assumable FHA loan with an interest rate of 3.5%. A potential home buyer will have to put down the difference in the sales price and the amount owed on the mortgage. Being able to offer an interest rate in the 3’s will make this home more marketable, but it is not for everyone as you need to be able to put the difference down in cash. So in this example, the house sells on the higher end of the market because of the 3.5% mortgage for $600,000 and the potential home buyer has to come up with $110,000 for a down payment the difference between the $600,000 agreed on sale price and the amount owed of $490,000.
Once a contract is negotiated between the new Home Buyer and the Seller the process begins. If you have a good Real Estate Agent, like an MAE Capital Agent, they would have done the leg work before the house went on the market to make sure the existing home loan is assumable and get the paperwork for when a potential home buyer does come knocking it will be ready for them. The process to get an assumption started is to complete the entire Residential Mortgage Application from the existing lender and provide them with all of your Income documentation, your banking info, and your credit report with a minimum credit score of 620, however, this may vary from lender to lender. You will be applying for the existing mortgage payment, balance, and remaining term. You will need to be able to show enough income to qualify for the existing mortgage by being able to prove that the mortgage payment and your existing monthly bills are no greater than 49.99% of your income. This is done by providing pay stubs tax returns and W2s.
Once you have gathered all the documents that the existing lender needs to issue an approval by analyzing all the documents provided such as pay stubs, bank statements, retirement statements, tax returns, W2s, and any other supporting documentation they require. If you are involved in an assumption transaction you should be prepared to wait as lenders are just getting the message that this is a viable way to sell a house, they have not fully ramped their assumption departments so it could take a bit, up to 30 days once they have the documentation. This is why you need a Real Estate professional on both ends that understands the process. At MAE Capital Real Estate and Loan, most of our Agents hold both a Real Estate license as well as an NMLS mortgage license so they can help talk the talk with lenders with trying to get an assumption accomplished. Knowing how the process works and being able to understand what the existing lender is saying is invaluable as this could save the transaction from falling through or taking longer than it should. Also when you bundle your services with MAE Capital Real Estate and Loan you will save money on the sale of your home and the purchase of your next home.
As a seller, you may not know if your loan is assumable without talking to your existing mortgage holder. If you know you have an FHA or VA loan you know those can be assumed. If you are a Veteran, you should know that if you allow your VA home loan to be assumed by a non-veteran you will not be able to use your VA benefit to buy a home again until that home loan has been paid in full. So, if you are a Veteran you may want to look at this more carefully especially if you are planning on using the VA home loan on your next home purchase. If this is a process that you are interested in please contact one of our Realtor/ Agents today as you will have a pro on your side.
FHA Loans were born during the great depression in 1933. The idea of the government insuring a Real Estate loan, at the time, was groundbreaking. In today’s world, we expect the government to step in and try to fix things when the economy is sluggish or depressed. In 1933 our government was far less a part of the ordinary citizen’s life and it did not financially take care of its citizens like they try to do today. So when the private sector was approached by the government to insure mortgages that were traditionally insured privately by large down payments was a groundbreaking concept. At the time Banks and Brokers were the only way to get a home loan and they required that a potential home buyer put 25-50% or more down to buy a home. So when the government said they would insure mortgages up to 95% of the value of the home, you can imagine how this changed the way Real Estate Loans were originated. It was designed to stimulate housing growth to get the country out of the grips of the Great Depression. It worked, along with a whole new age of people relying on the government to help them when things were tough. Out of the Great Depression, we also got a welfare system, unemployment insurance that the government collected from employers to help with displaced workers and a whole litany of other programs that expanded the scope of the Government. The Federal Housing Administration (FHA) was designed to be a short-term way to get the housing markets stimulated to get America out of the Depression. The program still exists today, and you can take full advantage of it and you can get a mortgage up to 96.5% of the purchase of a home.
