By now you probably have heard that interest rates have risen to a 20-year high, but how exactly is this affecting Real Estate sales and prices? The Federal Reserve (the Fed) raises interest rates to slow demand for goods and services as with higher interest rates things cost more over time. The Federal Reserve does not directly affect mortgage rates as the rates the Fed control are only the rates that banks borrow from the Fed. This makes the cost of money to banks cost more so Banks raise their rates to the consumer to cover the increased costs to them. Since consumers get loans from Banks to buy cars, homes, consumer goods, and services the costs for all of it go up. In the mortgage arena, we have seen rates go from the low 3’s in January of 2022 to the low 7’s currently.
It should be obvious that a consumer will be able to buy less of a home in a high-interest rate environment, but home buyers don’t really understand how much it actually affects their buying power. An example would be a couple who has been making an income of $100,000 combined with a normal debt load of a car payment of $500 a month and student loans of $250 a month. This couple could afford a house with a 3% mortgage rate and 5% down at $561,000 sale price. At a 7% interest rate the same couple can now only afford a house priced at $356,000. This a $205,000 difference that has occurred in less than a year. This will hold true when qualifying for auto payments, business loans, and all loans to buy goods and services.
So with the diminished buying power of potential home buyers, you would think that Real Estate values will go down to accommodate the higher interest rates. You would be right in your assumption. This holds especially true in the higher priced homes where the people that were qualifying for a million-dollar mortgage can now only qualify for a $700,000 mortgage. Home sellers are having to come to grips with the fact that their home is not sellable at the same price it would have been a year ago. With older folks looking to retire in the next 5-10 years they are seeing the value of their Real Estate portfolio go down, and this may hold off their plans for retirement and holding on to their long-term jobs not making room for younger folks to fill the gap. Furthermore, the older generation has seen this before so they will be extra cautious with their money going into retirement and possibly not selling their family home to downsize for retirement as they may have originally planned.
The higher interest rates are pushing Real Estate values lower and this is making investors worried to the point they are holding back investing in Real Estate taking out a whole segment of Real Estate Buyers. As prices decrease you will be seeing appraisals come in lower-than-expected making selling a house more challenging when the sale depends on an appraisal. Those particular sales may fall through if sellers are not willing to lower their prices and eventually, if they need to sell, they will have to sell at a lower price. If interest rates continue to go up, and it is looking like this will be the trend, prices will have to continue to go down to accommodate those that can no longer afford to buy in the same price range as the lower interest rates would have allowed them to. The higher rates thin out the potential pool of home buyers as their buying power has diminished and those folks looking to move up by selling their existing home and buying a bigger one have dried up as well.
From a lending aspect, as rates rise, lenders know that the home values will be decreasing so the appraisal is going to be a much more important part of the transaction. FNMA and FHLMC will be cracking down in different markets where they know the prices are softening faster than other parts of the country, typically in higher-cost areas like California. Since MAE Capital Mortgage also does Private Money lending, we are seeing private individual investors who actually lend their own money to others, tighten up their requirements as well. This means less available funding for fix and flip programs, After Repair Value (ARV) programs, investor buy and hold programs, commercial funding, and more. Talking about commercial funding where that market has been killed essentially by COVID and Amazon coming in to fill the gap, has gotten even worse. As investors see the rates go up, they are less likely to buy or lend their money for Real Estate of any kind.
To conclude, higher interest rates make it more difficult for home buyers to buy homes that fit their needs. High-interest rates make home values have to come down to be able to sell their homes. Higher interest rates make the desire to invest in Real Estate and Real Estate Notes and Deeds a whole lot less. Higher interest rates make commercial lending even worse and make commercial values continue to decline. So, all in all. higher interest rates are not good for Real Estate values, resales, investments, and rehabilitation of real estate. If you are a potential buyer of Real Estate, you need to make sure your offer is a bit lower than the current market supports as prices will continue to fall as rates rise. If you are a potential seller of Real Estate, do it now before rates go even higher and be flexible in looking at lower offers, if you are not flexible you will not be able to sell your property in this crazy Real Estate market. On the bright side if you are well qualified first-time home buyer it should not matter to you what rates are so long as you can afford the payment associated with the house you want to buy. As a first-time homebuyer, you now have more inventory to choose from and if you buy now and interest rates continue to go up you have a low mortgage and an affordable payment, when interest rates go down in the future you can always refinance to the lower rate. So don't be afraid of rising interest rates as there is no perfect time to buy real estate but what I have seen over the long run owning is far better than renting so do it now and join the club of home ownership and let MAE Capital help you with buying your home and financing it as when you bundle with us you get perks like money for closing costs and an easier experience.
