September 8, 2023 • 27 mins
Ever wondered how Federal Reserve's decisions can impact your mortgage rates? How about the ripple effects of a robust job market on the same? Prepare to be enlightened as Jeff dissects the recent surge in mortgage rates, its intricate connection to the Fed Funds Rate and the implications of a healthy job market. Dive into the historical mortgage rates and understand why today's rates, though elevated, are just slightly above average.
As we navigate through this period of rising rates, Jeff will shed light on strategic home buying options. From acting on the buying urge now and potentially refinancing later, to leveraging options like discount points and temporary buydowns, he's got you covered. Discover the stark reality of consumer credit card debt in the US as it tops $1 Trillion for the first time ever, its impact on the economy and how you can manage this debt more effectively. This episode is a treasure trove of insights, whether you're a seasoned mortgage professional or a curious mind fascinated by the financial landscape.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:04):
Welcome to the show fairways and finance.
My name is Jeff Smith.
I've been in the mortgagebusiness for 16 years top
quarter percent L O nationwide.
And you know this podcast.
We want to talk about yourfinances, how to grow and
accumulate wealth and all thingsrelated to the mortgage
industry.
But we're golf lovers here aswell, so we're going to work in
some golf.
Don't worry for my golf loversout there.
(00:26):
We got you and I hope you enjoythe show.
Welcome back to another episodeof fairways and finance.
My name is Jeff Smith, I'm yourhost and here to talk to you
today about you know what theheck is going on in this market.
So this is the end of Augustand we've seen a spike in
(00:46):
mortgage rates over the last six, seven weeks, and so you know,
as a mortgage professional,that's been very disappointing.
We just keep thinking thatwe're getting closer here to
mortgage rates coming down.
It hasn't happened quite yet,but there's some interesting
dynamics going on in the marketthat are affecting rates right
now, and so you know the Fed.
(01:06):
They are the main driver of youknow what's happening with
rates because they can influencerates by their adjustments of
the federal funds rate and sothe Fed funds rate just as a
refresher is an overnight ratethat banks pay to borrow money
from the Federal Reserve.
So the banks borrow money fromthe Federal Reserve all the time
(01:29):
to give them liquidity and theypay an overnight rate to borrow
money from the Fed.
So that overnight rate is theFed funds rate.
So as Fed Reserve increasesrates, they are increasing that
Fed funds rate.
When the Fed increases the Fedfunds rate, that will change
interest rates on certainproducts dollar for dollar in
(01:52):
terms of the percentage.
So if the Fed raises the Fedfunds rate half a percent,
you're going to see the interestrate on your credit card go up
by half a percent immediately.
You're going to see theinterest rate on an auto loan go
up immediately.
Home equity lines of credit,some loans you're not going to
see an immediate change in rate,like mortgages, because
(02:12):
mortgages end up becoming whatare called mortgage backed
securities.
Are traded on Wall Street inthe open market, and so the
value of mortgage backedsecurities is what determines
the rate that's available withmortgages.
Now, mortgage backed securitiesare long term bonds, so they
tend to track what the long termbond market is doing, and the
(02:33):
long term bond market isinfluenced by where other rates
are at and what the economy isdoing overall as a whole.
So when the Fed hikes rates, itdoes have an indirect impact on
mortgage rates and a lot oftimes historically when we see
the Fed hiking rates, thatactually helps mortgage rates
and we usually see mortgagerates come down as a result of
(02:55):
it, because the economy slowsdown when the Fed is hiking
rates.
When the Fed keeps interestrates low, borrowing costs are
very low and that stimulateseconomic growth because people
can leverage debt to go out andconsume goods in the economy and
then that drives up the economy.
So what we've been seeing isthe Fed hiking rates for over a
(03:18):
year now, but the economy hasn'tslowed down in a significant
way.
Now.
Inflation has come down.
A lot of metrics have improved,but some of the metrics that we
look at have remained relativelystrong, and the one that is
still remaining strong, at leastas it appears, is the jobs
(03:39):
numbers, the jobs reports, andso there's actually been some
revisions to the job report overthe last couple of months,
significant revisions downward.
So these jobs reports a lot ofit is based off of modeling and
projections, and so the modelingthat's being used right now in
some of these key jobs reportsis actually turns out to be way
(04:02):
off.
So these models and thesereports cannot identify the
exact number of jobs that areout there.
What they do is they runsurveys with employers and
employees and they look at data,they look at payroll data, they
look at in a bunch of differentareas and then extrapolate all
that information and try andcome up with what the jobs
(04:23):
numbers are.
And so it's turning out thatsome of the modeling that's been
used over the last year isover-inflating the jobs numbers.
So the market is trading basedoff of the metrics that they see
, and the market has been makinga lot of trades based on the
fact that the jobs market hasbeen appearing to be really
strong.
(04:44):
And a strong jobs market wouldindicate a strong economy.
And if the job market is strong, that means people are earning
wages.
People have been really gettingan increase in wages, not only
if they stay with their currentemployer, but if, on average
over the last year, if someonehas left their employer, they're
getting a pay raise of, onaverage, 15%, so people are
earning more money.
If people are earning moremoney, that gives them more
(05:05):
money to spend, and then havingmore money to spend means that
they're going to spend it in theeconomy, and that props up
inflation, and so inflation isthe main driver of mortgage
rates.
So the stronger economicactivity is then, generally
speaking, the more inflationwe're going to see.
And our biggest problem and theFed's number one mandate with
(05:26):
all these rate hikes has been tocool off inflation and bring
inflation down.
So the jobs market would kindof work in the opposite
direction of that.
So, with all of that being said, what we've seen over the last
six weeks is that, you know, theinflation numbers are lower,
but these jobs numbers have beenreally strong, and so that's
actually caused an increase inmortgage rates, and so mortgage
(05:49):
rates went up almost threequarters of a percent over the
last month and a half.
We are at the highest that we'vebeen all year.
We are getting into almost intothe mid-sevens on a 30-year fix
of no points.
Now that sounds like insanelyhigh, but it's really not when
you look at it from a historicalperspective.