Today FHA loans are still alive and well and are used still today to get people into homes with a small down payment. FHA loans are still viable loans for those who have a small amount of money to purchase a home. The way an FHA loan works is very similar to Conventional Loans in that a potential borrower must qualify for the loan with their income and a current credit score. When we say qualify there are several factors that a lender must review in order for a client to “qualify” for any loan. These factors are but not limited to having shown the ability to handle credit or in today’s world, have a credit score that meets the criteria of an FHA loan (550 or better). Generally speaking, FHA loans are more liberal when it comes to having a good credit score than that of its Conventional counterpart that requires a 640 score or better. If a borrower has a low credit score due to circumstances out of his or her control and has shown that they are trying to take care of it and that is the only factor with regards to their financial situation they generally can get approved for a FHA Loan. There are several other factors that must fall into line before that can happen, however. For instance, a borrower’s house payment combined with their monthly bills should not exceed 43% of their gross monthly income. This brings us to verifying income and what is required by FHA. First, a potential borrower must have a two-year history of working which could be multiple jobs or a combination of school and a job, and must be able to show that their income will be stable enough to maintain the mortgage payment. Next, a borrower has to be able to prove they have enough money for the 3.5% down payment. This money can come from savings or can be a gift from a relative a close family member or friend, or an approved Down Payment Assistance Program.
We talk about FHA loans being federally insured loans, but what exactly does that mean when you have to pay the mortgage insurance on an FHA loan? Simply put there are two payments to the insurance fund a borrower will have to make; One the upfront insurance is 1.75% of the loan amount (Sales Price minus the 3.5% down payment requirement) this is actually added to the loan so you don’t have to come out of pocket for this; Two the monthly payment of the mortgage insurance is a small percentage of the Loan amount every month. These insurance payments go into pools that are designed to protect the lender’s yield on the loan if there is a foreclosure. This insurance makes FHA loans more appealing to lenders and thus lenders have more flexible underwriting guidelines and can get more people into homes utilizing the FHA Loan.
Talking about flexible Underwriting guidelines your eyes probably just rolled to the back of your head as this may sound confusing. Not to worry I am here to help break it down to simple bullet points that you may not have heard of before. Being evaluated for loan approval seems daunting but that is why we have a team of folks to walk you through the whole process. Our highly qualified loan originators will walk you through the process. The Loan Officer will gather your pay stubs, tax returns, bank statements, and W2s and they will do the analysis for you. Your loan officer will check your credit, check your debt-to-income ratio, and make sure you have enough money verified to close the transaction. The loan officer’s job is to paint your financial picture with your financial information and present it to the underwriter, who will approve your loan. Our Loan Officers do this every day, multiple times, so they are experts at what it takes to get an FHA loan approved, so When you are looking for expert advice and guidance please let us walk you through this process.
Now that we have explored the history and the benefits of using an FHA loan you may ask: “How do I apply for an FHA Loan?” At MAE Capital Mortgage Inc., we have over 38 years of experience working with FHA loans, so we should be your logical choice, not to mention our interest rates are better than the rest. Simply click on this link and you can start the process or call us at 916-672-6130 and we can do it for you over the phone.
A Loan Officer is Licensed by the National Mortgage Licensing System (NMLS). This holds true across our great nation. A Loan Officer can do multiple things but our discussion today will be for first-time home buyers and move-up buyers looking for their primary residence to live in. This type of home loan is called a Qualified Mortgage and certain rules have to be followed by your loan officer to stay in compliance with the law. If you are looking for an investment property you are not a qualified mortgage home buyer as under the law and you are not protected under the same rules as a primary home buyer. When finding a Loan Officer you should know these basic facts of the law so it can benefit you. If your Loan Officer doesn’t even understand these basic rules of the industry then you might need to find one that does. Of course, there are many factors that we will be covering to pick the right Loan Officer for you.
So how do you know what Loan Officer or Company to pick when shopping for a new Mortgage? The first thing everyone should know is you have to feel comfortable with the loan officer. You have that little voice in the back of your head and if it is screaming at you to not trust the person on the other end of the phone that is your first sign. A little knowledge of what a Loan Officer actually does goes a long way. Trust your intuition with the person on the other end of the phone as we are in a mortgage market right now where every deal is important to have as it is so slow and interest rates are on the rise. Loan Officers are having to compete like no other time in the industry so some of the things that they will say are misleading or bait and switch.
