Category: Home Prices

Expect more sales, lower rates, and bottoming home values

2022 was a rough year for the real estate market.  Interest rates and home values both changed course at the fastest pace on record, causing many potential buyers & sellers to hit the pause button on their transaction efforts.  As we enter a new year, sellers likely have been waiting for the rain to finally end to list their homes, while buyers have been waiting for lower rates and home values before jumping back in the market.  Will the current “bear” real estate market end?  Will a “bull” market return?  Read more as I share my insight on what’s ahead for our market (& read all the way to the end for why they are called bear & bull markets!)

The bear market will come out of hibernation (but don’t expect a bull market to return)

Most regions throughout California have become “bear” markets, meaning home values have fallen consistently and considerably.  Take Folsom, for example, where the average home price fell 25% from May to December.  That’s a sobering statistic for current home owners considering selling, but keep in mind the current values are still higher than they ever have been if you exclude the insane Covid-related boom. These recent declines are largely due to higher interest rates and hesitant home buyers, but also because of SIGNIFICANTLY fewer home sales.  To be precise, the 4^th quarter (October-December) was the slowest quarter in over 20 years in Sacramento County, with fewer than 30 homes selling per day in a county comprised of over 600,000 housing units!

Expect the market to pick back up in 2023 as more sellers put their homes up for sale and buyers eagerly purchase them.  Affordability has improved due to declining home values, thus inspiring first-time home buyers to get back into the market.  After 3+ years of competitive bidding wars and few homes for sale, buyers are now calling the shots in transactions.  The typical listing is selling for 6% less than the asking price, with sellers often paying credits towards closing costs and home repairs.  Many buyers will score great bargains on homes this year, but they shouldn’t expect rapid price appreciation to return to the market just yet.

Interest rates will settle down (but don’t expect record lows to return)

Interest rate declines are also helping affordability.  Yes, you read that right…interest rates are going down!  After peaking at nearly 7.5% in October, 30-yr fixed rates are settling down near 6% in recent days, and likely poised to drop further in the months ahead (more on that in a future post). 

While rates aren’t likely to plummet back to 3%, 30-yr rates in the ~5% range will help to stabilize the real estate market and reduce the sting buyers feel when calculating their monthly payments.

Sacramento home values will bottom out (but don’t expect big price gains to return)

The worst is likely behind us with falling home prices.  After dropping 2-3% per month since May, Sacramento area home values should find a bottom sometime this year.  Rent rates remain high everywhere (1-bedroom apartments are renting for over $2,000/month!), which will help prop up home values as tenants weigh the options between renting and buying.  2023 buyers may risk some short-term losses in equity, but that is a small risk to take for the big rewards of purchasing a home in this strong buyer’s market.  After 6 months of price drops, the average listing is on the market for 6 weeks & selling for 6% off the asking price.  These 6s may be a troubling sign for sellers, but for buyers it’s a proverbial jackpot! Get out in the market and let me help you dictate the terms of your next home purchase!

2023 will feel like an awakening after a dormant second-half of last year.  If you are a seller, you need to make worthwhile preparations to your property to make it stand out above the competition. If you are a buyer, you need to “start your engines” and follow my top 5 tips from my prior post to get ready to decisively act when the right home comes up for sale.  Both sides need to be partnered with an experienced mortgage and real estate broker like me who can navigate you through this changing market.  I look forward to helping more clients in the weeks ahead prepare for their 2023 transactions.

PS – Bull & Bear markets earned their names based on how these animals attack. A bull lowers its head and then surges its horns upwards in an attack, hence why a bull market is known as one that is on the upswing. Bears, however, get high and then attack down with their giant paws. When a financial market (like today’s real estate market) is going down in value, its known as a bear market. Now you know!

Major life events will continue to prompt real estate transactions

For the last two years, most home purchases were driven by “wants.”  Covid-related isolation made many buyers feel like they “needed” a bigger backyard, a home office, a vacation home, a Red-state zip code…but those were wants, not needs.

With current mortgage rates now over 7%, most existing homeowners may be content sticking with their sub-4% mortgage rate and never moving again.  Right?

Think again.

