7% Rates Mean Trouble For Market

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!

Summer Breeze, (STILL) Makes Me Feel Fine!

Thank goodness the record heat wave throughout California is behind us.  This week we have summer breezes to cool us off & blow the smoke away!  At the beginning of the summer season, I penned a post that predicted the real estate market normalizing and home values cooling over the summer months.  With mere days left in summer, lets look back and see how that prediction fared to what transpired over the last few months.

Buying Pace Slowed

As summer temps were heating up, the pace of home buying was falling dramatically.  30% fewer homes were purchased this June compared to the same time in 2021.  Oddly, early summer is normally when we see volume INCREASE as spring-fever purchases begin to close escrow.  Clearly the market was going through a change, and this shift continued through the rest of summer.  Things appear to have bottomed out, as August saw a small increase compared to July, but we are still at seasonably low levels.  You have to go back all the way to 2007 to see a slower summer for Sacramento real estate.

Listings Piled Up

From April 1 to August 31, we saw the number of homes for sale nearly TRIPLE This wasn’t due to a ton of people deciding to sell all at once, but rather a back-log of homes sitting on the market from a drop in buyer demand.  This sharp increase has leveled off, and the ratio between buyers and sellers has returned to a normal, pre-pandemic range.

Home Values Fell

I had predicted that fewer buyers and more sellers would result in falling home prices. Indeed, the greater Sacramento area experienced a drop of nearly 7% in the median home price from Memorial Day to Labor Day.  August’s mark of $580K is still the highest ever recorded if you exclude the prior 6 months, so most homeowners are still in very good shape.  

Nevertheless, the market is clearly changing and both buyers and sellers need to get accustomed to the new landscape in real estate.  Like this week’s summer breeze that has removed the unusually hot temperatures, our cooling real estate values mark an end to the insanity experienced during the pandemic. This shift should make both buyers and sellers feel just fine as things have normalized heading into the autumn & winter seasons.

Feel free to call on our team & me should you need any advice navigating today’s market.

Got Debt?  You Are Not Alone

US household debt is at an all-time high; it may be time for a cash-out refinance

Spurred by the largest 3-month increase in credit card debt in over 20 years, total US household debt recently hit a record amount of $16.1 trillion…with a T!!! 

While $11 trillion is attributed to mortgage debt, that leaves over $5 trillion in car, student, and credit card loans. By my account, that averages to more than $40,000 per household in consumer debt!  Many of us are facing harder times with the on-going economic slow down along with surging gas and food prices. With credit card balances & their interest rates at all-time highs, it may be time to consider a cash-out refinance to consolidate high-rate loans

Home values remain resilient & most homeowners have record levels of home equity. At the same time, mortgage rates are settling down, with our best-priced lenders back in the 4s on 30-yr fixed loans. 

Has the economic slowdown forced you to borrow more against credit cards, cars, and education?  Borrowing from your equity at a low rate to pay off higher rate debt will lower your overall monthly payments and lower your interest costs over the long-run.

Consider the following graphs…according to CreditCards.com the national average credit card interest rate hit 17.48% last week, approaching an all-time high. With The Fed steadily increasing the Federal Funds Rate, this will lead to further increases in credit card rates.

Meanwhile, mortgage rates have been falling as credit card rates have been rising. 30-yr mortgage rates dipped below 5% last week for the first time since Spring time. Our rates, in particular, continue to be much lower than the industry average (read Our Rates Are Some Of The Best In The Biz).

Let us help alleviate the financial stress of carrying high credit card balances at astronomically high interest rates by refinancing them into a lower fixed rate mortgage. Give us a call & allow us to assess your cash-out refinance options.

Summer Breeze, Makes Me Feel….

I’m forecasting falling home values, and this summer breeze on the cooling market should make buyers feel fine!

My oh my, a lot can change in a few months.  At the beginning of the year, home prices were rising at an unsustainable 4% per month and selling faster than ever before.  And then a war broke out!  Needless to say, Russia’s war sent shockwaves around the world & we’ve all been impacted by the war’s economic ripple effects (gas prices, food costs, interest rates, etc).

The typical red-hot summer real estate market has changed too.  Sellers have watched buyers become more hesitant due to the fastest rise in mortgage rates since the early 80s.  

As a result, 30% fewer home sales have occurred this month compared to the same time frame in 2021.  This significant decrease in volume will force motivated sellers to drop their prices to attract a buyer, and eventually this momentum should lead to declining home values by summer’s end.