I know this as I have clients telling me daily that they have been quoted interest rates far below where the actual market is. For example, you are shopping for interest rates for a home you will be living in, or as we stated above a Qualified Mortgage. You are getting quoted consistently in the low to mid 7’s for interest rates based on your credit qualifications. When you call and talk to a Loan Officer that tells you that the interest rates are in the mid to high 6s anybody’s first reaction would be to think they have found the perfect deal. The trap here is that you have been fooled but you don’t know it yet. So you gather all your documents, complete the loan application and deliver it to the loan officer you talked with earlier. Then you wait for all the inspections to be done on the house you are in contract on to see what might be wrong with the house and you become distracted with the house and not the financing. A loan officer understands how this process works so about this time when the inspections start to come in, the Loan Officer sends out the disclosures, required by law, and you realize that the terms are not what you were told on the phone. So you call the Loan Officer and he or she tells you that things have changed and that this is your interest rate which happens to be in the low to mid 7’s. So you think “Oh well I don’t want to have to go through delivering all that paperwork to another lender so I will just stay here.”
If this happens to you, you should run as fast as you can to one of the Loan Officers you talked to that you felt comfortable with as if they lied to you in the beginning to get your business what will stop them from lying more and possibly getting your loan declined because they were untruthful to the processor and the underwriter. Because the actual people who are working on your loan may not trust that loan officer because they know they are not a truthful person. This kind of deception is called the Bait-and-Switch sales technique which is highly unethical, but people will do it to get the business in the door.
When shopping for a Mortgage you should always go with the Loan Officer who you are comfortable with and although they can’t match that low rate that was told to you by the untruthful Loan Officer, you can trust that they will get the job done for you with an interest rate that is real. This brings me to the fact that if you are a home buyer, with good credit and you are looking for a home to live in you are not only protected by the law but you now know that all Lenders and Mortgage Brokers have to get the interest rates from all the same sources like the Federal National Mortgage Association (FNMA or Fannie Mae) or the Federal Home Loan Mortgage Corporation, FHLMC, or Freddie Mac. So if you are being told something different be very suspect as all Lenders that are dealing with FNMA and FHLMC will be in the same basic interest rate range. Some lenders or Mortgage Brokers can be slightly better in interest rates only because they may have less overhead but there should only be at the most a .5% difference in interest rates between all lenders and Brokers on any given day and that may be high.
The moral of the story here is that if it is too good to be true it usually is. Your Loan Officer should be your advocate through the process. Your Loan Officer will be integral in helping your loan get through the process as fast and efficiently as possible. You will be in contact with your loan officer once you have found a house almost every day so you should have a good working relationship with them. I also would be looking for energy in my Loan Officer as it takes a lot of energy to get your file through the system fast and efficiently. Your Loan officer should have a working knowledge of how your Realtor does his or her job, in fact, if your Loan Officer also holds a Real Estate License you will know that he or she has an advanced knowledge of how the Real Estate Process works. At MAE Capital Real Estate and Loan, all of our Loan Officers will have both a Real Estate License and an NMLS license. Be careful of Credit Unions and Banks as they are not under the same rules that we are so they generally have slower turn times and Loan Officers that do not hold Real Estate Licenses and in some cases, you may be talking with someone at a bank or credit union that doesn’t hold any license. We are here to help and we will not mislead you in the process of buying a home in fact we don’t even get paid until we close your transaction so it is in all our best interests to get your transaction closed as quickly and efficiently as possible.
Here we are in the middle of 2023, had to believe. This year has been one of the slowest Real Estate Markets we have seen since 2009. We are experiencing record inflation for the 21st century of the like we have not seen since the early 1970s. This tells us that the cost of goods and services has risen faster than most people’s income streams have. What does this mean for Real Estate now and into the second half of 2023?
Based on the history of inflation you see the Stock markets go up due to the fact that the valuations of companies tend to go higher with inflation. We have seen this throughout history and this time is no exception. What you must be cautious of is when companies’ costs rise so high and the demand for those goods or services decreases thus income for those companies will also decline. After this companies will have to lay off salary-based employees to keep up with the rising costs and when this starts to happen you will see the economy fall into a recession or worse depression.
