September 11, 2023 • 27 mins
Are you feeling the pinch from high mortgage rates and rising inflation? Join us as we dissect current housing market trends and shed light on why mortgage rates continue to soar, establishing a 7% "new normal". We take a journey back to 1995, to draw parallels and understand the affordability challenges in today's market. We discuss how recent bank failures have added fuel to the fire, pushing up the rate of mortgage-backed securities.
Turning our lens to the challenges home builders face, we delve into the dynamics of today's housing market. We explore the impact of recessions, material costs, and supply chain hiccups on new construction. Put yourself in the shoes of a Tampa Bay resident, where the average home sale price is $450,000, and the median household income is $60,000. We discuss the implications of such disparities on the future of the housing market and the potential influence of out-of-state and out-of-county buyers.
In our final segment, we ponder the shifting demands from existing homes to new construction. Embrace the thought of an increasing desirability gap between old and new homes. We discuss how work-from-home setups are influencing the housing market and whether the cost of upkeep in established communities could be less daunting than HOA fees in new communities. As we wrap up, we warn about the potential risks of taking out a HELOC at a high interest rate and paying for rental properties with credit cards, in light of possible rate hikes by the Federal Reserve. So join us and arm yourself with knowledge, for a balanced perspective on the market is the key to successful real estate ventures.
For all your Real Estate Investment and Property Management needs check out HomeProp!
https://www.homeprop.com
https://www.HomepropPM.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:05):
Hello everybody, chase Clark here with your
Mercadius buying Tampa Baypodcast, and we're glad to be
back with you chatting a littlebit about the housing market.
We've been gone for much of thesummer and, man, a lot has
changed, or maybe a lot hasn'tchanged we thought would change.
I think if we had looked backand wondered where we would be
about this time at the start ofthe year, chase, we'd be
thinking that the market wouldbe well into its death spiral by
(00:27):
now and that mortgage rateswould have brought everything to
an absolute standstill, thatwe'd be in the middle of a
recession.
That's certainly what we wouldhave been thinking if we were
listening to the talking headsabout this time last year.
But here we are in August of2023, and by many measures,
things couldn't be muchdifferent.
So tell me a little bit aboutwhat you're seeing.
Maybe we should start with awhole mortgage interest rate
scenario, because that's drivingso much of this picture.
(00:48):
What are you seeing right nowand why aren't we in a real
estate death spiral thateveryone was projecting we would
be in?
Speaker 2 (00:54):
Hey Peter, what's up man?
What is the million dollarquestion?
Right, it's like when aremortgage rates going to go down?
How did we get to 7 percent?
It's a tough question, but 7percent seems to have become the
new normal.
People are getting used to it.
We're starting to see salesvolumes stabilize a little bit
and pick back up, but people arestill asking that question all
the time is when are ratescoming down?
(01:17):
And if you look at the papers,watch the news, read online,
wherever your source of media is, you're always hearing about
inflation numbers.
Where is inflation?
Regulatory rates are typicallythe 30 year fixed rate is tied
to inflation.
They're highly correlated andso we know inflation has come
way down off its peaks of 8 or 9percent, but during that same
period of time, rates havestayed high or continued to rise
(01:38):
.
And people are like what'sgoing on?
As inflation goes down, ratesshould come down, and normally
that's true.
But if you remember back to thespring, we had this crazy event
happen with bank failures.
We had three of the largestbank failures occur in US
history just this spring.
And what happened with that wasit shook up the Fed a little
bit.
The Fed got nervous, people gotnervous.
(01:59):
They kept raising rates,partially because the Fed looks
in a rearview mirror.
They always look backwards.
They're not really looking atwhat's really happening today.
They're looking at three, six,nine, 12 months in a rears, and
so they kept raising rates.
As the Fed raises rates, therate that banks have to pay on
deposits goes up, money marketrates go up, and so people
(02:21):
started pulling their money outof their checking accounts and
putting them in money marketfunds so that they could get a
higher rate of interest, and indoing so, banks had less money
on hand at a low cost of capitalto lend out at current interest
rates.
And so when that happens, bankshad to recapitalize.
They had to find funds thatthey could lend out, because
people had moved their moneyinto money market accounts where
they can't have that as theirreserve basis, and in doing so,
(02:43):
banks started selling off theirmortgage backed securities.
The 30 year fixed rate is 100%tied to the bond market, and the
mortgage backed security bondmarket is what's driving up
these 30 year fixed rates.
When banks sell bonds, theprice goes down.
They flooded the market withsupply of bonds.
When the price of bonds goesdown, the interest rate on the
bonds goes up and as the rate onthe bonds goes up, that's what
(03:07):
drives the 30 year fixed rate up, because it's tied to these
mortgage backed securities.
So, in a nutshell, the 30 yearfixed rate is staying high
because there is a glut ofsupply of these mortgage backed
securities on the market, whichis driving up the bond rates.
And that's where we findourselves right now.
Will the rates go down?
I don't know.
You listen to experts.
They're thinking we might get ahalf a point movement downward
(03:30):
by the end of the year, whichwould take us back into the high
six range.
That's good Good for buyers outthere looking for something a
little cheaper on the interestrate front.
But not a ton of movementexpected in this market right
now, unless we end up seeing afull blown recession, because
rates always fall during yourrecession.
Speaker 1 (03:49):
Okay, so affordability and interest rates
always seems to be the keyquestion, right?
And people are looking back andsaying, you know, wow, interest
rates seem so high relative towhat I've experienced so far in
my life or in my recent history.
And so we have to go all theway back to almost like 1995 or
earlier where we see interestrates equivalent to where they
are today, in the low sevens.
Right, so a long time ago.
(04:10):
Chase, where are you at 95?
Right, I was just.
I would think I was like 15,right, so 16.
Maybe I was in my junior yearin high school.
So I don't have a relevantperspective of what the market
was like, at least the firsthand perspective of what the
market was like back then.
So let's talk a little bitabout that.
You know, are what were folksdoing from an affordability
standpoint when rates were inthe sevens?
And you know how do they, howdo they buy a home at all?
Speaker 2 (04:33):
Yes, you know.
I mean, the typical benchmarkrate is 30%, right?
You don't want to spend morethan 30% of your income on your
mortgage and it's hard to getapproved by a lender for
anything over that, right?
So as rates go up, there's twothings at play.
Have your wages grown duringthat time so that you can afford
that higher rate and thathigher payment, or is the price
going to have to come down?
(04:53):
Or is your budget going to haveto be reduced so that the
affordable price of a home foryou is now less than it was a
year ago?
And for a lot of people that'sthe case.
They just can't afford all thehouse that they want to have now
because the rates seven, it'snot four, and that's a big jump
in rate, especially when you'retalking about a median home
price in the 400,000 range.
So I think that's where peopleare finding themselves today,
(05:14):
and the question we get all thetime right is well, should I
wait?
Should I wait till rates comedown to buy, or should I buy now
?
You know, and that's thequestion we have to address
every day for people, anddepending on what market you're
in, that answer is going to vary, but here in Tampa Bay.