As most of you know Mortgage interest rates have been rising at a speed at which most people alive today in the home buying market have never seen before. Some of us old timers have seen this before and it is very true that history repeats itself and we should all learn from it. We are going to explore why rates are moving up so rapidly and then we will look at the future and where rates are heading and why. When I say history repeats itself all you must look to is the early 1970s through the early 1980s and see how monetary policy was run. I was a kid in the early 1970s and remember the gas lines and high inflation and interest rates that topped out right around 20% for a 30-year fixed-rate mortgage. During this, the government also set the interest rates for FHA and VA loans and put ceilings on gas prices.
If this sounds familiar it should be as the government has been involved since the beginning of time with free markets and it has never really worked out. In the 1970’s President, Nixon put gas price ceilings in place in hopes to make gas prices go down or at least stabilize them. This failed miserably as when you try to put a ceiling or a cap on prices that de-incentivizes producers from producing. During this time the government was also spending and expanding the government and services the government felt would help the common American. Then to pay for all the spending they were forced to raise taxes across the board and the Federal Income tax rate got as high as 60%. So, Government spending caused inflation, and the taxing of the citizens meant less money the average worker could take home on every paycheck thus they did spend less, and the economy was basically stagnant. During this time the term “Stagflation” was coined meaning a stagnant economy with high inflation. If this sounds familiar, then open your eyes and look around with the Government spending Trillions of dollars on “COVID relief”, the Ukraine war, AKA money being sent to the United Nations. Then we have all heard about the 87,000 IRS Agents they are hiring to make sure they get their money from the average American after they raise taxes on all of us. This type of economics is called tax and spending or Keynesian Economics.
This is poor Monetary Policy from an economic point of view. I can say without one doubt in my mind that if Monetary Policy continues down this road then we are in for many years of high inflation and high-interest rates. The government has totally neglected the economic curve's supply side and focused only on the demand side. The evidence is seen at the gas pump, the grocery store, at the automaker's showrooms, and the list goes on. Current monetary policy is to raise interest rates with the hopes that with high-interest rates consumers will slow their demand for goods and services, which has held true, however, when staples like food, fuel, transportation (automobiles), and housing prices have risen due to normal demand interest rates can’t slow the basic demand for these goods. Couple the fact that we have just come out of an economy that was shut down for basically 2 years the supply of the goods consumers need has been diminished as there were fewer workers to build or produce these basic goods. Since this has caused a shortage in supply and with the same amount or more consumers going after the same amount of goods and services with the same or less ability to produce more goods due to lack of labor and now high-interest rates or a high cost of money to pay for these workers to produce a normal amount of goods you get supply side inflation. If you have heard of this before you are not wrong, Ronald Ragan was the first to look at the supply side of the economic curve and after that was addressed in the mid-1980s the economy was more manageable. Also, with more workers working the government was getting more tax dollars by taxing the workers less and having more workers paying lower rates but more workers paying those lower rates made the government more money. This is a concept that has been lost by our current Monetary Policies which are only looking at the demand side of the demand and supply curve.
I think you now have the knowledge to see where this is all going unless some drastic changes are made. The economy has no feelings and reacts only to what is given to it. I will say without a doubt in my mind that if the supply side of the global economic and American economic curve is not addressed soon interest rates have to continue to rise. The Federal Reserve or our Central Bank only has interest rates to fight inflation with they do not have the ability to address the supply side of the demand and supply curve and without the Government’s policies changing to address this we will continue to see high inflation and high-interest rates. The way out of all of this is to actually do the opposite of what is going on currently. I agree with the Federal Reserve in raising interest rates as inflation is high, however, high-interest rates will not curve the demand and it will only hurt the supply side of the curve as it is costing companies more to have workers with high taxes and high-interest rates. Until the Government addresses the supply side of the curve this will continue to spiral upward out of control, and I am truly convinced that our current government leaders do not understand this basic economic concept. In fact, they have gone so far the other way spending money to “protect the environment” they have basically stopped the expansion of oil production in the United States, and with a low supply of oil you get higher gas prices. Oil is not only used for our automobiles but our roads, plastics, fertilizer, and so many goods are produced from oil that people don’t even realize. The price of fuel is directly related to our food prices, as well, and people may not realize that it cost more to deliver the food on a truck, it also costs more for the fertilizer to grow the food. It also costs more for the farmers to till the fields and harvest the food as that is all done with fuel. We are nowhere close to using electric vehicles for all of this and then you have to ask the question, are we going to need fuel to power generators to make the electricity to power all the electric vehicles? I agree we should be more environmentally friendly, but not at the expense of our way of life, and our economy invest more time to come up with real solutions not a knee-jerk to some environmentalists. The real solution to clean power is Hydrogen as 2/3 of the Earth is covered in water and when you burn Hydrogen the byproduct is water, why we have not gone down this road baffles me, but I digress.