So, looking back over the last30 years, the average 30-year
(06:12):
fixed rate mortgage is 6.5% forthe rate.
So right now, you know we'vebeen getting into the low sevens
and that's a little bit aboveaverage, but not, you know,
extreme by historical measures.
Now if you compare it to theall-time low rates that we saw
during COVID, it feels veryextreme.
It's over double the rates thatwe saw from mortgages during
(06:32):
COVID.
So in that perspective,mortgage rates do feel very high
.
But if we think about it in abroader, longer-term perspective
, mortgage rates really are notsuper high.
They're just above average.
So now mortgage rates have hada nice improvement over the last
week or so.
And what's happened over thelast week is it's come out that
(06:54):
these job report models need tobe revised downward because
they're over-inflating the jobsnumbers and the job market is
not actually as strong as someof this data has suggested.
So now we're seeing someimprovement in mortgage rates as
a result of that.
And so, going forward, you knowa lot of what happens is going
(07:17):
to be dependent on what the Feddoes, and so you know we're
thinking that if these jobsnumbers continue to weaken, then
it makes it more difficult forthe Fed to hike rates again.
If these jobs numbers don'tcome down and we don't see
additional revisions lower, thenthe Fed may hike rates again in
the month of September.
(07:37):
So this is going to beinteresting to see how it plays
out, but there is no doubt thatthe economy is slowing down.
The jobs market is not as goodas it was 6, 12 months ago, and
so we're definitely going to seethe rates come down.
It's just a matter of you knowhow much longer that's going to
take, but for right now, youknow we're on a good little
slide.
We haven't quite hit that pointyet, though, where we're
(07:59):
hopefully going to see ratescome down in a meaningful way.
I think we'll see that once theFed starts to pause, because
hopefully, when the Fed beginsto pause their rate hikes, we're
getting strong data that theeconomy is slowing down in a
significant way.
And so you know I say hopefully.
That's hopefully in the eyes ofthe mortgage industry.
As a loan officer, I'm alwayskind of rooting against the
(08:21):
economy.
You know, when the economy isstruggling, that's when the
mortgage industry tends to dovery well, because mortgage
rates come down when the economyslows down.
And then, when mortgage ratesgo down, people are refinancing,
people are buying homes, and soit spurs activity as a loan
officer.
So it's always kind of adifficult dichotomy in the
(08:41):
mortgage business, because insome ways, you're rooting for
the economy to do poorly,because that generally helps
real estate.
So that's what we're looking atgoing forward here.
That's what's happening rightnow.
Now home values during thiswhole thing are going up and so
normally we, when we see anincrease in interest rates
(09:02):
looking back, you know, over thelast 50 years when we see an
increase in interest rates, wesee a decrease in home values
because mortgage interest ratesdrive demand.
So the lower the rates are,then generally we see stronger
demand to buy homes because it'sless expensive to finance a
mortgage.
You can buy a more expensivehome with a lower payment and
(09:25):
that brings buyers into themarketplace First time.
Home buyers can get into themarket more than they can when
rates are higher because monthlypayments are lower due to lower
rates.
So lower rates drives anincrease in demand.
And then we see the oppositehappen when mortgage rates go up
.
When mortgage rates go up, wesee a decrease in demand because
it's more expensive to financea mortgage.
(09:47):
That same, you know, $500,000house, or whatever the number is
, becomes a lot more expensiveon a monthly basis.
So mortgage rates very muchaffect the demand of the real
estate market.
Now what's happened here overthe last year and a half is June
of last year we had alreadystarted to see mortgage rates
increase.
(10:07):
So rates really startedincreasing at the beginning of
2022.
Home values continued going upas we went through the first 6
months of 2022 because rateswere inching their way up they
don't just go up overnight andthen so, as we started seeing
mortgage rates increase, we sawa slowdown in the real estate
(10:31):
market and then we even startedto see home values come down a
little bit.
So, looking back from the peakof home values last year, which
was June of 2022, we sawinterest rates increase through
that period of time and then, asthey continued to increase, we
actually saw home values comedown.
So, from June of 2022, upthrough January of this year, we
(10:53):
saw home values pull back about3%.
So real estate market lostabout 3%.
This year, mortgage rates havestayed relatively flat.
They're actually a little bithigher now than they were at the
beginning of the year, butwe've seen home values go up
significantly.
So home values depending onwhich report you look at home
prices home values are on paceto increase between 7% to 10%
(11:18):
this year, which is crazy whenyou think about it, because the
average rate of appreciation forhome values is roughly 3% to 5%
, depending on the year.
So for home values to increase10%, that's well above average.
But we have interest rates thathave risen significantly, and
so that really normally we wouldnot see that happen when rates
(11:38):
have moved higher.
But what's happening in themarket right now is a very low
inventory of homes for sale.
The supply available in realestate is very low, so even
though the demand is lower thanit would be in a strong,
balanced market, we're seeingprices go up because the supply
(11:59):
relative to the demand that'sout there is extremely low.
So it's just simple economicswhen you have more demand than
you have supply, that pushesprices higher, and so that's
what we've seen this year.
So it's really an interestingsituation, and what I think is
happening with that is that somany people in the US right now
(12:19):
are sitting on a mortgage ratethat's 3% or less.
They refinanced during COVID,they've got a super low monthly
payment, and even if they wantto move they want to buy a
bigger house, they want to moveto another part of town they're
not doing it because they'd haveto exchange a 3% mortgage rate
to a 6% or 7% mortgage rate.
The house itself would probablybe more expensive in price as
(12:41):
well, and so now you're lookingat a mortgage payment that's
probably more than double whatyou're currently paying, and so
that's a significant increase inpayment and I think that's
keeping a lot of people on thesidelines from selling their
home because they can't affordthat significant increase in
payment.
So the transactions we'reseeing right now are people who
(13:02):
are relocating to another statefor family reasons, job reasons,
whatever it may be.
We're seeing first time buyerswho have now accumulated enough
money to get into the market.
So even though rates are higher, you know if they're not
exchanging a low rate to getinto the market.