There's a lot of data out thereto suggest that you should not
wait, right.
So prices are continuing torise and what you'll miss out on
(05:35):
is greater than the extrainterest you're going to pay if
you wait for the rate to drop,let's say, a half a point.
Speaker 1 (05:43):
So you're saying that we're going to miss out on
opportunities, that we will bein a worse financial situation
if we wait to purchase realestate and we're waiting for an
interest rate to fall than if webuy today?
Speaker 2 (05:56):
Yeah, you know, I listened to, you know a great
resource in this in this area ofthe industry, barry Habib, the
other day, and he gave thisexample from Palm Beach County,
florida.
Okay, in the next 12 months,home prices are expected in
Florida in general expected toincrease 3%.
Right now we're hovering aroundthe two and a half 3% range so
(06:18):
far for 2023 as far as homeprice increases.
By the end of the year, theforecast is that that's going to
be at 6%.
So we've got about another 3%to go over the next six to 12
months and what we'll call HPAor home price appreciation in
the state of Florida, and ratesare only predicted to drop about
a half a point during that time.
And so, if you do the math onthat, you'll save $380 a month
(06:40):
on your mortgage payment.
If you wait for that rate tocome down a half a point on
average, right, but you're goingto lose out on almost $39,000
of appreciation on an averagehome, and so the math just
doesn't work.
So you're definitely going towant to buy now and not wait for
that half point reduction if apurchase is in your future, for
the next, in the next 12 monthsof your future.
Speaker 1 (07:02):
Well then, talk about why we should feel like home
prices will continue to grow,because that does seem to be the
other half of all of this.
If we're in a situation whereinterest rates remain high,
where incomes may well I guesswe're saying that incomes will
grow, but may not grow at thesame rates that we see an
increase in home prices then whyshould we think necessarily
that will continue to see anincrease of home prices equal to
6% or so per year?
Speaker 2 (07:24):
It's simple supply and demand, right.
What the forecasters showing usright now is that the supply of
new homes coming into themarket over the next 12 months
is going to be about 1.4 million.
Well, the demand for thosehomes is going to be closer to
1.6 million, and so anytimedemand is outpacing supply,
economics 101 tells you theprice has to rise, and that is
(07:48):
what we're seeing here inFlorida.
Definitely what we're seeinghere in Tampa Bay is we just
can't produce enough new housingunits to meet the demand of
everyone that wants housing inthis area, right, so this week,
big news broke in the investorworld that Warren Buffett,
spirks your Hathaway madesubstantial investments in some
of our nation's largest homebuilders.
Speaker 1 (08:09):
They got included DR Horton and Linnar and NVR, and
he bought up with equivalent ofabout 780 million or so in
shares of these assets.
So he was sending a strongsignal to the market that what
we're seeing here is as likelygoing to be of continued strong
growth in the home buildersegment.
Your statement is that yoursentiment is the reason why
we're seeing major investment inhome builders, because that is
(08:30):
the only way we can reallyaddress the supply side of this
equation, and that's what iscausing home prices and demand
really to be where it is rightnow Insufficient supply.
We can't make existing homeproduct out of thin air.
We can make new home product,and new home product is what is
absolutely necessary to meetthis strong demand for homes.
Speaker 2 (08:49):
Yeah, that's exactly right, and you know, the process
of building a new home doesn'thappen overnight.
These builders have to go outand acquire the land, get the
entitlements, permit the houses,get the houses built and then
sell the homes to these peoplethat want them, and that process
can take at least 12 months.
And so these forecasts for newhome construction are pretty
accurate, because we know howmany homes are going to get
(09:10):
built in the next 12 months,because they're already
permitted today, and so we caneasily look at active permits
and figure out how much of thatdemand are we going to be able
to meet over a 12 month timehorizon.
Speaker 1 (09:20):
So we've heard for all year about the gray cloud
hanging over the home builders.
We saw home builder shares downat record lows earlier in the
year and now we have homebuilder shares moving in the
exact opposite direction andbuoyed largely by these major
votes of confidence by biginstitutional investors like
Berkshire.
So tell me about that rollercoaster.
(09:41):
I mean what?
Why is a market that isrational?
I mean, if it's a year ofinventory and we know a year
ahead of time what demand willbe like, why is it that, like
eight months ago, we were tryingto bury some of these home
builders?
Speaker 2 (09:54):
Well, I think a couple of things that are played
right when you're talking aboutlarge, national, publicly
traded home builders.
They have to look at thenational dynamic and the
national economy when they makedecisions about how much they're
going to build, where they'regoing to build and do all that
and they've got shareholdersthey're responsible to and
ultimately their stock price isreally what matters.
And when there is the fear of arecession on the horizon, I
(10:15):
think that gives some of thesebig builders a little bit of
pause about.
Will those 1.6 million peoplereally be there when the homes
are finished and will they beable to afford our homes?
That's definitely part of theequation.
And then I think the other partof the equation that we're still
dealing with coming out ofCOVID are material costs and
material supply chains.
They've gotten so much betterover the past six to 12 months
(10:38):
now, but they're still not wherea lot of people feel like they
should be.
Especially when it comes toprices of materials.
They continue to fluctuate, andso a lot of these big builders
try to lock in long termcontracts with fixed costs for
certain supplies, and if theirsuppliers now aren't able to
fulfill that contract or meetthat supply demand.
That's going to kind of slowdown that process of new
construction.
Speaker 1 (10:59):
Chase.
One of the things that seems tocontinue to be troublesome, at
least in theory, is the ideathat the average sale price for
homes in July was somewherearound $450,000 in our local
market here in Florida $450,000.
And the median household incomeis well about $60,000.
I think, if we you know, it was$60,000 in 2021.
(11:21):
So a couple years later wecould probably trend it up
that's census data in 2021.
We can trend it up probablyabout 10%.
We're in the mid-60s in alllikelihood for our median
household incomes in that samemarket, with average sale prices
nearly six times what themedian household income is.
How does that?
(11:43):
What kind of future does thatportend or project for
affordability of homes, or isthere something that we're
missing in that?
Speaker 2 (11:51):
Yeah, you know that's a good question.
That's the million dollarquestion everyone's been asking
is, okay, affordability.
You know what's happening here.
I mean if you look at that$60,000 median household income,
if you go out and buy a$450,000 house and let's say you
have $50,000 to put down and soyou're going to borrow $400,000
right now at 7%, you're goingto spend half of your gross
(12:12):
income on your mortgage payment.
A lender won't allow that.
So I mean you've got to havetwo incomes on average in a
household to be able to afford.
You know what's out there on themarket to buy on average right
now $450,000 purchase price, andI think there's some things
that play there.
Right.
When we look in Tampa Bay, ifyour household income is $60,000
(12:34):
a year, you really can't affordto live here unless you've
lived here for a long time.
I was doing the math with somefirst time home buyers the other
day and what I see is thethreshold for being able to
afford that $450,000 or $450,000home is a gross household
income of around $120,000 a yearis what I see to be able to
afford a new home and live inTampa Bay in a comfortable but
(12:59):
not extravagant way.