So, I will conclude this by saying if we stay on the current course the interest rates will be around 8% by the end of the year, and by the first quarter of 2023, we will have interest rates at or above 10%. You might think this is a crazy prediction but look at the history of this type of Monetary Policy and see what happened last time. I am not a Doom and Gloomer, I consider myself a realist and everything to this point under the current Monetary policy has not worked or has made things worse. If you read some of my earlier blog posts and the dates, I wrote them you will see I have been dead on. Remember the economy has no feelings it does what it is told to do, all you have to do is look to see what it is being told to do and you will come to the same conclusion I have. Unfortunately, I have no say in how the government creates its policies and if I did I fear I would be called an “Extremist” in my views. We will see sagging housing prices, but the rub will be that no one will be able to afford them with rates as high as they are headed without some income inflation to match the current inflation rate, however, if you make more income but are taxed at a higher rate your net income will have gone down. We live in a world with cause and effect and if the elected people can’t see the cause and effect of their policies then We the People pay the price. If you are a first-time home buyer don’t be discouraged by all this as there are only 2 things you should be concerned about and that is “What is my payment going to be and what is it going to cost me to get the house?” Once you own the home and you can make the payment then it should not matter to you what your rate is if you are comfortable making the payment. When the rates come down you can always refinance to a lower mortgage payment. So now is a great time to buy your first home, but it is now before the rates go even higher because they will be worse before they get better.
photo via Pexels
Debt Management Tips for First-Time Home Buyers
Are you planning on buying a home within the next year? Now is the time to start managing any existing debt so you can improve your debt-to-income ratio and boost your credit score. While you don’t have to pay off all of your debt before buying a home, do what you can to get your financial house in order before taking on more debt. The last thing you want is to become house poor! Here are some debt-management tips to help you prepare for a home purchase in the next 6-12 months.
Home Buying Steps for Business Owners
If you own your own business, you may have to take some extra steps as you prepare to buy a home. For example, consider forming an LLC to protect your personal assets from business-related debts or lawsuits. This will keep your new home safe from creditors! LLCs also enjoy tax advantages and management flexibility that can make it easier to grow your company. Plus, when you file an LLC, your business will seem more credible to mortgage lenders when it comes time to buy your new home. Check specific state regulations around forming an LLC so you know what to expect.
Cut Your Spending
If you want to pay off a lot of debt quickly, one of the first things you should do is reduce your spending. MoneyUnder30 recommends against creating a strict household budget and tracking every dollar you spend. Instead, set up a system that tracks all of your spending automatically, like using a single debit or credit card for everything.
Consider allocating yourself some money to spend on personal expenses, like a dinner out or a new clothing item. For example, you could set aside just $100 a month to spend on treats for yourself. Rewarding yourself for your spending cuts is a great way to maintain your motivation.
Make a Debt Reduction Plan
People use all kinds of different methods to pay off debt. Look into your options and choose a debt repayment method that will work best for you. For example, you could start by paying off either your smallest loan amount or your debt with the highest interest rate. These methods are known as the debt snowball and debt avalanche, respectively. Both of these methods can boost your confidence and increase your sense of control over your debt, encouraging you to continue down the same path.
Transfer Your Debt
If you’re paying a lot of interest on your debt, consider transferring your remaining balance to a line of credit with a lower interest rate. This will make it easier to pay down your debt. For example, you’ll typically pay a much lower interest rate for a line of credit than for a credit card or personal loan. A line of credit can also be useful for consolidating several loans into one. Just use the money from your line of credit to pay off all of your other debts, then you only have to focus on making one loan payment each month.
Land a Side Gig
Bringing in some extra income will help you pay off debt more quickly. Consider picking up a side gig for a little while until you’re happier with your debt situation. Look for a part-time job in town, drive for ride-sharing companies in your free time, or offer professional services remotely on a freelance basis. There are countless ways to make money on the side of your full-time job!