And then we're seeing, you know, like divorce situations or
people who've gotten in overtheir head with too much debt,
(13:23):
those types of things.
So it's generally transactionsfor people who are in a
situation where they kind ofhave to sell.
There's a life event that'sdriving that transaction for
them.
So when we look at the overallnumber of transactions being
done right now, it is 30% lowerthan it was last year, and last
year was down from the yearprior.
So number of transactions isdown significantly, but the
(13:47):
supply is so low that homeprices are going up.
Okay, so what does that mean foryou as a buyer thinking and as
somebody who's thinking of maybedoing a home purchase.
Well, I would.
You know, it kind of depends onwhat bucket you fall into, okay
, whether you own a home rightnow or you don't.
But I think something toconsider, especially if you're
not in the market right now, isthat home prices are going up.
(14:12):
So if you're waiting formortgage rates to come down
before you buy a home, whileyou're waiting, the value of the
homes that you're interested inbuying are going to go up and
you're going to have to pay moreto buy that same home.
So if rates come down but theprice goes up, you're really not
saving much money because, yeah, you keep, maybe get it at a
(14:35):
lower rate next year, but you'regonna pay a higher price.
So how much are you actuallysaving?
If you buy a home now whilerates are still elevated, you're
locking in the price of whereit's at today and then next year
or the year after or wheneverit is and mortgage rates come
down, you can refinance thatmortgage to a lower rate, but
you've locked in the price fromwhere it's at today.
(14:55):
So $500,000 home is going to goup 50,000 in value at a rate of
10% appreciation.
So that is something that Ithink is really important to
consider.
And then the fact of refinancing.
That can get you a lowermonthly payment.
So as long as you can affordthe payment at where the rates
(15:15):
are at today, I think a solidgame plan is to go ahead and buy
today and then refinance whenthe rates come down.
It's not very expensive torefinance either, so you don't
have to see a significantreduction in the rate to justify
the cost of a refinance and youcan refinance multiple times.
There's no restriction on whenyou can refinance or how many
(15:36):
times you can refinance yourmortgage.
So that's what I wouldrecommend for someone who could
afford today's rates andpayments.
That's going to save you money.
Now, other ways that we cancombat where the rates are at
right now we can do buy downs onthe interest rate, so you can
do a permanent buy down whereyou pay discount points and then
permanently lower the interestrate for the entire duration of
(15:58):
the loan, or you can do atemporary buy down.
A temporary buy down let's takea 2-1 temporary buy down as an
example 2-1 temporary buy downgets you a 2% lower rate in the
first year, 1% lower rate in thesecond year and then you're
paying whatever the note rate isof the mortgage from year 3 all
the way through 30.
Temporary buy down has to bepaid for by the seller and the
(16:20):
cost of the temporary buy down2-1 temporary buy down is
usually just over 2% of the loanamount, so like 2.1% or 2.1% of
the purchase price, I shouldsay.
But it is calculated based on apercentage of the loan amount.
So that cost for a temporarybuy down let's take a $500,000
home You're looking at close to$11,000 for a 2-1 temporary buy
(16:42):
down that cost has to be paid100% by the seller because the
total cost for that temporarybuy down is just the difference
in interest over those first 2years.
That's how the cost iscalculated.
So what happens to that moneyis it goes into the escrow
account of the mortgage and thenevery month that you're making
your payment the difference ininterest is coming out of the
(17:02):
funds from the temporary buydown that are sitting in the
escrow account.
So let's say in year 1, yourmonthly payment is $600 a month.
Lower that $600 is coming outof the escrow account each month
to cover the difference in theinterest If one year down the
road, mortgage rates are lowerand you refinance that loan, any
unused portion of the temporarybuy down funds gets refunded
(17:26):
back to you as a principalpayment against the loan.
So that's a nice way to go toget yourself a lower monthly
payment for the first 2 years.
Now that's a good deal ifmortgage rates come down within
2 years and you're refinancingto a lower rate.
But it's possible they don't.
So if you do a temporary buydown, it's very important to
know what that payment is goingto be in year 3 and make sure
(17:49):
that you can afford that paymentfrom year 3 through 30 in case
mortgage rates don't come down.
With the discount points, welike to run a break-even
analysis on how much are yousaving per month and how much
does it cost up front to pay thediscount points, and then we
look at what's your break-evenpoint on that money.
So how long does it take?
You know, if you pay 6 grand indiscount points, how many
(18:10):
months does it take you to save6 grand on the payment?
That's your break-even.
So generally right now withdiscount points, a break-even is
north of 3 years.
So I don't recommend payingdiscount points in this market
unless the seller is paying thecost of the discount points.
If the seller is paying thecost of the discount points,
then we're not really concernedwith the break-even period
because the seller is paying thecost, so it's not an
(18:33):
out-of-pocket expense for you.
So anytime the seller is payingthe cost, I would buy down the
rate as much as I could If I waspaying the buy down cost.
I would not do that in thismarket unless the break-even was
under 2 years, because I thinkthe chance of people who are
getting a mortgage todayrefinancing the next 2 years is
very high, based on how longrates have been elevated and
(18:53):
what the economy is doing rightnow.
So we are in right now thelongest rising rate cycle of the
last 30 years.
So the longer that this goes on, just statistically, the closer
we're getting to mortgage ratescoming back down.
So at some point they are goingto come back down.
Refinancing is an easy processto do.
(19:14):
So if you've never refinanced amortgage, you have to submit
paperwork to verify your incomeand your assets.
So if you're doing alone, likeany client that I've done alone
for over the last year I stillhave their application.
We've got all their basicpaperwork, so we just need to
update some of their documents,run a new credit report and then
(19:34):
we can submit their file tounderwriting and lock their rate
.
There's a lot of cases,depending on how much equity you
have, where we don't need anappraisal on a refinance.
So refinances take less than 30days to close.
There's some closing costs,which will vary depending on if
you're buying down the rate ornot, but any closing costs on
(19:54):
the refinance can be rolled intothe loan so you're not having
to pay that as an out-of-pocketexpense.