Contrary to recent history, the real estate market is not solely guided by mortgage rates and exuberant home buying trends fueled by reality TV.  It’s guided by life; you know, the thing you are constantly planning but inevitably takes an unexpected turn.  And its in these turns when people NEED to move to a bigger home, a smaller home, a different state, closer to new work…the list goes on and on.

You never know where life’s next turn may take you

Marriage, job relocation, illness, promotion, divorce, kids, grandkids, death…these events drive the real estate market; keystone life moments that are emotionally charged with excitement, fear, hope or tragedy.  As such, its important you and your loved ones enter your real estate transactions with experienced & caring professionals.  We know your home purchase or sale is more than a transaction; it’s a significant chapter in your life’s story.

Higher mortgage rates will certainly curtail a homeowner from moving just because they are bored with their current house.  But life goes on for the rest of us.  Something will come along that will force you to reconsider your living situation.  When that time comes, I hope that you’ll give me a call to review things with you.  Nearly no one else does what we do: holistically assess your overall real estate position including your current home’s value, your new home buying opportunities, and the mortgage programs available to you.

Life’s unexpected twists & turns may force you to change direction with your real estate affairs, but we will be able to clearly articulate the options available to help you stay on your path.

For the first time in 20 years, 30-year fixed rates hit 7%

The last time 30-yr fixed mortgages were at 7%, the world was very different place:

• Gas was $1.36/gallon
• “Friends” was still on TV
• The iPod was Apple’s latest gizmo
• Tom Brady won his 1st Super Bowl

But what’s also drastically different compared to 2002 is our real estate market. 20 years ago, the median price for a Sacramento home was $187,000. That was relatively affordable even with rates at 7%. Today with rates at 7%; not so much. Let’s compare the then & now numbers.

Today, home values are almost 200% higher than they were 20 years ago while income is only marginally up 62% higher. All that translates to is instead of 34% of a household income going to a mortgage payment, it is now standing at an unsustainable 57%. Something has to give.

Let’s compare this percentage of income to what the market was at the last peak of the real estate cycle in 2005.

Home values were less & annual income was less but as a percentage, today’s household’s monthly income going towards a mortgage payment is higher than the levels in in 2005. That is a very troubling statistic. Something is going to break. Something has to change from these 2022 numbers. They are not sustainable. 1 of 2 things is going to happen: home prices have to come down or interest rates have to come down. Let me show you by how much.

How about a middle-of-the-road number of 45% as an acceptable mortgage payment-to-income ratio. To get to that number, home values need come down to $420K in Sacramento County. That’s a 21% drop from where they are right now. Keep in mind from 2005 to 2011, home values in Sacramento County decreased by more than 50%. To have a 21% correction, its not quite as deep of a crash as what we saw, but its very certainly possible to see them come down quite a bit if interest rates stay at these elevated levels at 7%.

Now, if interest rates come down then affordability is obviously aided by paying less in interest & you can pay more for a house. For home prices to remain at their current levels, 30-yr rates will need to fall down to 4% to get that percentage of income to acceptable 44-45% range.

Which is going to happen? I don’t know. We’re going to have to see as we go into Q4 here and see what happens with inflation. See what happens with buyer demand. There’s so many factors that go into impacting the health of the real estate market. But in the present moment right now with prices where they are at, with interest rates where they are at, we are at an unhealthy level.

If I had to guess, its going to be a combination of both prices and interest rates falling in the next 3-6 months for us to find a little bit more of a healthy footing for our real estate market. I know I just showed you Sacramento numbers, but this is an issue statewide and, arguably, nationwide.

What do you think, though? I’d love to see some comments down below. Tell me what your forecast is & we’ll all be on the edge of our seats here as we go into Q4 of 2022. As always, I appreciate you taking the time to watch my videos & read my posts.

Look out for more. I’ll keep you updated with market analysis here at MattsMemos.com.

Thanks again!

Times are uncertain, so skipping a few mortgage payments sounds nice, right? Not so fast.

In response to the economic turmoil caused by the Covid-19 pandemic, Congress passed an unprecedented 2.2 TRILLION dollar financial aid package for Americans. Known as The CARES Act, it aims at relieving businesses and individuals from economic hardships, including provisions to allow folks to request mortgage payment forbearance for the next several months. Awesome, right??!! Not so fast.