If you’re planning to buy a home within the next year, start preparing your finances now. Don’t let your existing debt get in the way of your homeownership goals! Make a plan to start paying down your debt now so you can feel confident in your decision to become a homeowner in the near future.
Are you looking for your dream home? MAE Capital Real Estate and Loan can help you find an affordable mortgage! Call today so we can discuss you
Article was written by: Suzie Wilson
“ I heard the market was red hot and homes are selling for more than the asking price” this is what we are hearing daily from our clients. Is this true anymore or is something else going on now? All you hear on the TV and Radio is that the Real Estate Market is red hot, but is this really true? In my 37 years in the Real Estate and Mortgage business, I have never seen a market quite like this one we are experiencing. I also hold a degree in economics and have not seen anything like this in history. So what’s going on, one minute things are going crazy with low interest rates and more buyers than sellers. The next minute everything slows down.
This is happening across the board, interest rates are still at historic lows, but it appears everyone that has had the opportunity to refinance and take advantage of the low rates has done sone so. Or is it that, like COVID, we are about to experience a second wave of people refinancing and buying homes. We have never seen such a market in the past so there is no real model to judge this on. But we have seen a dramatic slow down in home buying and refinancing over the last 3 months. In California, they lifted the mask mandate, and it appears those that have been locked down decided to all go on vacation at the same time.
We generally see a summer lull in Real Estate, however, this one is far more pronounced than ever before. It has me and others asking if this lull is just that or is it something else? I do see this as the market seeking an equilibrium point, not an all-out bust. I have seen big news in the markets before and the way the markets tend to react to this is by over-correcting on both sides. I would liken this to stretching a rubber band and letting it go, it will spring up then back down then reach an equilibrium point. Right now, in the real estate market, we are seeing a bounce down or a slowdown after it was super-heated.
Another factor that we have not seen before is that California was shut down for 15 months and people were told to stay inside and not travel. In a normal year, people would travel all time of the year but the last year and a half have been far from normal. What we saw during the pandemic was people staying home not traveling, so when they were told they could now go out and about they did and they are still are taking vacations and traveling not thinking about Real Estate or their mortgages. Couple that with their kids being out of school they are taking full advantage of the time they have out of their houses seeing family they have not seen in months and enjoying the outdoors while the weather is good.
Understanding how humans think is a big part of economics. So as schools reopen in August and kids head back to the classrooms that will leave the parents back home and working with the time to think about their living situation and their financial situation. Coupled with low-interest rates that the Federal Reserve says they are keeping low until 2023 I believe that the Real Estate market will pick up again by the end of August and into September, but it will not be at the pace we saw during the height of the pandemic thus the bounce. Another interesting phenomenon that will be discontinued in September is the extra $300 a week in unemployment benefits. This will send people back to the workforce, but will the economy be able to accept all of these long-term unemployed folks that took advantage of the system? As an employer, I would not hire an able-bodied person who chose to stay on government assistance rather than work as that shows me laziness and I think this will be a big issue in the high-end job market. Entry-level jobs like Walmart, retail jobs, and restaurant workers will be happy to take these folks back into the workforce as those workers can easily be replaced if they don’t work out. But I digress, those entry-level workers will not be homebuyers in the immediate future but having them back in the workforce will allow management and owners to realize a better income level so those folks will be the benefactor of the ability to purchase real estate. So my crystal ball says that by September we should start to see Real Estate pick back up for all the reasons that are not the standard reasons for Real Estate to boom or bust. To get started today and beat the rest of the crowd call one of our Real Estate Professionals to get pre-approved for a home loan and start your search as new listings hit the market you will be there first. If you have been waiting for your credit score to improve before refinancing start now ahead of the crowd Interest Rates are still in the 2’s and 3’s. Call MAE Capital Real Estate and Loan to get started at 916-672-6130.