So when you refinance yourmortgage you're only coming out
of pocket with the appraisal fee.
If a full appraisal is required, that gets paid on a credit
card and then everything elsecan be rolled into the balance
of the mortgage.
You skip one monthly paymentwhen you refinance as well.
So say, you close on arefinance in the month of
(20:16):
September, you'd have no paymentin October.
First new mortgage paymentwould be due November 1st.
You always skip at least onemonth after the month that you
close when you refinance yourmortgage.
And again, I mentioned thisearlier.
But there's no restrictions onhow many times you can refinance
or when you can refinance, soyou can leverage refinancing to
lower your expense on your homeand I think that as we see
(20:41):
mortgage rates come down, themarket's really going to heat up
because lower rates drivedemand, like I mentioned earlier
, and so it's going to bring alot of first-time buyers into
the market who can now affordmortgage payments at lower rates
.
And then I think there's a lotof people who currently own
homes who will be interested inselling because they want a
(21:02):
bigger home or they want to moveto another part of town, or
they need an extra bedroom, orthey need fewer bedrooms or
whatever the reason is thosepeople now it's more palatable
for them if they're exchanging a3% rate to 4.5 or 5.5 versus a
3% rate to 7 or 7.5.
So I think we'll see asignificant increase in activity
(21:24):
as mortgage rates come backdown.
But if you wait to buy untilthat happens and we're in a very
competitive market it'sdifficult to get offers accepted
in competitive markets and wesaw that during COVID very
competitive market and itstarted to get to the point in
the Phoenix area where, unlessyou were paying cash, it was
(21:44):
really difficult to get an offeraccepted because sellers were
getting all cash offers frominvestors and other people full
purchase price closing in 3weeks.
Would you take that offer?
Or would you take the firsttime buyer or any buyer
financing a mortgage, puttingthe minimum down and needing a
full appraisal to close, andit's going to take 30 days and,
(22:06):
by the way, you don't know forsure if it's going to close
because they've got to getapproved for a mortgage.
So the cash buyers get a hugeadvantage when the market is
competitive.
So that's what we're seeingright now in the marketplace.
It's an interesting time.
This is the longest rising ratecycle I've been in in my career
.
This is the longest rising ratecycle of the last 30 years.
I do think the foundation isbeing laid by the Fed for the
(22:30):
economy to slow downsignificantly.
We just can't go this long withrates as high as they are and
not just mortgage rates butother rates as well without the
economy slowing down asignificant way.
And so I'll leave you with one,two more antidotes here
regarding the economy.
So one the money supply duringCOVID increased by 40%.
(22:52):
It was a historic increase inthe money supply.
The government was printingmoney, sending out COVID checks,
and then they were juicing thatup with super low interest
rates.
So that really juiced up theeconomy and put a ton of money
into the supply.
And so what happens?
When you increase the moneysupply, that much is, people can
(23:15):
leverage that money and itbecomes, you know, 10 times the
amount that it actually is.
So I'll give you an example.
You get a $5,000 COVID check.
You go out and buy an $80,000car.
Putting $5,000 down from yourCOVID check, you're financing 75
, you put 5,000 in cash intothat car, but now that car
dealership has just sold an$80,000 car from $5,000 COVID
(23:39):
check.
So that leverage of moneyreally juiced up the economy.
The increase in the moneysupply causes inflation and it
takes a long time for that moneysupply to then contract back
down.
And because that was such ahistoric increase in the money
supply, it takes a long time forthat to get soaked up.
The second thing that we'reseeing now is a significant
(24:03):
increase in credit card debt.
So consumer credit card debt inthe US passed $1 trillion last
month for the first time ever.
So credit card debt is now thehighest that it's ever been.
And you know I personally havehad quite a few clients reach
out to me who've gotten in overtheir head with credit card debt
, and you know there's lots ofreasons why this happens for
people.
But I think what happened to alot of people during the COVID
(24:26):
years was they were gettingstimulus money from the
government.
Rates were really low.
They inflated their lifestyleand then, as those COVID checks
stopped and interest ratesstarted to go up, they weren't
able to readjust their lifestyleand started financing on credit
(24:46):
cards.
And now, with the Fed havinghiked rates as much as they have
and for as long as they have,every time the Fed hikes rates
it is directly impacting creditcard interest rates.
So credit card interest rateson average are over 25% now.
So even if you don't have ahuge amount of credit card debt,
25% interest rate on that debtis significant.
(25:09):
And not only that, but studentloans have gone back into
repayment.
If you had to buy a new carover the last year and a half,
your rate on a car loan issignificantly higher.
So all these costs are muchhigher than they were, and the
burden of credit card debt forthe average consumer is
significant.
And so if that continues on atsome point, that has to cause a
(25:33):
snap in the economy, because theaverage consumer is going to be
in over their head and unableto make their payments, and then
that filters through theeconomy, so something to keep an
eye on and watch.
It would be interesting to seehow this plays out over the next
several years.
But one way to combat getting inover your head with debt if you
own a home is, as rates comeback down, you can do what's
(25:58):
called a cash out, refinance andconsolidate and pay off that
debt.
So, like right now, I've hadseveral clients reach out to me
who want to do a cash out,refinance and pay off all their
credit card debt and a couplecar loans to lower their monthly
outflow.
Well, rates are so much highertoday than the rate that they
currently have on their mortgagethat actually doesn't pencil
(26:19):
out for them, and so I'verecommended a home equity line
of credit instead.
But if we see mortgage ratesget back down to the low fives
or the high fours, if you couldtake equity out of your home,
pay off, you know, 50 grand incredit card debt or 70 grand in
credit card debt, maybe pay offa car loan Even if you take your
mortgage rate from 3% to fourand a half, your monthly outflow
(26:40):
would be significantly lessthan it would be if you did not
pay off that debt.
So that's something that we canlook at for folks if they've
gotten in over their head withdebt, as a way to bring their
monthly payments as a whole backdown to a manageable level.
Let's go to cash out refinance.
So hope you're doing well.
(27:01):
Shoot me a DM.
I'd love to hear from you.