Homes on the market are up; homes actually selling are down. But both are approaching normal, pre-pandemic levels

Some may read those figures and suggest this post’s musical title be changed to “Cruel Summer” or “Summertime Sadness.” But they would be wrong.  Rather, this cooling “Summer Breeze” is simply returning the market metrics to pre-pandemic levels.  We are approaching 7,000 homes for sale in the Sacramento market, a similar amount we saw in the spring of 2020.  This equates to 2 months of housing inventory on the market, again a comparable figure seen before the pandemic.

For some, this market slowdown is wonderful news!  A more balanced, normal market will lead to more opportunities for first-time buyers.  With younger Millennials now hitting their late 20s/early 30s, there are literally millions of them looking to purchase their first home.  This will help soften the fall for home prices, particularly for lower priced homes.

If you have been considering a home purchase, now is the time to get prepared for buying opportunities!  You have more options, sellers are more eager, and prices are no longer increasing.  Give me a call to discuss ways to best capitalize in today’s market as a home buyer.

Should You Make Your Next Mortgage Payment?

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 27th, 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. WERF-00017390-001The 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

95a49ccb-4512-48f9-a3c8-49a128a6db32
Mortgage firms may go bankrupt

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.

e959fb34-c706-439d-bf8d-aee4215276beWhat 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 4th month. Obviously, most folks who truly need the payment reli6d414dac-6ee1-4973-b54a-0f8cdb5bc8d7ef 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.

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If you still have cash, keep making your monthly payments!

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 15th!), 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!

Should You Finance Energy Efficient Upgrades? UPDATED 2018

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.

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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.

Record-Setting Home Prices

Last week I helped sell a home down the street from my own for a price never seen before in our neighborhood’s 24-year history. Obviously, home prices are soaring and certain pockets, like mine, are setting new price records.

CC 414

In fact, most of the country’s regions have fully recovered from the housing crash.  Most of California, including the Sacramento area, still has a bit more ground to cover before getting back to pre-crash levels.  Some communities, such as East Sacramento, have recovered better than others.  This chart shows how current median home prices compare to the previous peaks seen in certain markets.

1218 CC Graph

Don’t see your town?  Want to know how your city has fared?  Complete this quick survey and I’ll send you your community statistics (greater Sacramento area zip codes only).

Tune in to next month’s blog post for my 2018 Market Forecast and which locations may see home prices continuing to soar to new heights.

 

Its Time to Talk Monopoly, Again!

I’ve previously written about my love for the game of Monopoly.  Ever since I have been old enough to count, its been one of my favorite games.  Whenever my buddies and I played I wanted to be both the banker and the property card-keeper; an ironic foreshadowing of my career as a combined mortgage broker and REALTOR.  As it turns out, I’ve been playing banker and property card-keeper my entire life!

Ollie picLove for Monopoly is hereditary

Property Ladder (2)I was playing Monopoly Jr. with my son this week, and it reminded me of this 2011 blog post.  Back then, I was helping a few brave clients purchase investment properties despite the bleak economic outlook.  Things worked out quite well for that group of investors, as their investments have doubled in value over the last 5 years.

This summer, half of my team’s home buying clients were investors as expectations of Sacramento home prices are high.  Combined with low levels of new home building, a flood of Bay Area money (check this article out) and some of the country’s fastest rising rental rates, Sacramento is an area many investors have honed in on. 

Concept conceptual 3D illustration young man businessman silhouette jump happyClients with the courage to own rental properties over the long-term amass great wealth as home prices rise, particularly in hot spot markets like Sacramento.  My team has become experienced in helping clients make the leap to real estate investor.  From hosting info seminars (remember this one!!??) to illustrating cash-flow analysis to having trustworthy connections with property managers and licensed contractors, we are a valuable resource to those looking to play real-life Monopoly.

As I said earlier, I’ve been doing this my entire life! 

It’s May. Bring on…EVERYTHING!

May seems to always be the most hectic month of the year.  Weddings, picnics, school parties, swim team, boating…commitments and fun keep us busy all month long, and I’m sure the same is true for you.

The real estate market has a way of hitting its full stride in May as well.  For the last few years, May has signaled the time when many homeowners decide to put their homes on the market.  This year appears to be similar as I’ve already spoken to several clients in the first few days of this month. This is a good sign for the market at large since the single greatest issue we have in our market is too few homes for sale.

At time of this writing, there are only 100 single-family homes for sale in Folsom

May GraphThis is an incredibly low amount, considering we are a town of over 70,000 people and 26,000 housing units (according to the US Census in 2010).  Over the last few years, beginning in May, we start to see this figure increase through the summer months, but since 2014 we have seen the number of homes for sale in the summertime decrease each year.