A very modest living here inTampa Bay right now is requiring
that kind of household income.
Speaker 1 (13:06):
Right.
So that's about twice thecurrent average household income
in our county, which isprobably in Hillsborough County.
It's somewhere around the mid60,000.
That's a huge step up.
So I think you have to conclude, then, that one of two things
is happening Either the buyersare well above the median
household from an socioeconomicstandpoint, or we have
(13:26):
non-county and non-stateresidents purchasing these
products.
You have people who are notinfluenced by median household
income statistics.
That's not their economicreality, right, which you could
certainly make the case for.
If we look at our migrationstats into the state, how much
do you think it's out of statebuyers, out of county buyers,
that are driving the demand forhomes in our local area?
(13:47):
We have some data thatcirculated around our office
that about 30 to 35% of all homesales in 2022 were cash
purchases in Florida, and sowe're thinking about that
reality.
These are people who are notgoing to be constrained by
mortgage, by the need for amortgage or the need to justify
a household income of close tothe ratios that are required by
(14:07):
lenders in order to buy them.
These are people who are goingto be able to or at least 30% of
all the buyers are going to beable to pay cash for a property.
That may also affect what wesee in terms of the
unaffordability potential ofthese ratios, that you have
plenty of people moving into thearea that might be retirees
that might have sold a homesteadproperty in another area.
They may report a lower thanaverage, a lower than necessary
(14:29):
household income in order tojustify that purchase price.
But since they're flush withcash through a sale or through
retirement, that doesn't reallymatter, right?
They're going to buy this homeat these average prices and
compared to where they're comingfrom, they're still wonderful
bargains.
They're still tremendous valuefor money at $400,000 on average
, compared to what they'repaying for in the Northeast or
in the major metro areas of theUnited States.
Speaker 2 (14:51):
Well, it really is hard to believe when you start
hearing talk of an impendingrecession because there does
seem to be so much money stillout there sitting on the
sidelines for people ready tobuy a new home, invest in a
business, spend money onvacations.
I mean, we were in Europe thissummer, right, I couldn't
believe, like I mean that whenyou look at the stats on pent up
vacation demand and how muchmoney people are spending on
(15:12):
European vacations this summer.
So the economy has been good ingeneral to the public and they
have money.
And I don't think there's asingle segment, price segment of
the housing market right nowthat's suffering, right, you
would expect that, like, milliondollar homes would be sitting
on the market right now.
Or, like you know, there's a 15million dollar home that was
just listed over in Clearwaterright, that was, I think it was
(15:35):
sold within four months.
So I mean, that's a differentechelon of somebody looking at a
$400,000 new home, newconstruction home, or a $350,000
town home.
But all segments of the marketseem to be doing okay.
So I don't know where theactual impact is going to show
up first.
Right, we've started to see alittle bit of lag in rents.
From a standpoint of.
(15:56):
It's not the you know red hotrent market that we had, where
you could just name your priceand someone would pay it that we
had six months ago.
Right, we're starting to seemore discerning renters that are
starting to have options onthat side of the market, and I'm
not sure if that's because ofhome ownership conversions or
you know what's driving thatkind of dynamic here in Tampa
(16:16):
Bay.
But we have seen what I feellike is a little bit of
softening there, not that rentsare going down, it's just that
there is more available forpeople to choose from.
Speaker 1 (16:27):
Well, what's your opinion will be then?
If we continue to see majordevelopment in the new home
category and that that ends upbeing the product of target, the
desirable product for mostbuyers in this area, we
certainly will have existinghomes all throughout our areas,
certainly our urban course, andthose existing homes will not be
, will not be of the quality orof the standard in a lot of
cases of what new homes arebuilt are being built right now.
(16:48):
Right now and into the futurethey won't have the same
amenities, the same upgrades.
In some cases they will be inestablished neighborhoods and
fairly good locations, but butthey will not be the same in
appearance or potentially indesirability as new home
construction will be.
That gap will continue to widenbetween the age of those, the
vintage of those two homes.
We might see a case emerging ofa very substantial bifurcation
(17:11):
in the housing market of oldhomes and new.
Do you sense that will createany kind of problem for the old
home segment?
Well, we start seeing strongdemand for new homes, lots of
retirees who want or a new homebuyers who want a low
maintenance product.
But we'll see stuff that'salready been built and now
there's aging up into that 60and 70 and 80 years old, which
won't be as desirable.
There'll be those smaller ranchhouses built in the mid 50s of
(17:32):
the 1900s right which will havethree bedrooms and one bathroom
and no garage, which won't be asattractive for that person
moving into the area or eventhat person starting to buy a
home, and we'll see somelanguishing potentially in that
product segment.
What do you think?
Where will we see?
How will we see that shakingout and what does?
What do we do as investors whomight own some of that, or home
owners who might own some ofthat older product, to stay
ahead of what might be apreferential shift to new homes?
Speaker 2 (17:57):
Yeah.
So you know, right at the top ofmy head, the first thing I
think about when it comes to newconstruction is distance from
the urban core right, and thathasn't really mattered to people
so much over the past threeyears because of the work from
home set up that most peoplehave enjoyed, right.
I think a lot of this is goingto depend on whether that trend
continues and what percentage ofany given local population
(18:20):
continues to not have to fighttraffic to the urban core right
because, like the heights,seminal heights here in town,
water street, all of these typeof communities Davis Island,
south Tampa part of the reasonthat these communities have been
so strong in value anddesirability over the years has
a lot to do with their proximityto urban centers of work.
(18:41):
Now you've got people moving toDade City to live in Marata
because they built a lagoon outthere and they don't have to
make that commute because thatcommute would be something.
You know that people wouldstart to reconsider after a few
months of everyone going backdowntown.
I think that's going to be abig driver of that.
You know new constructionsalways prefer to existing by
most people, but location is thetrump card when location
(19:03):
matters.
Speaker 1 (19:05):
Right.
So your position will be thatif we can maintain a work from
home environment or if theemployment centers move into the
suburbs close to where the newconstruction will be, then we'll
continue to see strong growthtrends outside of earth and
cores into new constructioncommunities.
But the converse, if we need tomove back into some kind of a
concentric, a reasonableconcentric radius from our, from
(19:25):
our employment centers, thenwe'll see an increase in demand
for infill and for olderconstruction homes and then
certainly what we'll follow, Iimagine, is ongoing investments
in renovating, upgrading andimproving those in those
interior homes, even thoughthey're aging, to make them
acceptable for buyers who wantto live close to their jobs.
Speaker 2 (19:43):
Yeah, and one other thing to consider in that is, if
you move into a 40, 60, 80 yearold, established community,
it's not likely that you have anHOA, and so sometimes it's
going to be pure preference,right?
You want mature landscaping, youwant character in your home.
Do you want to be somewherewhere it's been well established
and you've got generationalfamilies at play?