See what you're seeing in theeconomy.
Hope you have a great rest ofyour week.
Hey guys, thanks for listening.
I hope you enjoyed the show andgot some valuable information
out of it.
I want to help to educateothers and help people grow
their business and build wealth,and I can only do that with
referrals and your help gettingthe word out about this podcast.
(27:23):
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Welcome to the show fairways and finance.
My name is Jeff Smith.
I've been in the mortgagebusiness for 16 years top
quarter percent L O nationwide.
And you know this podcast.
We want to talk about yourfinances, how to grow and
accumulate wealth and all thingsrelated to the mortgage
industry.
But we're golf lovers here aswell, so we're going to work in
some golf.
Don't worry for my golf loversout there.
(00:26):
We got you and I hope you enjoythe show.
Welcome back to another episodeof fairways and finance.
My name is Jeff Smith, I'm yourhost and here to talk to you
today about you know what theheck is going on in this market.
So this is the end of Augustand we've seen a spike in
(00:46):
mortgage rates over the last six, seven weeks, and so you know,
as a mortgage professional,that's been very disappointing.
We just keep thinking thatwe're getting closer here to
mortgage rates coming down.
It hasn't happened quite yet,but there's some interesting
dynamics going on in the marketthat are affecting rates right
now, and so you know the Fed.
(01:06):
They are the main driver of youknow what's happening with
rates because they can influencerates by their adjustments of
the federal funds rate and sothe Fed funds rate just as a
refresher is an overnight ratethat banks pay to borrow money
from the Federal Reserve.
So the banks borrow money fromthe Federal Reserve all the time
(01:29):
to give them liquidity and theypay an overnight rate to borrow
money from the Fed.
So that overnight rate is theFed funds rate.
So as Fed Reserve increasesrates, they are increasing that
Fed funds rate.
When the Fed increases the Fedfunds rate, that will change
interest rates on certainproducts dollar for dollar in
(01:52):
terms of the percentage.
So if the Fed raises the Fedfunds rate half a percent,
you're going to see the interestrate on your credit card go up
by half a percent immediately.
You're going to see theinterest rate on an auto loan go
up immediately.
Home equity lines of credit,some loans you're not going to
see an immediate change in rate,like mortgages, because
(02:12):
mortgages end up becoming whatare called mortgage backed
securities.
Are traded on Wall Street inthe open market, and so the
value of mortgage backedsecurities is what determines
the rate that's available withmortgages.
Now, mortgage backed securitiesare long term bonds, so they
tend to track what the long termbond market is doing, and the
(02:33):
long term bond market isinfluenced by where other rates
are at and what the economy isdoing overall as a whole.
So when the Fed hikes rates, itdoes have an indirect impact on
mortgage rates and a lot oftimes historically when we see
the Fed hiking rates, thatactually helps mortgage rates
and we usually see mortgagerates come down as a result of
(02:55):
it, because the economy slowsdown when the Fed is hiking
rates.
When the Fed keeps interestrates low, borrowing costs are
very low and that stimulateseconomic growth because people
can leverage debt to go out andconsume goods in the economy and
then that drives up the economy.
So what we've been seeing isthe Fed hiking rates for over a
(03:18):
year now, but the economy hasn'tslowed down in a significant
way.
Now.
Inflation has come down.
A lot of metrics have improved,but some of the metrics that we
look at have remained relativelystrong, and the one that is
still remaining strong, at leastas it appears, is the jobs
(03:39):
numbers, the jobs reports, andso there's actually been some
revisions to the job report overthe last couple of months,
significant revisions downward.
So these jobs reports a lot ofit is based off of modeling and
projections, and so the modelingthat's being used right now in
some of these key jobs reportsis actually turns out to be way
(04:02):
off.
So these models and thesereports cannot identify the
exact number of jobs that areout there.
What they do is they runsurveys with employers and
employees and they look at data,they look at payroll data, they
look at in a bunch of differentareas and then extrapolate all
that information and try andcome up with what the jobs
(04:23):
numbers are.
And so it's turning out thatsome of the modeling that's been
used over the last year isover-inflating the jobs numbers.
So the market is trading basedoff of the metrics that they see
, and the market has been makinga lot of trades based on the
fact that the jobs market hasbeen appearing to be really
strong.
(04:44):
And a strong jobs market wouldindicate a strong economy.
And if the job market is strong, that means people are earning
wages.
People have been really gettingan increase in wages, not only
if they stay with their currentemployer, but if, on average
over the last year, if someonehas left their employer, they're
getting a pay raise of, onaverage, 15%, so people are
earning more money.
If people are earning moremoney, that gives them more
(05:05):
money to spend, and then havingmore money to spend means that
they're going to spend it in theeconomy, and that props up
inflation, and so inflation isthe main driver of mortgage
rates.
So the stronger economicactivity is then, generally
speaking, the more inflationwe're going to see.
And our biggest problem and theFed's number one mandate with
(05:26):
all these rate hikes has been tocool off inflation and bring
inflation down.
So the jobs market would kindof work in the opposite
direction of that.
So, with all of that being said, what we've seen over the last
six weeks is that, you know, theinflation numbers are lower,
but these jobs numbers have beenreally strong, and so that's
actually caused an increase inmortgage rates, and so mortgage
(05:49):
rates went up almost threequarters of a percent over the
last month and a half.
We are at the highest that we'vebeen all year.
We are getting into almost intothe mid-sevens on a 30-year fix
of no points.
Now that sounds like insanelyhigh, but it's really not when
you look at it from a historicalperspective.
So, looking back over the last30 years, the average 30-year
(06:12):
fixed rate mortgage is 6.5% forthe rate.
So right now, you know we'vebeen getting into the low sevens
and that's a little bit aboveaverage, but not, you know,
extreme by historical measures.
Now if you compare it to theall-time low rates that we saw
during COVID, it feels veryextreme.
It's over double the rates thatwe saw from mortgages during
(06:32):
COVID.
So in that perspective,mortgage rates do feel very high
.
But if we think about it in abroader, longer-term perspective
, mortgage rates really are notsuper high.