What will this summer bring?  Unfortunately, much of the same.  Unless I get more calls from clients interested in selling their homes this summer, I expect the number of homes for sale to be similar to last summer.  This means there won’t be enough homes to meet demand, which will push prices up further.  For current homeowners, this is great news.  For those looking to buy their first home, this is truly discouraging.  Perhaps they’ll be too busy with a hectic May schedule to notice right now, but by the end of summer I predict home values in most areas will increase 2% per month through August.  If that pace holds, we may see Folsom home prices eclipse their previous all-time high levels before summer is over.

May Graph 2

Much like May’s relentless calendar, higher home prices are on their way. Some of the cause is inevitable, like wedding invites in May, and some of our own doing, like over-scheduling boating picnics. Either way…Bring. It. On.

2017 Real Estate Market Forecast

c0501a39-6615-4dce-9c0f-3703cc5aa964March marks the beginning of Real Estate season.  As snow melts and flowers bud, current and aspiring home buyers alike are coming out of financial hibernation to assess their real estate affairs.  That’s why I hope this annual market forecast is a timely message to many of my clients and readers.

 

I’ve always said forecasting is a fancy word for guessing.  No one knows for certain what lies ahead in our local real estate market.  Nevertheless, as someone who witnesses the front-lines action in the market, I have the chance to share observed indicators with you.

These “markers” signify much of the same patterns we’ve seen in the market for the last three years: high demand, low supply, and rising prices.  Frankly, I don’t see these altering course in 2017.  Here’s why:

Without further ado, here are three significant real estate predictors to watch for in 2017.

Welcome to the Party, Millennials!

Millennials are discussed for many reasons, and for good reason!  They are the largest generation by population in our country, so their actions will have profound impact on many industries, including real estate.  Research from Zillow indicates Millennials were the largest generational buying group in 2016, and they are predominantly buying in the suburbs.  This is a big deal, as Millennials have deferred home buying longer than their predecessors.  The conceived factors vary from their high levels of student debt to their emotional scars of witnessing others before them lose homes and wealth during the Great Recession, but the simple fact is Millennials have not been buying homes at typical rates…until now.

Last year, the United States’ Home-ownership rate dipped below 63% for the first time since 1965 a symptom not necessarily of affordability (after all, home-ownership rate hit an all-time high when prices were at all-time highs in 2005) but rather due to a lack of appetite.   With Millennials poised to remain hungry for homes of their own, the demand for housing will persist into 2017 and beyond.

Where are all of the new homes?

In last year’s forecast post, I shared some shocking statistics regarding the relatively low level of new home construction in Sacramento.  Without enough homes to go around for everyone, prices are forced to go up.  New home permits are increasing (up 20% from a year ago), but not at a rate fast enough to meet current buyer demand.  2016 had over 6,000 single-family home permits filed in the Sacramento area, the most seen since the Great Recession but far fewer than the peak of 18,523 in 2004.

Furthermore, there are fewer and fewer homes available to rent.  In the 4th quarter of 2016, the Western region of the United States had a rental vacancy rate of 4.2%, the lowest reading since the Census department began collecting this statistic in the mid-1950s!!!

Until new home construction picks up considerably, there will be upward pressure on the prices (& rents) of the limited number of homes for sale (& rent).

Never Say Never (to new housing highs)

When the real estate market crashed ten years ago, many people said home prices became so inflated that they’d never reach those levels again.  In 2011, the “never again” prophecy seemed accurate.  Sacramento home prices had lost over 50% of their values from the peak seen in 2005.  Beginning in 2012, however, the market rebounded with a vengeance and now has clawed back to price levels seen in 2007, before the Great Recession.  This 5-year rally has market observers wondering if we will break through to new price highs soon.

Some pockets of town have already earned this accolade.  East Sacramento, for example, is experiencing higher home prices now than ever before.  I believe other neighborhoods will follow suit, but not prolifically in 2017.  We may need to wait one more year before breaking new records, but sooner or later the “never say never” prophecy will ring true.

In 95819, the median home price hit a peak of $500k in 2005.
Presently, it’s $525k!
 

Is This a Bubble Waiting To Pop?

Some view these hot market factors and predict a market bubble forming.  After all, how much longer can a 5-year rally last?  While I agree that a rally can’t last forever, the rare combination of scarce housing options, home-ownership rates at 50-yr lows, and an emerging generation of home buyers leads me to believe the Sacramento housing market is well-insulated from another bubble.  Even with the looming possibility of rising interest rates impinging housing affordability, our real estate market should see steady gains (5-10%) yet again this year.

If you are thinking of buying or selling a home, I’d love the opportunity to serve.  With 15 years of local market experience, I am able to provide honest insight on how to best navigate the current market dynamics to help make your real estate transaction a success.

As always, thank you for reading Matt’s Memos!