September 2023
The single-family home market remains resilient due to limited supply and high demand. It’s an expensive market for buyers, but Brian says it may be best to buy now rather than wait for prices to decrease significantly, as that is not likely to happen. Brian also thinks in the next couple years, interest rates may stabilize and come down due to election cycles. Buyers may be able to refinance loans later if/when rates drop, but they cannot go back in time and pay for a home with less competition.
Chris and Brian agree that residential properties will not be running into the same problems as multifamily apartments, commercial and retail properties, as loans for these larger spaces typically involve shorter-term loans with adjustable interest rates. As the interest rate has jumped from 3% to 7% this past year, monthly payments will increase by 60% for these borrowers while residential mortgages are still locked in their long-term, fixed-rate loans.
Brian emphasizes the importance of understanding your financial profile when buying a home and securing a mortgage. He helps his clients assess their finances and tailors mortgage options to their individual needs.
Learn more about CrossCountry Mortgage here: https://crosscountrymortgage.com/
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Watch previous episodes of THE FINANCIAL COMMUTE here:
Ep. 51 Investing with Patience: Real Estate in a Changing Market
Ep. 50 The Modern Real Estate Dilemma: Gifting or Loaning to the Next Generation
Hello, everybody, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski. And today, we have Brian Farwell from CrossCountry Mortgage. Brian, thank you for joining us.
Yeah, glad to take a seat at the table.
So last week we had an episode with one of our large real estate partnerships that invests a lot in, you know, a skilled nursing facilities, hotels and multifamily apartments and broad expertise in real estate. There's many reasons why they're excited about real estate over the next decade. Some of it has to do with this debt maturity wall, all of this really cheap loans that, you know, sub 4% interest rates are now having to become due and be refinanced at higher rates.
And they just think that this could potentially be a once in a decade opportunity to invest. But that also got us kind of talking a little bit about single family homes and the current interest rate market. And so that's why we have you here today. Talk a little bit about what's going on with residential real estate and interest rates.
It's been an interesting last couple of years.
And has it's been a wild ride, just kind of. Oftentimes, when I'm talking about the industry, I tell my clients I'm sometimes functioning more as like a therapist or talking someone through just the emotional state of the market as opposed to the numbers because it has been just a big rollercoaster up and down over the last three or four years.
Yeah, I mean, I it wasn't too long ago that, you know, we were getting paid zero for money saying in our bank account and it was like that for a really long time. I was on vacation last week and I was with a friend of mine and we were talking about money sitting at the bank. And he didn't realize that money markets, you know, at institutions like Fidelity or Schwab were paying as high as they were because money was still sitting in his savings account.
So it's nice to now be in an environment where rates are higher for the cash that's sitting there.
But it's not been great for people's monthly payments. Right? We were talking about just looking at historical view, not crazy far back, but going back from about 2010 to 2020. So about a decade. We saw rates stay in a pretty narrow window, about three and a half to 5%. Right. Very rarely did they go above or below that.
So people got really comfortable with where rates are at. And then we all know what happened. March 2020, we saw rates plummet and people were getting rates in the high to low threes, and that lasted for about a year and a half until the end of 2021 and January 2022 to now, we've seen rates go from three to at times seven and a half percent.
It has just been a, you know, more of a shock than a cold plunge in the morning, you know, to people’s systems on what a monthly payment looks like is somewhere in the neighborhood of a 60% increase in what they can expect to pay in their monthly payment.
But just because rates went from three and a half to call it seven and a half.
60% increase. So an $800,000 mortgage, you went from about 3500 to 5500 in the mortgage payment. That's really hard for people to digest, especially if they started the process, seeing those low payments and those low rates. And now today, the reality before them is a much higher payment.
Well, so that's interesting. I mean, with Megan, we were talking last week from KCB, you know, people refinancing from lower rates to higher rates going from three and a half percent to seven. That hurts the profitability rate. And so that building might sell at a lower or higher cap rate because of that. But single family homes have been resilient as far as price is concerned, even though rates have gone from three and a half to seven, seven, especially here in summer.