They're just above average.
So now mortgage rates have hada nice improvement over the last
week or so.
And what's happened over thelast week is it's come out that
(06:54):
these job report models need tobe revised downward because
they're over-inflating the jobsnumbers and the job market is
not actually as strong as someof this data has suggested.
So now we're seeing someimprovement in mortgage rates as
a result of that.
And so, going forward, you knowa lot of what happens is going
(07:17):
to be dependent on what the Feddoes, and so you know we're
thinking that if these jobsnumbers continue to weaken, then
it makes it more difficult forthe Fed to hike rates again.
If these jobs numbers don'tcome down and we don't see
additional revisions lower, thenthe Fed may hike rates again in
the month of September.
(07:37):
So this is going to beinteresting to see how it plays
out, but there is no doubt thatthe economy is slowing down.
The jobs market is not as goodas it was 6, 12 months ago, and
so we're definitely going to seethe rates come down.
It's just a matter of you knowhow much longer that's going to
take, but for right now, youknow we're on a good little
slide.
We haven't quite hit that pointyet, though, where we're
(07:59):
hopefully going to see ratescome down in a meaningful way.
I think we'll see that once theFed starts to pause, because
hopefully, when the Fed beginsto pause their rate hikes, we're
getting strong data that theeconomy is slowing down in a
significant way.
And so you know I say hopefully.
That's hopefully in the eyes ofthe mortgage industry.
As a loan officer, I'm alwayskind of rooting against the
(08:21):
economy.
You know, when the economy isstruggling, that's when the
mortgage industry tends to dovery well, because mortgage
rates come down when the economyslows down.
And then, when mortgage ratesgo down, people are refinancing,
people are buying homes, and soit spurs activity as a loan
officer.
So it's always kind of adifficult dichotomy in the
(08:41):
mortgage business, because insome ways, you're rooting for
the economy to do poorly,because that generally helps
real estate.
So that's what we're looking atgoing forward here.
That's what's happening rightnow.
Now home values during thiswhole thing are going up and so
normally we, when we see anincrease in interest rates
(09:02):
looking back, you know, over thelast 50 years when we see an
increase in interest rates, wesee a decrease in home values
because mortgage interest ratesdrive demand.
So the lower the rates are,then generally we see stronger
demand to buy homes because it'sless expensive to finance a
mortgage.
You can buy a more expensivehome with a lower payment and
(09:25):
that brings buyers into themarketplace First time.
Home buyers can get into themarket more than they can when
rates are higher because monthlypayments are lower due to lower
rates.
So lower rates drives anincrease in demand.
And then we see the oppositehappen when mortgage rates go up
.
When mortgage rates go up, wesee a decrease in demand because
it's more expensive to financea mortgage.
(09:47):
That same, you know, $500,000house, or whatever the number is
, becomes a lot more expensiveon a monthly basis.
So mortgage rates very muchaffect the demand of the real
estate market.
Now what's happened here overthe last year and a half is June
of last year we had alreadystarted to see mortgage rates
increase.
(10:07):
So rates really startedincreasing at the beginning of
2022.
Home values continued going upas we went through the first 6
months of 2022 because rateswere inching their way up they
don't just go up overnight andthen so, as we started seeing
mortgage rates increase, we sawa slowdown in the real estate
(10:31):
market and then we even startedto see home values come down a
little bit.
So, looking back from the peakof home values last year, which
was June of 2022, we sawinterest rates increase through
that period of time and then, asthey continued to increase, we
actually saw home values comedown.
So, from June of 2022, upthrough January of this year, we
(10:53):
saw home values pull back about3%.
So real estate market lostabout 3%.
This year, mortgage rates havestayed relatively flat.
They're actually a little bithigher now than they were at the
beginning of the year, butwe've seen home values go up
significantly.
So home values depending onwhich report you look at home
prices home values are on paceto increase between 7% to 10%
(11:18):
this year, which is crazy whenyou think about it, because the
average rate of appreciation forhome values is roughly 3% to 5%
, depending on the year.
So for home values to increase10%, that's well above average.
But we have interest rates thathave risen significantly, and
so that really normally we wouldnot see that happen when rates
(11:38):
have moved higher.
But what's happening in themarket right now is a very low
inventory of homes for sale.
The supply available in realestate is very low, so even
though the demand is lower thanit would be in a strong,
balanced market, we're seeingprices go up because the supply
(11:59):
relative to the demand that'sout there is extremely low.
So it's just simple economicswhen you have more demand than
you have supply, that pushesprices higher, and so that's
what we've seen this year.
So it's really an interestingsituation, and what I think is
happening with that is that somany people in the US right now
(12:19):
are sitting on a mortgage ratethat's 3% or less.
They refinanced during COVID,they've got a super low monthly
payment, and even if they wantto move they want to buy a
bigger house, they want to moveto another part of town they're
not doing it because they'd haveto exchange a 3% mortgage rate
to a 6% or 7% mortgage rate.
The house itself would probablybe more expensive in price as
(12:41):
well, and so now you're lookingat a mortgage payment that's
probably more than double whatyou're currently paying, and so
that's a significant increase inpayment and I think that's
keeping a lot of people on thesidelines from selling their
home because they can't affordthat significant increase in
payment.
So the transactions we'reseeing right now are people who
(13:02):
are relocating to another statefor family reasons, job reasons,
whatever it may be.
We're seeing first time buyerswho have now accumulated enough
money to get into the market.
So even though rates are higher, you know if they're not
exchanging a low rate to getinto the market.
And then we're seeing, you know, like divorce situations or
people who've gotten in overtheir head with too much debt,
(13:23):
those types of things.
So it's generally transactionsfor people who are in a
situation where they kind ofhave to sell.
There's a life event that'sdriving that transaction for
them.
So when we look at the overallnumber of transactions being
done right now, it is 30% lowerthan it was last year, and last
year was down from the yearprior.
So number of transactions isdown significantly, but the
(13:47):
supply is so low that homeprices are going up.