(20:03):
Or do you want to go into asuburban you know suburban, new
construction type environmentwhere you know your oak trees
are three centimeters around andyou've got a play place next
door to your house and you'vegot a tiny postage stamp that's
enclosed by a white PVC fenceand you know your neighbor's
house you can touch when you putyour arm out the window and
you've got to pay, you know,$200, $300 a month to an HOA for
(20:26):
amenities that may not meananything to you, the cost of
upkeep and renovation of anolder home and an established
community, maybe less costlythan the HOA fee you're paying
every month.
So there's a lot of differentvariables and people have
different tastes anddesirabilities when it comes to
their place of abode.
But you know, new constructionis always a safe play in
(20:49):
people's minds becauseeverything's new and no one
likes to fix anything.
Speaker 1 (20:54):
You know we can say that the experiment with 100 and
100 plus year old housing inAmerica is a relatively new one.
But because there aren't thatmany communities where we have
100 year old housing wherepeople are still able to live in
it.
Right, but increasingly we do.
Right, we have inner city areasin many of our major cities
where housing is 100 or moreyears old and you know, we even
(21:18):
have some suburbs and some ofour more established communities
in the northeast and the westcoast which is in excess of 100
years.
You know what remains after 100years?
What is still sound andhabitable in many cases tends to
be extremely desirable.
Right, because it has alocation, but it also has oodles
of character, just like buckets.
Right, it's using the kind oflifestyle that people want to
have, because it has characterfrom a bygone era and it has
(21:41):
been, you know, upgraded or youknow maintained to a standard
that people nowadays want tolive in.
So we must, I suppose, make theassumption that the ingenuity of
homeowners and the Americanpeople will outlast the
obsolescence of the homes thatwere built 70 years ago, that we
will make improvements in thatproduct and improvements of the
desirability of that product tomeet our current desires and
(22:02):
we're not just going to allowthat to be demoed and you fall
into disrepair entirely.
There's stuff that will right.
Certainly there's somecommunities that are thoroughly
obsolete and built out withobsolete product and the future
of those remains uncertain.
But that's certainly not all.
That's certainly nowhere closeto all of even the homes that
were built in the 40s and the50s here in Florida.
So I guess have a little faithin your fellow man.
Maybe have a little faith inyour urban planning centers and
(22:24):
your neighbors and their abilityto be able to turn their old
homes into something desirable.
That might also help.
You have established confidencein infill areas.
Speaker 2 (22:31):
Yeah, yeah, you know two quick things about that,
about this new home versusexisting home concept, and one
of the things driving new homesales right now are that I've
worked recently with threedifferent buyers, with three
different builders, and thesethree national builders are
offering these buyers a 4.99fixed 30 year fixed rate on a
(22:53):
loan through their internalmortgage company and $30,000 to
pay for that rate buy down andtheir closing costs.
And so when you look at that,when you're looking at a rate
right now of seven, seven andeight on a 30 year fixed loan in
the Traditional market versus asubsidized rate from a
builder's lender at 4.99%, notonly can you now qualify for a
much higher price, and we knowthe builders rolling a lot of
(23:15):
that cost into the price of thehome and their Profit margin is
is still pretty healthy, butthat's a very attractive play
for any buyer right now and Ithink that is is a significant
play in driving people to newconstruction right now.
Speaker 1 (23:27):
these subsidized rates and yeah, without a doubt,
they're locking in the cost ata far lower basis because of
these mortgage companies,because these builders are able
to Control the economics of themortgage.
Speaker 2 (23:37):
Yeah, the other thing I think that that's at play is
one of the reasons We've seensuch a dearth of supply on the
existing home front over thelast 12 months is because during
COVID, people renovated theirhomes, remember, I mean, we were
hearing for months about peopletaking out home equity lines of
credit, putting pools in,remodeling their kitchens and
building offices in their homesto work and you know, all of
these things, all these upgradesThey've always wanted to do.
(23:58):
Well, they did it during COVIDbecause they were home for two
years, right, and you know theyfigured I hate now's the time to
do this.
Well, those helox that theytook out on those existing homes
are now at 9 plus percentinterest.
So when they took them out theywere at 5, now they're at 9.
Okay, if they haven't paidthese things off or are making
good progress paying thesethings off, these things are
(24:20):
gonna get painful for people.
If people put their rentals oncredit cards, credit card rates
right now are 22 and a halfpercent on average.
That's very painful.
So if you're in an existing homethat you fixed up real nice
you're like I'm not gonna sellbecause I can't go anywhere.
I don't want to pay marketprices for something new.
But now you've added four, five, six, seven hundred dollars a
(24:41):
month onto your payment andyou're thinking, hmm, that house
out there in Dade City that'sbrand new and the builders gonna
subsidize me at 4.99 percent.
That's looking pretty good, andI've got a hundred fifty
thousand dollars of equity inthis house.
Maybe it is time to sell and goto the suburbs.
You know, and I think we'regonna maybe, maybe, start seeing
some of that kind of thinkinghere over the next 12 months and
(25:01):
some of the more you know.
Desirable premium area existinghome inventory.
Speaker 1 (25:06):
Well, without the fear of recession hanging over
everyone's head the way it was12 months ago.
I certainly see, and Icertainly sense, a resurgence in
confidence all across the board, from folks who are interested
in buying A new construction toexisting homeowners who are
willing to take the shot now ofselling and seeing what they can
, what they can try To get onthe market.
The constrained inventorycontinues to be a strong driver
of high prices here, and so wehave not seen a falloff in home
(25:28):
prices that would force peopleto have to stay in their homes
or Necessarily to force them tosell right now to avoid this
decline.
So that can work both ways.
But overall confidence remainsstrong and I think we're gonna
see increasingly people willingto take a risk on some of this.
The risk doesn't look like it'sthat dangerous.
Speaker 2 (25:44):
Yeah, so you know.
A reference Barry Habib onemore time in this podcast,
because I feel like he'sexcellent.
If you can get a hold Hismaterial it's great.
One thing he said the other dayon one of his shows was that
there actually still is a greatrisk for recession and it lies
in the hands of the Fed.
If the Fed continues to hikeinterest rates over the next six
(26:04):
months, it's almost undoubtedlygoing to lead to a recession.
Just based on the economicfactors and math alone, it will
cause a short-term recession.
So it'll be interesting to seeif the Fed is going to continue
to hike those short-terminterest rates and what impact
that continues to have on thebusiness environment.
Right, because business linesof credit are at 9% now and
(26:27):
they're going to 10.
That's really painful forbusinesses that need working
capital to operate, and so we'llsee what kind of constraint
that puts on the economy if wedo see another one or two rate
hikes, like direct Hikes, likeJerome Powell is talking about
doing, over the next six months.
Speaker 1 (26:41):
Well, definitely a sobering thought and something
to keep some of the maybeunbridled optimism in check.
I'm glad we have bothperspectives because you don't
want runaway fear or runawayoptimism to take over.
That's when mistakes happen forsure.
So interesting conversationtoday, glad, worth.
