Blog with MAE Capital

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.  

Posted by Gregg Mower on November 18th, 2022 10:10 AM


I am going to start this by stating that this is not meant to be political but it sure is going to sound that way after I give a true and accurate accounting of what will happen economically to the US if this Student loan forgiveness is allowed to go through.   I will not even get into the extreme unfairness this is and the blatant attempt to get votes this is, that would not be productive to the economics of this.  We are going to explore history, and what happened in the past when the Government tries to spend it’s way out of inflation and a recession.

 It appears the current administration believes that the value of the dollar will not decline if they put more dollars into the economy.   That is like saying if I gave you more money what would you do with it?  Then give everyone more money and ask what they are going to do with it.   You would be right if you said they are going to buy things with the money, cars, houses, clothes, vacations, electronics, etc..  Logically, you can say if more people are buying more things and those things are in high demand the price of those things will go up.  This is called inflation.  Inflation happens when more people want the same things and the supply can’t keep up with it.  If you forgive someone’s debt it is like giving them a raise, they will have more money every month to spend if they are not spending the money on the debt they owe because the government paid it off.

As you ponder that basic economic theory, let’s look at the effect on the value of the dollar worldwide and how that will affect you here in America.  So, our government gives its citizens money, and in this case to pay off debt.  By doing so they put more US dollars into circulation and that will devalue the dollar worldwide.  Why? Simple the more of anything everyone has the less value it will have.  For example, if I produce a specific widget and I have more than I can sell I will have to lower the price of the widget to sell them.  The same holds true with the dollar, the more US dollars that are out in the world the less value they have to other countries.    If other countries, see our dollar as plentiful or in oversupply then they will ask for more dollars when they sell stuff to the US thus inflation.  This type of economics is called Keynesian Economics and in the history of the world this has never worked, kind of like socialism has never worked, I digressed.  

I told you I would not get into politics here so I will give you the facts and you can do what you want with the information.  Keynesian economics is a tax and spend way of running a monetary policy.  Yes, after the spending will come the taxation, it is inevitable and already shown by the government wants to hire 87,000 new armed IRS agents.  It doesn’t take much of an economic mind to see what our government is trying to do.   When you couple the climate change agenda with all this and the slowing of domestic oil production you are staring at an economic disaster.  The people it will hurt the most are those older folks that have saved for retirement all their lives to see it all erode away with poor government money management.   

Again, trying not to be political here, but I am 59 years old and have seen this disastrous mindset in the early to late 1970s.  Back then the monetary policy was very similar to today’s tax and spend mentality.   Where that ended up was high inflation and high-interest rates which was called stagflation (a stagnant economy with high inflation).  I started in the mortgage business in 1982 and mortgage interest rates at the time were hovering around 18-20% for a fixed rate loan for 30 years.  We have just seen mortgage rates jump from the start of the year (2022) when they were at a nice 3-4% to a staggering 5-6% with no end in sight for how they will go.  The Federal Reserve (for those that don’t know is not part of the Federal Government they are a Central Bank that other banks use), has vowed to continue to raise interest rates until inflation gets back down to 2%.  Anyone can see that under this tax and spend regime we will never get there, so interest rates will continue to rise.  If you go back to my previous posts from last year you will see how correct I have been in my predictions.  

You might be making more money now at your job and that is great but now if the government cut your expenses more than half you would have even more money to spend.   Initially, you think this is a great deal but eventually, you will have to pay for it and in the end, you will be paying a lot more than the short-term relief you got.   It is simply the price of everything that went up and so has your tax obligation.  The more money you make the more you pay in taxes.   Next, the Government will raise your tax rate to cover the short-term benefit of getting your student loans paid off, and over your working life, you are paying more in taxes than the student loan was by about 10-fold.   So not to be political, but would you rather pay fewer taxes and have more freedom to open a business and not worry about the government coming after you, or would you rather pay more taxes and see the government pay for people that have not contributed to our economy in any way or send money overseas?  Or simply put would you like to put your neighbor’s kid through college or your own kid?  If you are close to retirement and you have saved all your life for retirement, would you like to see the government tax your retirement away to pay for people you don’t know and suffer because of it?  If you are a first-time home buyer, would you rather pay a 3% interest rate or a 6% interest rate and be taxed on your income at a higher rate?  If you said yes to any of the above then your wish has been granted by this administration.  Again not being political, I can’t stand back without informing those that have not had the benefit of a good education to fully understand the principle here.  You can probably tell I don't like the idea of paying off student debt or any frivolous government spending that appears to be only for getting votes at the expense of every American.  