Okay, so what does that mean foryou as a buyer thinking and as
somebody who's thinking of maybedoing a home purchase.
Well, I would.
You know, it kind of depends onwhat bucket you fall into, okay
, whether you own a home rightnow or you don't.
But I think something toconsider, especially if you're
not in the market right now, isthat home prices are going up.
(14:12):
So if you're waiting formortgage rates to come down
before you buy a home, whileyou're waiting, the value of the
homes that you're interested inbuying are going to go up and
you're going to have to pay moreto buy that same home.
So if rates come down but theprice goes up, you're really not
saving much money because, yeah, you keep, maybe get it at a
(14:35):
lower rate next year, but you'regonna pay a higher price.
So how much are you actuallysaving?
If you buy a home now whilerates are still elevated, you're
locking in the price of whereit's at today and then next year
or the year after or wheneverit is and mortgage rates come
down, you can refinance thatmortgage to a lower rate, but
you've locked in the price fromwhere it's at today.
(14:55):
So $500,000 home is going to goup 50,000 in value at a rate of
10% appreciation.
So that is something that Ithink is really important to
consider.
And then the fact of refinancing.
That can get you a lowermonthly payment.
So as long as you can affordthe payment at where the rates
(15:15):
are at today, I think a solidgame plan is to go ahead and buy
today and then refinance whenthe rates come down.
It's not very expensive torefinance either, so you don't
have to see a significantreduction in the rate to justify
the cost of a refinance and youcan refinance multiple times.
There's no restriction on whenyou can refinance or how many
(15:36):
times you can refinance yourmortgage.
So that's what I wouldrecommend for someone who could
afford today's rates andpayments.
That's going to save you money.
Now, other ways that we cancombat where the rates are at
right now we can do buy downs onthe interest rate, so you can
do a permanent buy down whereyou pay discount points and then
permanently lower the interestrate for the entire duration of
(15:58):
the loan, or you can do atemporary buy down.
A temporary buy down let's takea 2-1 temporary buy down as an
example 2-1 temporary buy downgets you a 2% lower rate in the
first year, 1% lower rate in thesecond year and then you're
paying whatever the note rate isof the mortgage from year 3 all
the way through 30.
Temporary buy down has to bepaid for by the seller and the
(16:20):
cost of the temporary buy down2-1 temporary buy down is
usually just over 2% of the loanamount, so like 2.1% or 2.1% of
the purchase price, I shouldsay.
But it is calculated based on apercentage of the loan amount.
So that cost for a temporarybuy down let's take a $500,000
home You're looking at close to$11,000 for a 2-1 temporary buy
(16:42):
down that cost has to be paid100% by the seller because the
total cost for that temporarybuy down is just the difference
in interest over those first 2years.
That's how the cost iscalculated.
So what happens to that moneyis it goes into the escrow
account of the mortgage and thenevery month that you're making
your payment the difference ininterest is coming out of the
(17:02):
funds from the temporary buydown that are sitting in the
escrow account.
So let's say in year 1, yourmonthly payment is $600 a month.
Lower that $600 is coming outof the escrow account each month
to cover the difference in theinterest If one year down the
road, mortgage rates are lowerand you refinance that loan, any
unused portion of the temporarybuy down funds gets refunded
(17:26):
back to you as a principalpayment against the loan.
So that's a nice way to go toget yourself a lower monthly
payment for the first 2 years.
Now that's a good deal ifmortgage rates come down within
2 years and you're refinancingto a lower rate.
But it's possible they don't.
So if you do a temporary buydown, it's very important to
know what that payment is goingto be in year 3 and make sure
(17:49):
that you can afford that paymentfrom year 3 through 30 in case
mortgage rates don't come down.
With the discount points, welike to run a break-even
analysis on how much are yousaving per month and how much
does it cost up front to pay thediscount points, and then we
look at what's your break-evenpoint on that money.
So how long does it take?
You know, if you pay 6 grand indiscount points, how many
(18:10):
months does it take you to save6 grand on the payment?
That's your break-even.
So generally right now withdiscount points, a break-even is
north of 3 years.
So I don't recommend payingdiscount points in this market
unless the seller is paying thecost of the discount points.
If the seller is paying thecost of the discount points,
then we're not really concernedwith the break-even period
because the seller is paying thecost, so it's not an
(18:33):
out-of-pocket expense for you.
So anytime the seller is payingthe cost, I would buy down the
rate as much as I could If I waspaying the buy down cost.
I would not do that in thismarket unless the break-even was
under 2 years, because I thinkthe chance of people who are
getting a mortgage todayrefinancing the next 2 years is
very high, based on how longrates have been elevated and
(18:53):
what the economy is doing rightnow.
So we are in right now thelongest rising rate cycle of the
last 30 years.
So the longer that this goes on, just statistically, the closer
we're getting to mortgage ratescoming back down.
So at some point they are goingto come back down.
Refinancing is an easy processto do.
(19:14):
So if you've never refinanced amortgage, you have to submit
paperwork to verify your incomeand your assets.
So if you're doing alone, likeany client that I've done alone
for over the last year I stillhave their application.
We've got all their basicpaperwork, so we just need to
update some of their documents,run a new credit report and then
(19:34):
we can submit their file tounderwriting and lock their rate
.
There's a lot of cases,depending on how much equity you
have, where we don't need anappraisal on a refinance.
So refinances take less than 30days to close.
There's some closing costs,which will vary depending on if
you're buying down the rate ornot, but any closing costs on
(19:54):
the refinance can be rolled intothe loan so you're not having
to pay that as an out-of-pocketexpense.
So when you refinance yourmortgage you're only coming out
of pocket with the appraisal fee.
If a full appraisal is required, that gets paid on a credit
card and then everything elsecan be rolled into the balance
of the mortgage.
You skip one monthly paymentwhen you refinance as well.
So say, you close on arefinance in the month of
(20:16):
September, you'd have no paymentin October.
First new mortgage paymentwould be due November 1st.
You always skip at least onemonth after the month that you
close when you refinance yourmortgage.
And again, I mentioned thisearlier.