Inflation is such a killer of economies in many ways not just with the higher costs of goods and services but also with the availability of money with higher interest rates. Over the last year and a half now we have seen interest rates move from historic lows for 30-year fixed-rate mortgages from the 2%-3% range to now a 7%-8% range. What this has done is cut out a whole segment of the population’s ability to qualify for a new home loan. In California, we have starter home prices hovering around $500,000 on average for the state. What the higher interest rates have done is cut the people that could have qualified for this house. For example, the payment on a $500,000 house with 5% down at a 3% interest rate is $2002.62 principal and interest at 7.5% Interest rate the payment would be $3,321.27. At the 3% rate, an average borrower would have to make right about $7,000 a month to qualify for the mortgage. At 7.5% the borrower will have to show around $11,500 a month. This shows you the power of interest rates and buying power.
That said you would assume that Real Estate prices would have to come down to accommodate the higher interest rates. We saw this occur in some markets but not nearly enough to make up the difference. Today we see Real Estate prices staying relatively steady. The reason for this is interesting. Since so many people refinanced or purchased their homes with lower interest rates, they are reluctant to sell their homes as the can’t qualify for a move-up home, and in some cases, people couldn’t afford the house they are living in if they had to do it all over again. So, we are seeing people holding on to the lower interest rates and not selling their homes as they would have to qualify for a new home under the higher interest rates. With people not selling their homes, we are experiencing a supply shortage of homes on the market and with that low supply of available housing prices have remained steady even with the higher interest rates.
The next hammer to fall, unfortunately, is going to be employment layoffs. This is going to happen due to inflation and government spending that fuels inflation with an oversupply of money. In the second half of 2023, I see consumers holding on to their hard-earned money as the average consumer feels that something is going to happen, they just don’t know what. There are many factors that could fuel inflation, but the biggest unreported issue will be the worldwide devaluation of the dollar. When the world drops the US Dollar as the worldwide reserve currency, all the goods we buy from overseas will cost more and more. This is something that no generation of Americans has ever seen, the closest we got to this was the great depression. The way America got out of that was World War 2 by producing Ships, Planes, Autos, Guns, Ammunition, and such. The largest difference between then and now is that we produce very little in the US, we outsource to China and other countries. History tends to repeat itself, so shouldn’t be preparing for a war? If you are paying attention to the world and not preoccupied with all the social issues going on in our country, you will see how close we are to this prophecy coming true.
I don’t like to be negative, and I truly believe in America and the American way of life, however, I must be a realist with what I know and have seen with history. As the US Dollar becomes less valuable in the world markets this will cause further inflationary pressures on our economy. The only way out of this at this point is to figure out a way to re-set America’s debt to the Central Bank or get rid of the Central Reserve Banking system altogether and start with something new. How this could be done I would not know, but I do know it will be a very painful process to every American. With the BRICS nations and a new world reserve currency on the horizon, America is going to have to do something fast, very fast as that is supposed to launch in August of this year, and over half of the world’s nations have agreed to sign on this new asset-backed currency. Our central Bank is going to try and compete with this with a new Central Bank Digital Currency (CBDC). The problem with this is that even our own citizens don’t like the idea of this as Americans don’t like the idea of being watched or controlled in the name of some made-up government issue like climate control. For more on this please I urge you to do research on this as this CBDC is supposed to come out in July of 2023.
What will a CBDC do to interest rates, housing, and inflation? This is something that remains to be seen but rest assured it will be a rocky ride going into the end of the year. I always say if you can own Real Estate do so as Real Estate will have value. I believe that once people see the changes happening there will be a flight to quality investments like real estate. I will bet the Stock Markets will struggle, to say the least. Interest rates will be dependent on how much inflation we have as interest rates will rise as inflation rises. So, if you are looking for advice as to when to buy Real Estate my advice would be to buy as much as you can now, if you can find it, and hold those properties that you hold currently. Keep an eye on the world and what is going on, and research other sources other than your mainstream media that most of us have grown up on as we are not being told the truth to keep the masses under control for as long as they can. Not that one individual can do anything, but the power of the masses can make changes.