When shopping for a home loan even your Realtor may not know the differences between a Broker and Banker, so even if they recommend a Loan Officer to you, because they have used them in the past, you should do your research as you might be able to save yourself thousands of dollars. Your Agent may think a direct lender is a better deal for you as they underwrite their own loans “in house”, but the fact is it might be in the Realtor’s best interests not yours. “In House Underwriting” sounds sexy, however, in today’s automated world every Loan Officer be it from a Banker/Direct lender or a Mortgage Broker has the same automated underwriting systems available to every underwriter. So when you apply for a loan with either a Big Banker or a Small independent Mortgage Broker they all have the same access to an underwriter or underwriting systems. So the myth of having your own underwriter as a selling point is just that a myth and what happens when their underwriters have a bad day, you pay the price. A Mortgage Broker can deliver your loan file to several different underwriters that will have different rules and guidelines to get your loan approved. Technology has improved so much that all of the paperwork necessary to process a loan can be uploaded and transmitted to an underwriter instantly and that underwriter can make a decision quickly and if a Banker’s Underwriter declines your file you are done with them. If a Mortgage Broker submits your file to an underwriter and they decline it a Broker can take your file to another underwriter without you having to gather all your information again and again. Most underwriters today use either the Federal National Mortgage Association’s or the Federal Home Loan Mortgage Corporation (Fannie Mae or Freddie Mac) automated underwriting systems to underwrite traditional home loans and those same systems are available to all Loan Officers either from a Large Banker/Direct Lender or a Small Mortgage Broker.
You may say that all of that is good but all I care about is getting the lowest monthly payment and the lowest costs. Although both a Banker and a Broker inevitably get their interest rates from the same sources it is how much that is charged by the company that makes the difference in interest rates and fees that are quoted to you from lender to lender. We have already discussed earlier that Bankers have bigger and shinier offices than that of Brokers and with that comes a larger overhead and more expenses than that of a smaller Mortgage Broker. That all has to be paid for and they do that in the form of higher interest rate and fees. The smaller firms like MAE Capital Real Estate and Loan can keep that overhead low thus being able to offer a lower interest rate and lower fees and can save you thousands of dollars upfront and monthly.
In addition, the regulator in California for Bankers is the Department of Business Oversight (DBO) and they have different laws then that of the Department of Real Estate (DRE) who regulate Mortgage Brokers. We talked earlier about Bankers having a larger overhead and expenses than that of a Mortgage Broker and thus the need to make more profit per loan closed for the company than that of a Mortgage Broker but what exactly does that mean? The Direct lender has to pay more staff, more rent, more insurances making their costs much higher than that of a Mortgage Broker and their Regulator, the DBO, knows this so the Banker has no limit on the amount they can add to the interest rates and fees to maintain their profitability . A Mortgage Broker, on the other hand, is limited to a maximum of 3% of the loan amount they can make on any one loan from the DRE. A Direct lender does not have that limitation and they can charge what they want to be profitable costing you money. The Mortgage Broker has to keep their overhead as low as possible being limited by law on how much they can charge is your benefit with lower interest rates and fees.
Having been on both sides of the fence I understand completely how this process works and will tell you that you will save thousands by working with a company like MAE Capital Real Estate and Loan. Every Loan we close is a testimony to this as the client’s rates and fees are significantly lower than that of a Banker on every loan transaction. As a Mortgage Broker we can also offer other loan products that a Banker can’t such as Private Money Loans for investors, Certain Bank Statement only loans to qualify borrowers that can’t show enough income to qualify traditionally. Overall we as a small Mortgage Broker can find the best loan for your needs with he lowest interest rates and fees. An example of this is; MAE Capital closed a VA loan that came to us from a Veteran who works for the VA and he received a quote from one of the Veteran’s Administration’s “Approved Lenders” that is a Banker/Direct Lender and we beat them by .5 in interest Rate and $13,000 fees. We closed the loan a 3.875% and the veteran paid $0 down and $0 closing costs, saving him $13,000 in costs and has a lower monthly payment. We have many stories like this and most of our clients don’t even realize the savings they are receiving as most clients don’t shop for a loan. So if your Agent is recommending a Loan Officer Check the rates and fees and then check with MAE Capital Real estate and Loan and you will be shocked at what you will save. If you are buying in the Greater Sacramento Area (El Dorado, Placer and Sacramento Counties) ask about our Bundling of Services where we represent you as the Realtor and the Loan. This has saved our clients even more money as we can bundle our commissions and get you a home warranty and even lower interest rates and fees. MAE Capital Real Estate and Loan is one of California’s best kept secrets when it comes to saving people money on their home financing. Trying to change this secret into mainstream facts by educating our clients and future clients. Call us today to find out more or have us compare your Direct Lender’s Loan Estimate with ours and see how we can save you thousands of dollars. We can Lend all up and down the State of California. Our phone number 916-672-6130 or go directly to our site at www.maecapital.com.