But there's no restrictions onhow many times you can refinance
or when you can refinance, soyou can leverage refinancing to
lower your expense on your homeand I think that as we see
(20:41):
mortgage rates come down, themarket's really going to heat up
because lower rates drivedemand, like I mentioned earlier
, and so it's going to bring alot of first-time buyers into
the market who can now affordmortgage payments at lower rates
.
And then I think there's a lotof people who currently own
homes who will be interested inselling because they want a
(21:02):
bigger home or they want to moveto another part of town, or
they need an extra bedroom, orthey need fewer bedrooms or
whatever the reason is thosepeople now it's more palatable
for them if they're exchanging a3% rate to 4.5 or 5.5 versus a
3% rate to 7 or 7.5.
So I think we'll see asignificant increase in activity
(21:24):
as mortgage rates come backdown.
But if you wait to buy untilthat happens and we're in a very
competitive market it'sdifficult to get offers accepted
in competitive markets and wesaw that during COVID very
competitive market and itstarted to get to the point in
the Phoenix area where, unlessyou were paying cash, it was
(21:44):
really difficult to get an offeraccepted because sellers were
getting all cash offers frominvestors and other people full
purchase price closing in 3weeks.
Would you take that offer?
Or would you take the firsttime buyer or any buyer
financing a mortgage, puttingthe minimum down and needing a
full appraisal to close, andit's going to take 30 days and,
(22:06):
by the way, you don't know forsure if it's going to close
because they've got to getapproved for a mortgage.
So the cash buyers get a hugeadvantage when the market is
competitive.
So that's what we're seeingright now in the marketplace.
It's an interesting time.
This is the longest rising ratecycle I've been in in my career
.
This is the longest rising ratecycle of the last 30 years.
I do think the foundation isbeing laid by the Fed for the
(22:30):
economy to slow downsignificantly.
We just can't go this long withrates as high as they are and
not just mortgage rates butother rates as well without the
economy slowing down asignificant way.
And so I'll leave you with one,two more antidotes here
regarding the economy.
So one the money supply duringCOVID increased by 40%.
(22:52):
It was a historic increase inthe money supply.
The government was printingmoney, sending out COVID checks,
and then they were juicing thatup with super low interest
rates.
So that really juiced up theeconomy and put a ton of money
into the supply.
And so what happens?
When you increase the moneysupply, that much is, people can
(23:15):
leverage that money and itbecomes, you know, 10 times the
amount that it actually is.
So I'll give you an example.
You get a $5,000 COVID check.
You go out and buy an $80,000car.
Putting $5,000 down from yourCOVID check, you're financing 75
, you put 5,000 in cash intothat car, but now that car
dealership has just sold an$80,000 car from $5,000 COVID
(23:39):
check.
So that leverage of moneyreally juiced up the economy.
The increase in the moneysupply causes inflation and it
takes a long time for that moneysupply to then contract back
down.
And because that was such ahistoric increase in the money
supply, it takes a long time forthat to get soaked up.
The second thing that we'reseeing now is a significant
(24:03):
increase in credit card debt.
So consumer credit card debt inthe US passed $1 trillion last
month for the first time ever.
So credit card debt is now thehighest that it's ever been.
And you know I personally havehad quite a few clients reach
out to me who've gotten in overtheir head with credit card debt
, and you know there's lots ofreasons why this happens for
people.
But I think what happened to alot of people during the COVID
(24:26):
years was they were gettingstimulus money from the
government.
Rates were really low.
They inflated their lifestyleand then, as those COVID checks
stopped and interest ratesstarted to go up, they weren't
able to readjust their lifestyleand started financing on credit
(24:46):
cards.
And now, with the Fed havinghiked rates as much as they have
and for as long as they have,every time the Fed hikes rates
it is directly impacting creditcard interest rates.
So credit card interest rateson average are over 25% now.
So even if you don't have ahuge amount of credit card debt,
25% interest rate on that debtis significant.
(25:09):
And not only that, but studentloans have gone back into
repayment.
If you had to buy a new carover the last year and a half,
your rate on a car loan issignificantly higher.
So all these costs are muchhigher than they were, and the
burden of credit card debt forthe average consumer is
significant.
And so if that continues on atsome point, that has to cause a
(25:33):
snap in the economy, because theaverage consumer is going to be
in over their head and unableto make their payments, and then
that filters through theeconomy, so something to keep an
eye on and watch.
It would be interesting to seehow this plays out over the next
several years.
But one way to combat getting inover your head with debt if you
own a home is, as rates comeback down, you can do what's
(25:58):
called a cash out, refinance andconsolidate and pay off that
debt.
So, like right now, I've hadseveral clients reach out to me
who want to do a cash out,refinance and pay off all their
credit card debt and a couplecar loans to lower their monthly
outflow.
Well, rates are so much highertoday than the rate that they
currently have on their mortgagethat actually doesn't pencil
(26:19):
out for them, and so I'verecommended a home equity line
of credit instead.
But if we see mortgage ratesget back down to the low fives
or the high fours, if you couldtake equity out of your home,
pay off, you know, 50 grand incredit card debt or 70 grand in
credit card debt, maybe pay offa car loan Even if you take your
mortgage rate from 3% to fourand a half, your monthly outflow
(26:40):
would be significantly lessthan it would be if you did not
pay off that debt.
So that's something that we canlook at for folks if they've
gotten in over their head withdebt, as a way to bring their
monthly payments as a whole backdown to a manageable level.
Let's go to cash out refinance.
So hope you're doing well.
(27:01):
Shoot me a DM.
I'd love to hear from you.
See what you're seeing in theeconomy.
Hope you have a great rest ofyour week.
Hey guys, thanks for listening.
I hope you enjoyed the show andgot some valuable information
out of it.
I want to help to educateothers and help people grow
their business and build wealth,and I can only do that with
referrals and your help gettingthe word out about this podcast.
(27:23):
So if you come across someoneyou think of benefit from this,
please share it with them.
And if there's somebody whocomes to mind, a five star
review, go a long way in helpingme to grow this podcast and
grow the brand.
So appreciate your support.
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