Posted by Gregg Mower on September 1st, 2022 12:00 PM

Has the Federal Reserve Board gone too far with raising Interest Rates?  The Federal Reserve raises interest rates to combat inflation.   Yes, we have high inflation, but has it been caused by high demand for goods and services or is it normal demand with a diminishing supply of goods?  This question is not a question the Federal Reserve (the Fed) has not addressed properly as when inflation started to be seen the Fed initially called it “Transitory” meaning short term, turns out they were wrong.  So now after the Fed realizes their mistake, they are raising interest rates at a far faster rate than they would have normally.

When the Fed raises interest rates, they only control one rate which is the Federal Funds Rate or the rate at which banks can borrow from the Fed.  The Banks, in turn, raise their prime lending rate to the public which affects business loans, Home Equity Lines of Credit, but not the interest rates for your typical home loans.  The reason home loan rates increase or decrease when the Fed raises rates is the fact the home loan rates are driven by the FNMA, FHLMC, and GNMA and the bonds that are spun off of those securities.  Wall Street will actually set the rates based on a perception of what will happen as a result of the Fed raising its interest rate.  There is another factor at play here that needs to be addressed and that is the fact that the Fed has been buying mortgage securities since the pandemic started and now they are selling their holdings off reducing the “balance sheet” as some of you may have heard.  

The Fed is raising interest rates to slow down the economy in the hopes that the demand side of the economy will slow due to the higher interest rates thus slowing the demand to borrow money and expand.  This philosophy is fine and works if both sides of the demand and supply curve are addressed.  The problem I see here is that the Fed is overreacting to situations they can’t control.  The Fed has no way of controlling the supply of goods and services they only can control the demand side.  The problem with this philosophy in this economy is that I see normal demand with a shortening supply of goods and services.   So, by trying to slow demand they are missing the fundamental problem and that is the supply side of the equation.   We all have heard about China and its lockdowns over the last several months.  This is causing a supply shortage of consumer goods, auto parts, microchips, clothes, and retail goods.  The Fed can’t control the loss of these goods in our supply chain they are simply making it harder for American businesses to catch up to the loss of goods coming from overseas.  

As the Fed tries to fight inflation by raising the rates and ignoring the supply side we will see a recession in the near future as the economy will have to pay so much more for the money that is needed to expand American Business.  Oil prices are also a major factor in the inflation equation as we can all see at the pump.  The Fed can’t control the demand for oil by raising interest rates, so as prices for oil continue to rise so will the price of goods and services until the price of oil is addressed by increasing supply or at least showing the American people that the government is working on freeing up resources to increase supply inflation will continue.  As inflation soars and the Government doesn’t address the supply side of anything we will continue to see inflation and eventually with rates rising so high we will see an economy stagnate to the point where there is no possibility of expanding the economy with high rates to borrow money.  This is called stagflation and I would argue we have been in this state for some months now with it worsening every day.  

On the Real Estate and Mortgage side of rising interest rates, the signs will be obvious.  As interest rates rise the affordability of homes will diminish even further.  As demand for Real Estate dries up due to high-interest rates you will see the demand for home goods diminish as well.  As the demand for money drops off with the high rates mortgage companies will be laying off workers and so will home improvement stores, home builders, and appliance stores.  This ripple effect will cause other industries to have to lay off workers and the economy will slow so fast that you will have high prices for gas, food, and all services that revolve around them.  Eventually, the prices of homes will go down due to high-interest rates and people out of work not being able to afford a home.  I don’t want to scare people, but the government has been out of control of the economy for over a year now and it is showing and will continue to decline if logical decisions are not made.  My fear is that what should be done and what is being done is all somehow politically motivated.  Janet Yellen, the secretary of the Treasury of the United States, admitted that she made a mistake with inflation by not raising rates soon enough.  Now fast forward to today the Chairman of the Fed Jerome Powell is glossing over the supply side of the equation for some reason and that should scare you as that is the core problem with inflation, not the demand side.  So, I see the Fed raising rates to where we see a deep recession with mass layoffs on the horizon if they don’t stop with the interest rates and move to the supply side.   Again, politics get in the way with this as the current administration is responsible for the price of oil as they have shut off possibilities of America producing more thus having to look to foreign sources of oil.  Although this may look grim we are all Americans and we will persevere and prosper.  To counteract rising interest rates look for new innovative home loan programs coming soon to help those get into homes in a changing world.   

Posted by Gregg Mower on June 15th, 2022 3:32 PM



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