This point in the year we canstart looking back at some of
the projections for the start ofthe year and see that they
didn't entirely pan out.
We can start looking ahead tosee the one to see how we might
(27:03):
be able to reevaluate ourprojections for the future and
make good decisions.
But great stuff chasing workingfolks.
Go to learn a little bit moreabout what we're talking about
here.
Speaker 2 (27:12):
Yeah, check us out on home prop comm.
We've got a robust websitethere.
We can help you with any ofyour needs in real estate buy,
sell transactions, investmentproperties, property management.
Look us up, contact us andlet's see if we can help you on
your way in your real estateventures.
Speaker 1 (27:27):
Great stuff.
Say so we can talk to you and Igo next time to see you out.
See you later, you.
Hello everybody, chase Clark here with your
Mercadius buying Tampa Baypodcast, and we're glad to be
back with you chatting a littlebit about the housing market.
We've been gone for much of thesummer and, man, a lot has
changed, or maybe a lot hasn'tchanged we thought would change.
I think if we had looked backand wondered where we would be
about this time at the start ofthe year, chase, we'd be
thinking that the market wouldbe well into its death spiral by
(00:27):
now and that mortgage rateswould have brought everything to
an absolute standstill, thatwe'd be in the middle of a
recession.
That's certainly what we wouldhave been thinking if we were
listening to the talking headsabout this time last year.
But here we are in August of2023, and by many measures,
things couldn't be muchdifferent.
So tell me a little bit aboutwhat you're seeing.
Maybe we should start with awhole mortgage interest rate
scenario, because that's drivingso much of this picture.
(00:48):
What are you seeing right nowand why aren't we in a real
estate death spiral thateveryone was projecting we would
be in?
Speaker 2 (00:54):
Hey Peter, what's up man?
What is the million dollarquestion?
Right, it's like when aremortgage rates going to go down?
How did we get to 7 percent?
It's a tough question, but 7percent seems to have become the
new normal.
People are getting used to it.
We're starting to see salesvolumes stabilize a little bit
and pick back up, but people arestill asking that question all
the time is when are ratescoming down?
(01:17):
And if you look at the papers,watch the news, read online,
wherever your source of media is, you're always hearing about
inflation numbers.
Where is inflation?
Regulatory rates are typicallythe 30 year fixed rate is tied
to inflation.
They're highly correlated andso we know inflation has come
way down off its peaks of 8 or 9percent, but during that same
period of time, rates havestayed high or continued to rise
(01:38):
.
And people are like what'sgoing on?
As inflation goes down, ratesshould come down, and normally
that's true.
But if you remember back to thespring, we had this crazy event
happen with bank failures.
We had three of the largestbank failures occur in US
history just this spring.
And what happened with that wasit shook up the Fed a little
bit.
The Fed got nervous, people gotnervous.
(01:59):
They kept raising rates,partially because the Fed looks
in a rearview mirror.
They always look backwards.
They're not really looking atwhat's really happening today.
They're looking at three, six,nine, 12 months in a rears, and
so they kept raising rates.
As the Fed raises rates, therate that banks have to pay on
deposits goes up, money marketrates go up, and so people
(02:21):
started pulling their money outof their checking accounts and
putting them in money marketfunds so that they could get a
higher rate of interest, and indoing so, banks had less money
on hand at a low cost of capitalto lend out at current interest
rates.
And so when that happens, bankshad to recapitalize.
They had to find funds thatthey could lend out, because
people had moved their moneyinto money market accounts where
they can't have that as theirreserve basis, and in doing so,
(02:43):
banks started selling off theirmortgage backed securities.
The 30 year fixed rate is 100%tied to the bond market, and the
mortgage backed security bondmarket is what's driving up
these 30 year fixed rates.
When banks sell bonds, theprice goes down.
They flooded the market withsupply of bonds.
When the price of bonds goesdown, the interest rate on the
bonds goes up and as the rate onthe bonds goes up, that's what
(03:07):
drives the 30 year fixed rate up, because it's tied to these
mortgage backed securities.
So, in a nutshell, the 30 yearfixed rate is staying high
because there is a glut ofsupply of these mortgage backed
securities on the market, whichis driving up the bond rates.
And that's where we findourselves right now.
Will the rates go down?
I don't know.
You listen to experts.
They're thinking we might get ahalf a point movement downward
(03:30):
by the end of the year, whichwould take us back into the high
six range.
That's good Good for buyers outthere looking for something a
little cheaper on the interestrate front.
But not a ton of movementexpected in this market right
now, unless we end up seeing afull blown recession, because
rates always fall during yourrecession.
Speaker 1 (03:49):
Okay, so affordability and interest rates
always seems to be the keyquestion, right?
And people are looking back andsaying, you know, wow, interest
rates seem so high relative towhat I've experienced so far in
my life or in my recent history.
And so we have to go all theway back to almost like 1995 or
earlier where we see interestrates equivalent to where they
are today, in the low sevens.
Right, so a long time ago.
(04:10):
Chase, where are you at 95?
Right, I was just.
I would think I was like 15,right, so 16.
Maybe I was in my junior yearin high school.
So I don't have a relevantperspective of what the market
was like, at least the firsthand perspective of what the
market was like back then.
So let's talk a little bitabout that.
You know, are what were folksdoing from an affordability
standpoint when rates were inthe sevens?
And you know how do they, howdo they buy a home at all?
Speaker 2 (04:33):
Yes, you know.
I mean, the typical benchmarkrate is 30%, right?
You don't want to spend morethan 30% of your income on your
mortgage and it's hard to getapproved by a lender for
anything over that, right?
So as rates go up, there's twothings at play.
Have your wages grown duringthat time so that you can afford
that higher rate and thathigher payment, or is the price
going to have to come down?
(04:53):
Or is your budget going to haveto be reduced so that the
affordable price of a home foryou is now less than it was a
year ago?
And for a lot of people that'sthe case.
They just can't afford all thehouse that they want to have now
because the rates seven, it'snot four, and that's a big jump
in rate, especially when you'retalking about a median home
price in the 400,000 range.
So I think that's where peopleare finding themselves today,
(05:14):
and the question we get all thetime right is well, should I
wait?
Should I wait till rates comedown to buy, or should I buy now
?
You know, and that's thequestion we have to address
every day for people, anddepending on what market you're
in, that answer is going to vary, but here in Tampa Bay.
There's a lot of data out thereto suggest that you should not
wait, right.
So prices are continuing torise and what you'll miss out on
(05:35):
is greater than the extrainterest you're going to pay if
you wait for the rate to drop,let's say, a half a point.
Speaker 1 (05:43):
So you're saying that we're going to miss out on
opportunities, that we will bein a worse financial situation
if we wait to purchase realestate and we're waiting for an
interest rate to fall than if webuy today?
Speaker 2 (05:56):
Yeah, you know, I listened to, you know a great
resource in this in this area ofthe industry, barry Habib, the
other day, and he gave thisexample from Palm Beach County,
florida.