The intentions of this policy were wise, as a mortgage payment is often the single largest monthly expense for households. But, the unforeseen ripple effects of hundreds of billions of dollars in delayed payments has the potential to cripple the entire mortgage industry, put homeowners in perilous financial positions, cause grave damage to the overall economy.

To explain the economics of this issue, I’ll briefly touch on lessons of history, politics, English, and zoology.  I know its long, but please take the time to understand the full story and the negative consequences you and society at large may face if pursuing mortgage payment forbearance.

First, A Bit of History

On March 27^th, President Trump signed The CARES Act, a package of profound financial aid to Americans. The last time the federal government swooped in to save the economy, it was 2008 and TARP (“Troubled Asset Relief Program”) was passed to primarily bail out large (ie-“too big to fail”) banks in the midst of the “Mortgage Meltdown.” There was much criticism about how big banks were saved but the “little guy” was left out in the cold, so today’s policy makers didn’t want to repeat that same formula. The CARES Act is more focused on small businesses and individuals, and includes direct cash payments as well as the option to request to defer payments for the next 6-12 months without proof of financial hardship. As long as the mortgage is backed by a government entity, the mortgage servicer must honor the request. But, what the mortgage servicer must also honor is the monthly funds owed to the mortgage bond holders. In a nutshell, mortgage companies have to keep paying money out even though money is not coming in. YIKES!

Mortgage servicers will be facing incredible cash crunches and have repeatedly asked policy makers to establish a lifeline allowing mortgage servicers to borrow money from The Federal Reserve Bank to keep money flowing through the system. Without this form of aid, the mortgage industry as we know it could die.

Next, A Little Politics

As of this writing, the most influential politician on this matter insists that government intervention is not yet needed. Mark Calabria, the appointed director of Federal Housing Finance Agency (FHFA) who directs Fannie Mae & Freddie Mac, has a track record of disfavoring the government coming to the rescue in turbulent times. In fact, he’s gone on record to say if he were in charge during the Mortgage Meltdown of 2008 he would have let the very institutions he currently leads fail! Moreover, Mr. Calabria recently estimated “2 million borrowers would seek forbearance requests by May” and suggested if mortgage servicers get in trouble they could always sell their mortgage accounts to the larger mortgage servicers. Mr Calabria is either tragically miscalculating or misinformed on both fronts.

According to the Mortgage Bankers Association, the industry already processed well over 2 million requests by early April, and this number will only increase as our economy struggles to fully bounce back from shutdowns. Furthermore, the two largest mortgage servicers in the country, Wells Fargo & Chase Bank, have established policies in the last week to drastically reduce the amount and types of new mortgage

s they are willing to take on. There is no way the larger mortgage outfits will be a backstop to these new kinds of toxic mortgages with payment forbearance. Since the payment forbearance phenomenon was not created by the free markets, the free markets are not able to be the solution. Government intervention is essential, and at this time support to mortgage companies is only being offered to loans related to VA & FHA, which is a very small minority of the overall mortgage market.

Siri, What Does Forbearance Mean?

Unless you have a Jeopardy-sized vocabulary, forbearance is not a word you use often. Oxford dictionary says its “the action of refraining from exercising a legal right, especially enforcing the payment of a debt.” Simply put, forbearance does not mean forgiveness. Mortgage companies may temporarily refrain from collecting your payments, but they won’t hold back any longer than legally necessary, and likely won’t play nice when that time comes.

Survival Instincts Will Take Over

With inevitable liquidity issues and no sign of an immediate parachute from the federal government, mortgage servicers have impossible decisions ahead of them. Sadly, I believe this will force mortgage servicers to avoid favorable forbearance agreements at all costs. They will only play as nice as necessary to follow the law, but be ruthless otherwise. If you went through a short-sale or loan-modification process during the last housing recession, you know exactly what I’m talking about.

For example, there are no rules that govern when these deferred mortgage payments are re-paid. Even this video from the Consumer Finance Protection Bureau is vague. Potential options your mortgage servicer may offer: 1.) tack the payments on at the end of the loan; 2.) spread the missed payments over a period of time; or 3.) demand the payments be made in a lump sum.