By now you have heard about the banks that have failed. But what does this mean for mortgage rates and Real Estate? The banks that have failed have been bailed in by the Federal Government. Bailed In is different from bailed out in that a bailout keeps the bank doors open and Bailed In only gives deposits back to the depositors. To be clear if you had stock in those failed institutions it is now worth nothing but if you had a checking or savings account in one of these institutions you will be whole courtesy of the Federal Government. This is good for individuals who had deposits in those institutions but those who held stock in those institutions have lost their entire investment. So what does this tell an economist that is looking towards the future of all banks and monetary policy moving forward and what will happen with Interest rates and Real Estate?
What is next and what are the consequences of these banks failing, of the government bailing in depositors, inflation, and interest rates? This goes deep and you may have figured out some of what is going on but the underlying issues you may want to put your seatbelt on for the ride. You see knowing why these banks failed you may have heard on your favorite media source that told you that rising interest rates and poor asset management is what you have heard. Meaning that when interest rates have risen the banks had assets that were purchased in a low-interest rate environment and now that rates have risen to more than double what they were when the assets were purchased thus devaluing the held assets. When the customers came in to take money out of the bank it did not have enough assets set aside to cover the demand for the money so they failed. That is the rhetoric we are hearing and some of it is true, however, we should be looking at what has happened to the dollar's value lately and why. The dollar has lost a significant amount of value in the world marketplace and this has played a role in these collapses due to inflation and social economic factors in the world.
Here is the problem I see as a follower of economics. Inflation, we all know has been a problem with the high price of fuel and groceries, and consumer goods. We also know that the Federal Reserve will raise interest rates to fight inflation, to slow the economy down. Inflation is caused by a few things; One where the demand for goods and services exceeds the supply of goods and services; Two, when the value of money declines; Three when there is an oversupply of money in the economy; Fourth, and one that nobody wants to talk about and that is when people and other nations do not value the dollar as they used to and have lost some of their belief in the dollar. The last one there is the biggest problem that no one is talking about as it goes against everything we have always been taught and that is that the US government and the US dollar issued by the Central bank is no longer favorable to trade for goods and services on the world stage. This will be a topic for future blogs.
The problem with the government bailing in depositors is the Government will be infusing more dollars into the economy and that will further dilute the supply of money and create more inflation. What you may not have heard or understood is that the average deposit in the Silicon Valley Bank was or is $2 million dollars and the Federal Deposit Insurance Corporation (FDIC) only insures deposits up to $250,000. Yesterday, Biden told the world that the Federal Government would make up the difference to all depositors. This was an attempt to calm the public from taking their money out of the banks and causing a complete failure of the banking and the Federal Reserve system. You see, if you and I stop believing in the US dollar as a means of trade for goods and services then the dollar is useless and all US citizens have lost everything they have worked for. This is a simplified view however, the US dollar is backed by debt, not by gold, or silver, oil, or anything of tangible value. It has always been said that the dollar is supported by the good faith and full backing of the federal government. The same government is $31 Trillion in debt.
Our world has now become more confusing than ever, if interest rates rise to combat inflation, then the economy will slow further, more jobs will be lost and the potential for more bank failures will loom if they have been holding low-interest rate assets as reserves. If the Federal Reserve halts its interest rate march upward then we will continue to have higher inflation. Another issue we all should be watching as citizens is the introduction of the BRICS monetary system that is supposed to go into effect in August of this year. If you are not aware of what this is you should know that it stands for Brazil Russia India China South Africa and it is where these counties have got together to create a new currency to replace the US Dollar as the world's reserve currency. Since its announcement Saudi Arabia, Egypt, Iran, Iraq, and many other countries and most recently Mexico is joining this new currency and denouncing the US dollar. What this could mean to the US dollar could be staggering so stay tuned on this.
What does all this mean to the Real Estate business? It will all depend on how people view this current situation. Will investors look to real estate as a stable investment no matter what interest rates are at or will they stay on the sidelines in the current interest rate environment? This question might be answered by looking at the super-wealthy and what they are doing with their investments. Some of these whales or super investors are looking to real estate as an investment so in the short-term, this could be good. Myself having been in this business for almost 40 years, I have never seen anything quite like this and pray it turns around as housing is the foundation of America as it supports all aspects of American life. I have to stay positive as I believe we all have to and when investors come back into the Real Estate game we will be here for them with open arms. MAE Capital Real Estate and Loan is here for all of your Real Estate needs.