Okay, in the next 12 months,home prices are expected in
Florida in general expected toincrease 3%.
Right now we're hovering aroundthe two and a half 3% range so
(06:18):
far for 2023 as far as homeprice increases.
By the end of the year, theforecast is that that's going to
be at 6%.
So we've got about another 3%to go over the next six to 12
months and what we'll call HPAor home price appreciation in
the state of Florida, and ratesare only predicted to drop about
a half a point during that time.
And so, if you do the math onthat, you'll save $380 a month
(06:40):
on your mortgage payment.
If you wait for that rate tocome down a half a point on
average, right, but you're goingto lose out on almost $39,000
of appreciation on an averagehome, and so the math just
doesn't work.
So you're definitely going towant to buy now and not wait for
that half point reduction if apurchase is in your future, for
the next, in the next 12 monthsof your future.
Speaker 1 (07:02):
Well then, talk about why we should feel like home
prices will continue to grow,because that does seem to be the
other half of all of this.
If we're in a situation whereinterest rates remain high,
where incomes may well I guesswe're saying that incomes will
grow, but may not grow at thesame rates that we see an
increase in home prices then whyshould we think necessarily
that will continue to see anincrease of home prices equal to
6% or so per year?
Speaker 2 (07:24):
It's simple supply and demand, right.
What the forecasters showing usright now is that the supply of
new homes coming into themarket over the next 12 months
is going to be about 1.4 million.
Well, the demand for thosehomes is going to be closer to
1.6 million, and so anytimedemand is outpacing supply,
economics 101 tells you theprice has to rise, and that is
(07:48):
what we're seeing here inFlorida.
Definitely what we're seeinghere in Tampa Bay is we just
can't produce enough new housingunits to meet the demand of
everyone that wants housing inthis area, right, so this week,
big news broke in the investorworld that Warren Buffett,
spirks your Hathaway madesubstantial investments in some
of our nation's largest homebuilders.
Speaker 1 (08:09):
They got included DR Horton and Linnar and NVR, and
he bought up with equivalent ofabout 780 million or so in
shares of these assets.
So he was sending a strongsignal to the market that what
we're seeing here is as likelygoing to be of continued strong
growth in the home buildersegment.
Your statement is that yoursentiment is the reason why
we're seeing major investment inhome builders, because that is
(08:30):
the only way we can reallyaddress the supply side of this
equation, and that's what iscausing home prices and demand
really to be where it is rightnow Insufficient supply.
We can't make existing homeproduct out of thin air.
We can make new home product,and new home product is what is
absolutely necessary to meetthis strong demand for homes.
Speaker 2 (08:49):
Yeah, that's exactly right, and you know, the process
of building a new home doesn'thappen overnight.
These builders have to go outand acquire the land, get the
entitlements, permit the houses,get the houses built and then
sell the homes to these peoplethat want them, and that process
can take at least 12 months.
And so these forecasts for newhome construction are pretty
accurate, because we know howmany homes are going to get
(09:10):
built in the next 12 months,because they're already
permitted today, and so we caneasily look at active permits
and figure out how much of thatdemand are we going to be able
to meet over a 12 month timehorizon.
Speaker 1 (09:20):
So we've heard for all year about the gray cloud
hanging over the home builders.
We saw home builder shares downat record lows earlier in the
year and now we have homebuilder shares moving in the
exact opposite direction andbuoyed largely by these major
votes of confidence by biginstitutional investors like
Berkshire.
So tell me about that rollercoaster.
(09:41):
I mean what?
Why is a market that isrational?
I mean, if it's a year ofinventory and we know a year
ahead of time what demand willbe like, why is it that, like
eight months ago, we were tryingto bury some of these home
builders?
Speaker 2 (09:54):
Well, I think a couple of things that are played
right when you're talking aboutlarge, national, publicly
traded home builders.
They have to look at thenational dynamic and the
national economy when they makedecisions about how much they're
going to build, where they'regoing to build and do all that
and they've got shareholdersthey're responsible to and
ultimately their stock price isreally what matters.
And when there is the fear of arecession on the horizon, I
(10:15):
think that gives some of thesebig builders a little bit of
pause about.
Will those 1.6 million peoplereally be there when the homes
are finished and will they beable to afford our homes?
That's definitely part of theequation.
And then I think the other partof the equation that we're still
dealing with coming out ofCOVID are material costs and
material supply chains.
They've gotten so much betterover the past six to 12 months
(10:38):
now, but they're still not wherea lot of people feel like they
should be.
Especially when it comes toprices of materials.
They continue to fluctuate, andso a lot of these big builders
try to lock in long termcontracts with fixed costs for
certain supplies, and if theirsuppliers now aren't able to
fulfill that contract or meetthat supply demand.
That's going to kind of slowdown that process of new
construction.
Speaker 1 (10:59):
Chase.
One of the things that seems tocontinue to be troublesome, at
least in theory, is the ideathat the average sale price for
homes in July was somewherearound $450,000 in our local
market here in Florida $450,000.
And the median household incomeis well about $60,000.
I think, if we you know, it was$60,000 in 2021.
(11:21):
So a couple years later wecould probably trend it up
that's census data in 2021.
We can trend it up probablyabout 10%.
We're in the mid-60s in alllikelihood for our median
household incomes in that samemarket, with average sale prices
nearly six times what themedian household income is.
How does that?
(11:43):
What kind of future does thatportend or project for
affordability of homes, or isthere something that we're
missing in that?
Speaker 2 (11:51):
Yeah, you know that's a good question.
That's the million dollarquestion everyone's been asking
is, okay, affordability.
You know what's happening here.
I mean if you look at that$60,000 median household income,
if you go out and buy a$450,000 house and let's say you
have $50,000 to put down and soyou're going to borrow $400,000
right now at 7%, you're goingto spend half of your gross
(12:12):
income on your mortgage payment.
A lender won't allow that.
So I mean you've got to havetwo incomes on average in a
household to be able to afford.
You know what's out there on themarket to buy on average right
now $450,000 purchase price, andI think there's some things
that play there.
Right.
When we look in Tampa Bay, ifyour household income is $60,000
(12:34):
a year, you really can't affordto live here unless you've
lived here for a long time.
I was doing the math with somefirst time home buyers the other
day and what I see is thethreshold for being able to
afford that $450,000 or $450,000home is a gross household
income of around $120,000 a yearis what I see to be able to
afford a new home and live inTampa Bay in a comfortable but
(12:59):
not extravagant way.
A very modest living here inTampa Bay right now is requiring
that kind of household income.
Speaker 1 (13:06):
Right.
So that's about twice thecurrent average household income
in our county, which isprobably in Hillsborough County.
It's somewhere around the mid60,000.
That's a huge step up.
So I think you have to conclude, then, that one of two things
is happening Either the buyersare well above the median
household from an socioeconomicstandpoint, or we have
(13:26):
non-county and non-stateresidents purchasing these
products.
You have people who are notinfluenced by median household
income statistics.
That's not their economicreality, right, which you could
certainly make the case for.