What would you do if you ran out of cash and someone was overdue on a loan due to you? You’d force them to play catch up ASAP, right??!!  Its not greed.  Its not nasty.  Its survival.

Mortgage servicers will do the same thing, forcing a homeowner who skipped payments at, say, $2000/month for 3 months & now pay $8000 in a lump sum in the 4^th month. Obviously, most folks who truly need the payment relief in the coming months likely won’t be in a position to make a single catch-up payment, but tragically mortgage servicers are not in a position to float millions of skipped payments over the next few months and then patiently wait for reimbursement at the end of a 30-year loan. They have been backed into a corner, and will use any means necessary to try and survive.

I remain optimistic that policy intervention and clarity will eventually calm this situation down, but until it does every mortgage servicer is in a choke hold.

What Should I Do?

If you have suffered a big economic loss and cannot make your mortgage payment, by all means call your mortgage company and request payment forbearance. Yes, this may mean you are forced into a lump sum payment at some point, but that is tomorrow’s problem. You have bigger problems today; take the payment relief and hope repayment options are more favorable when you’re back on your feet.

BUT, if you are still able to make your mortgage payments, please continue to do so. Consider taking advantage of the delayed tax filing deadline (extended 90 days to July 15^th!), but don’t delay making your mortgage payments unless absolutely necessary. Staying out of forbearance will allow you to keep your options open for refinancing if rates slip down (forbearance generally disqualifies you from getting a new mortgage) & will help you avoid a build-up of payments that will likely need to be paid all at once in the future. It is not only in your best interest, but also in the best interest of the mortgage industry and our country at large. If too many borrowers utilize payment forbearance, the mortgage system could face catastrophic failure that would result in a housing crash worse than the Mortgage Meltdown of the late 2000s.

Spread The Word, Not The Virus

Please pass this post along to as many friends and family as possible, and do your part to encourage folks who have been considering mortgage forbearance to know the full story. In the meantime, stay safe, stay inside, and stay sane!

Energy efficient upgrades to a home can add value, lower your utility bills, and make you a “greener” citizen of the Earth. There are now a number of finance alternatives that have made these updates more accessible than ever before.

For example, you can lease solar systems and offset the monthly lease payment with the energy savings produced. You can also borrow money to install energy saving appliances, and have the loan payments added to your property tax bill. With all of these new finance alternatives, it has helped many homeowners who otherwise wouldn’t have been able to install these updates with their own savings.

But are these new finance options truly helping homeowners? We have spoken to a number of clients who weren’t aware of some of the fine print of these finance schemes, specifically how these lease and loan options create a lien on their property that make it difficult or even impossible to refinance their homes.  Furthermore, changing income tax laws impact many of these finance alternatives.  PACE loans, for example, are liens buried into the property’s tax bill, but many California homeowners may find their property taxes not as tax-deductible as in years past.

Most folks recognize that they are going to pay interest if they borrow money from a solar or utility company, but what does not appear to be commonly understood is that these loans and leases are recorded against the property.

We have worked to help several clients refinance to a lower interest rate and save money on their mortgage payment. During the underwriting process, we discover an additional lien resulting from a solar, window, HVAC, or other energy efficiency update. This secondary lien must either be paid off or give permission for the mortgage to be refinanced. Many times, the client either doesn’t want to or can’t pay off the loan, and the energy efficiency loan won’t allow the refinance to proceed. The refinance attempt ultimately fails. Ironically, the act to save money through energy efficient updates ends up handcuffing the client to a higher mortgage interest rate loan, thus losing more money to interest than what is being saved in lower utility costs.

Not all loan and lease terms are the same amongst the various options and vendors. And in some cases it probably makes sense to obtain one of these loans and live with the potential down sides.   Simply be sure you know the fine print. Solar and other outfits are pushing these available financing options hard on homeowners, but there are more traditional finance options available that you may want to consider as well. A cash-out refinance, home equity line of credit, home improvement loan, or other form of traditional mortgage financing may make sense as well. As always, we are happy to discuss what options you may have and objectively point out the pros and cons of each.