If we look at our migrationstats into the state, how much
do you think it's out of statebuyers, out of county buyers,
that are driving the demand forhomes in our local area?
(13:47):
We have some data thatcirculated around our office
that about 30 to 35% of all homesales in 2022 were cash
purchases in Florida, and sowe're thinking about that
reality.
These are people who are notgoing to be constrained by
mortgage, by the need for amortgage or the need to justify
a household income of close tothe ratios that are required by
(14:07):
lenders in order to buy them.
These are people who are goingto be able to or at least 30% of
all the buyers are going to beable to pay cash for a property.
That may also affect what wesee in terms of the
unaffordability potential ofthese ratios, that you have
plenty of people moving into thearea that might be retirees
that might have sold a homesteadproperty in another area.
They may report a lower thanaverage, a lower than necessary
(14:29):
household income in order tojustify that purchase price.
But since they're flush withcash through a sale or through
retirement, that doesn't reallymatter, right?
They're going to buy this homeat these average prices and
compared to where they're comingfrom, they're still wonderful
bargains.
They're still tremendous valuefor money at $400,000 on average
, compared to what they'repaying for in the Northeast or
in the major metro areas of theUnited States.
Speaker 2 (14:51):
Well, it really is hard to believe when you start
hearing talk of an impendingrecession because there does
seem to be so much money stillout there sitting on the
sidelines for people ready tobuy a new home, invest in a
business, spend money onvacations.
I mean, we were in Europe thissummer, right, I couldn't
believe, like I mean that whenyou look at the stats on pent up
vacation demand and how muchmoney people are spending on
(15:12):
European vacations this summer.
So the economy has been good ingeneral to the public and they
have money.
And I don't think there's asingle segment, price segment of
the housing market right nowthat's suffering, right, you
would expect that, like, milliondollar homes would be sitting
on the market right now.
Or, like you know, there's a 15million dollar home that was
just listed over in Clearwaterright, that was, I think it was
(15:35):
sold within four months.
So I mean, that's a differentechelon of somebody looking at a
$400,000 new home, newconstruction home, or a $350,000
town home.
But all segments of the marketseem to be doing okay.
So I don't know where theactual impact is going to show
up first.
Right, we've started to see alittle bit of lag in rents.
From a standpoint of.
(15:56):
It's not the you know red hotrent market that we had, where
you could just name your priceand someone would pay it that we
had six months ago.
Right, we're starting to seemore discerning renters that are
starting to have options onthat side of the market, and I'm
not sure if that's because ofhome ownership conversions or
you know what's driving thatkind of dynamic here in Tampa
(16:16):
Bay.
But we have seen what I feellike is a little bit of
softening there, not that rentsare going down, it's just that
there is more available forpeople to choose from.
Speaker 1 (16:27):
Well, what's your opinion will be then?
If we continue to see majordevelopment in the new home
category and that that ends upbeing the product of target, the
desirable product for mostbuyers in this area, we
certainly will have existinghomes all throughout our areas,
certainly our urban course, andthose existing homes will not be
, will not be of the quality orof the standard in a lot of
cases of what new homes arebuilt are being built right now.
(16:48):
Right now and into the futurethey won't have the same
amenities, the same upgrades.
In some cases they will be inestablished neighborhoods and
fairly good locations, but butthey will not be the same in
appearance or potentially indesirability as new home
construction will be.
That gap will continue to widenbetween the age of those, the
vintage of those two homes.
We might see a case emerging ofa very substantial bifurcation
(17:11):
in the housing market of oldhomes and new.
Do you sense that will createany kind of problem for the old
home segment?
Well, we start seeing strongdemand for new homes, lots of
retirees who want or a new homebuyers who want a low
maintenance product.
But we'll see stuff that'salready been built and now
there's aging up into that 60and 70 and 80 years old, which
won't be as desirable.
There'll be those smaller ranchhouses built in the mid 50s of
(17:32):
the 1900s right which will havethree bedrooms and one bathroom
and no garage, which won't be asattractive for that person
moving into the area or eventhat person starting to buy a
home, and we'll see somelanguishing potentially in that
product segment.
What do you think?
Where will we see?
How will we see that shakingout and what does?
What do we do as investors whomight own some of that, or home
owners who might own some ofthat older product, to stay
ahead of what might be apreferential shift to new homes?
Speaker 2 (17:57):
Yeah.
So you know, right at the top ofmy head, the first thing I
think about when it comes to newconstruction is distance from
the urban core right, and thathasn't really mattered to people
so much over the past threeyears because of the work from
home set up that most peoplehave enjoyed, right.
I think a lot of this is goingto depend on whether that trend
continues and what percentage ofany given local population
(18:20):
continues to not have to fighttraffic to the urban core right
because, like the heights,seminal heights here in town,
water street, all of these typeof communities Davis Island,
south Tampa part of the reasonthat these communities have been
so strong in value anddesirability over the years has
a lot to do with their proximityto urban centers of work.
(18:41):
Now you've got people moving toDade City to live in Marata
because they built a lagoon outthere and they don't have to
make that commute because thatcommute would be something.
You know that people wouldstart to reconsider after a few
months of everyone going backdowntown.
I think that's going to be abig driver of that.
You know new constructionsalways prefer to existing by
most people, but location is thetrump card when location
(19:03):
matters.
Speaker 1 (19:05):
Right.
So your position will be thatif we can maintain a work from
home environment or if theemployment centers move into the
suburbs close to where the newconstruction will be, then we'll
continue to see strong growthtrends outside of earth and
cores into new constructioncommunities.
But the converse, if we need tomove back into some kind of a
concentric, a reasonableconcentric radius from our, from
(19:25):
our employment centers, thenwe'll see an increase in demand
for infill and for olderconstruction homes and then
certainly what we'll follow, Iimagine, is ongoing investments
in renovating, upgrading andimproving those in those
interior homes, even thoughthey're aging, to make them
acceptable for buyers who wantto live close to their jobs.
Speaker 2 (19:43):
Yeah, and one other thing to consider in that is, if
you move into a 40, 60, 80 yearold, established community,
it's not likely that you have anHOA, and so sometimes it's
going to be pure preference,right?
You want mature landscaping, youwant character in your home.
Do you want to be somewherewhere it's been well established
and you've got generationalfamilies at play?
(20:03):
Or do you want to go into asuburban you know suburban, new
construction type environmentwhere you know your oak trees
are three centimeters around andyou've got a play place next
door to your house and you'vegot a tiny postage stamp that's
enclosed by a white PVC fenceand you know your neighbor's
house you can touch when you putyour arm out the window and
you've got to pay, you know,$200, $300 a month to an HOA for
(20:26):
amenities that may not meananything to you, the cost of
upkeep and renovation of anolder home and an established
community, maybe less costlythan the HOA fee you're paying
every month.
So there's a lot of differentvariables and people have
different tastes anddesirabilities when it comes to
their place of abode.
But you know, new constructionis always a safe play in
(20:49):
people's minds becauseeverything's new and no one
likes to fix anything.
Speaker 1 (20:54):
You know we can say that the experiment with 100 and
100 plus year old housing inAmerica is a relatively new one.
But because there aren't thatmany communities where we have
100 year old housing wherepeople are still able to live in
it.
Right, but increasingly we do.
Right, we have inner city areasin many of our major cities
where housing is 100 or moreyears old and you know, we even
(21:18):
have some suburbs and some ofour more established communities
in the northeast and the westcoast which is in excess of 100
years.
You know what remains after 100years?
What is still sound andhabitable in many cases tends to
be extremely desirable.
Right, because it has alocation, but it also has oodles
of character, just like buckets.
Right, it's using the kind oflifestyle that people want to
have, because it has characterfrom a bygone era and it has
(21:41):
been, you know, upgraded or youknow maintained to a standard
that people nowadays want tolive in.
So we must, I suppose, make theassumption that the ingenuity of
homeowners and the Americanpeople will outlast the
obsolescence of the homes thatwere built 70 years ago, that we
will make improvements in thatproduct and improvements of the
desirability of that product tomeet our current desires and
(22:02):
we're not just going to allowthat to be demoed and you fall
into disrepair entirely.
There's stuff that will right.
Certainly there's somecommunities that are thoroughly
obsolete and built out withobsolete product and the future
of those remains uncertain.
But that's certainly not all.
That's certainly nowhere closeto all of even the homes that
were built in the 40s and the50s here in Florida.
So I guess have a little faithin your fellow man.
Maybe have a little faith inyour urban planning centers and
(22:24):
your neighbors and their abilityto be able to turn their old
homes into something desirable.
That might also help.
You have established confidencein infill areas.
Speaker 2 (22:31):
Yeah, yeah, you know two quick things about that,
about this new home versusexisting home concept, and one
of the things driving new homesales right now are that I've
worked recently with threedifferent buyers, with three
different builders, and thesethree national builders are
offering these buyers a 4.99fixed 30 year fixed rate on a
(22:53):
loan through their internalmortgage company and $30,000 to
pay for that rate buy down andtheir closing costs.
And so when you look at that,when you're looking at a rate
right now of seven, seven andeight on a 30 year fixed loan in
the Traditional market versus asubsidized rate from a
builder's lender at 4.99%, notonly can you now qualify for a
much higher price, and we knowthe builders rolling a lot of
(23:15):
that cost into the price of thehome and their Profit margin is
is still pretty healthy, butthat's a very attractive play
for any buyer right now and Ithink that is is a significant
play in driving people to newconstruction right now.
Speaker 1 (23:27):
these subsidized rates and yeah, without a doubt,
they're locking in the cost ata far lower basis because of
these mortgage companies,because these builders are able
to Control the economics of themortgage.
Speaker 2 (23:37):
Yeah, the other thing I think that that's at play is
one of the reasons We've seensuch a dearth of supply on the
existing home front over thelast 12 months is because during
COVID, people renovated theirhomes, remember, I mean, we were
hearing for months about peopletaking out home equity lines of
credit, putting pools in,remodeling their kitchens and
building offices in their homesto work and you know, all of
these things, all these upgradesThey've always wanted to do.
(23:58):
Well, they did it during COVIDbecause they were home for two
years, right, and you know theyfigured I hate now's the time to
do this.
Well, those helox that theytook out on those existing homes
are now at 9 plus percentinterest.
So when they took them out theywere at 5, now they're at 9.
Okay, if they haven't paidthese things off or are making
good progress paying thesethings off, these things are
(24:20):
gonna get painful for people.
If people put their rentals oncredit cards, credit card rates
right now are 22 and a halfpercent on average.
That's very painful.
So if you're in an existing homethat you fixed up real nice
you're like I'm not gonna sellbecause I can't go anywhere.
I don't want to pay marketprices for something new.
But now you've added four, five, six, seven hundred dollars a
(24:41):
month onto your payment andyou're thinking, hmm, that house
out there in Dade City that'sbrand new and the builders gonna
subsidize me at 4.99 percent.
That's looking pretty good, andI've got a hundred fifty
thousand dollars of equity inthis house.
Maybe it is time to sell and goto the suburbs.
You know, and I think we'regonna maybe, maybe, start seeing
some of that kind of thinkinghere over the next 12 months and
(25:01):
some of the more you know.
Desirable premium area existinghome inventory.
Speaker 1 (25:06):
Well, without the fear of recession hanging over
everyone's head the way it was12 months ago.
I certainly see, and Icertainly sense, a resurgence in
confidence all across the board, from folks who are interested
in buying A new construction toexisting homeowners who are
willing to take the shot now ofselling and seeing what they can
, what they can try To get onthe market.
The constrained inventorycontinues to be a strong driver
of high prices here, and so wehave not seen a falloff in home
(25:28):
prices that would force peopleto have to stay in their homes
or Necessarily to force them tosell right now to avoid this
decline.
So that can work both ways.
But overall confidence remainsstrong and I think we're gonna
see increasingly people willingto take a risk on some of this.
The risk doesn't look like it'sthat dangerous.
Speaker 2 (25:44):
Yeah, so you know.
A reference Barry Habib onemore time in this podcast,
because I feel like he'sexcellent.
If you can get a hold Hismaterial it's great.
One thing he said the other dayon one of his shows was that
there actually still is a greatrisk for recession and it lies
in the hands of the Fed.
If the Fed continues to hikeinterest rates over the next six
(26:04):
months, it's almost undoubtedlygoing to lead to a recession.
Just based on the economicfactors and math alone, it will
cause a short-term recession.
So it'll be interesting to seeif the Fed is going to continue
to hike those short-terminterest rates and what impact
that continues to have on thebusiness environment.
Right, because business linesof credit are at 9% now and
(26:27):
they're going to 10.
That's really painful forbusinesses that need working
capital to operate, and so we'llsee what kind of constraint
that puts on the economy if wedo see another one or two rate
hikes, like direct Hikes, likeJerome Powell is talking about
doing, over the next six months.
Speaker 1 (26:41):
Well, definitely a sobering thought and something
to keep some of the maybeunbridled optimism in check.
I'm glad we have bothperspectives because you don't
want runaway fear or runawayoptimism to take over.
That's when mistakes happen forsure.
So interesting conversationtoday, glad, worth.
This point in the year we canstart looking back at some of
the projections for the start ofthe year and see that they
didn't entirely pan out.
We can start looking ahead tosee the one to see how we might
(27:03):
be able to reevaluate ourprojections for the future and
make good decisions.
But great stuff chasing workingfolks.
Go to learn a little bit moreabout what we're talking about
here.
Speaker 2 (27:12):
Yeah, check us out on home prop comm.
We've got a robust websitethere.
We can help you with any ofyour needs in real estate buy,
sell transactions, investmentproperties, property management.
Look us up, contact us andlet's see if we can help you on
your way in your real estateventures.
Speaker 1 (27:27):
Great stuff.
Say so we can talk to you and Igo next time to see you out.
See you later, you.
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