Yeah, I mean, ultimately the resilience of the single family market has to do with supply and demand were so under built at the moment for the demand of people wanting to either buy a home and move up or buy their first home and get out of being a renter. Because the thing that's also happening that isn't getting talked about a lot, but I'm seeing this, you know, monthly from clients is I get calls of either pretty significant rate increases or even more consistently a landlord looking at what they could go sell their rental for and giving the clients 30, 60 days notice that they've got to go find something else to rent.
And so those clients are trying to get into a place where they own because now they control what their monthly payment looks like and where they can live.
Yeah, that's fascinating. I mean, on the just supply of single family homes, I was talking to somebody several years ago and said, okay, hey, let's say there's, you know, a thousand eligible buyers of our home out there and with rates said call it 3%, 400 of them qualify with rates said call it five or 6%.
200 of them qualifying with rates at seven or 800 of them qualify, but there's only 40 for sale. So you still have 100 qualified buyers at rates as high as they are, payments 60% higher.
And that's the big challenge in our market right now. It's probably the biggest challenge before people looking to buy is what we would call buyer affordability, which is really affected by two things. It's a combination of home prices and interest rates. And right now both are high. And so that makes buyer affordability really difficult. Going back to that analogy or those numbers of a clients payment increased 60% just because they've waited a year and a half to purchase.
And so that is coming to market a lot, but not enough. So we're not necessarily seeing the 20 offers on homes that we were seeing, you know, 12, 24 months ago. But we're still seeing multiple offers. The interesting thing to that, though, is a lot of people are saying, okay, well, maybe I'll sit back then and wait for housing prices to go down, which is a whole other story on whether you think that's going to happen.
Or they're saying, I'm gonna sit back and wait for interest rates to drop. But here's the irony on the interest rate dropping and versus waiting idea when the rates drop. Imagine the amount of buyers that are now going to flood into the market. If you were to go to my office right now, I have a board of probably 2530 pre-approved buyers who are ready to go.
They're just waiting for a 6% interest rate. Well, they're about to all come in and compete with you on that property. So the beauty of a loan of a mortgage is you can refinance it when it makes sense and rates do drop, but which you can't do is go back in time and pay for a home price with less competition.
You can't kind of go backwards.
Right. And I think that that's some of the one of the hard things for for buyers to kind of get over is the fact that they're looking at some of these properties saying, hey, that home used to be a million and a half. Now it's two and a half. Yeah, but that's just a different landscape. I mean, it's not likely that the home prices are going to drop by 20, 30, 40%.
Somebody said to me the other day like a coach that I have said, you know, you can tell your buyers the best time to buy was five years ago. But the second best time to buy is now. Because if we keep looking back, I mean, the fact is, for the most part, the housing continues to appreciate. There's obviously changes to that and there's dips and there's momentum.
But as you spread out in longer views of time, it does consistently appreciate.
So no crystal ball. But like, where do you think real estate prices are likely to go? You mentioned that, you know, you don't think they're likely to correct. Where do you think real estate prices for single family homes are going? Where do you think it's set?
So this is an interesting one because we do have that supply and demand issue that I talked about. And it's pretty much anecdotal. But driving around Southern California, I don't see a ton of new construction. Permitting is very difficult. Space is really limited and that is really what's going to have to come in order for the supply to increase.
The other thing, of course, is people being willing to get rid of their 3% mortgage to take on a six or 7% mortgage. The good news is that as rates come down, which we do believe and I'll talk about that a second, we do believe over time they will. The person sitting at 3% is more likely to say, okay, I'll sell my 3% home and I'll take 5%.
But right now, that gap is so big, it's hard to kind of stomach that idea in terms of interest rates. The first thing I will always say, if you talk to someone or you hear someone that's making an exact date or an exact rate prediction. Red flag right there. People have been trying that the last couple of years.
And I just I look back and I just laugh at how off they've been. What I do believe is that historically we've seen election cycles put pressure on the market. That doesn't mean rates have dropped, but they've pressured rates to stay as stable as possible, regardless of party, regardless of candidate, because in general, when you are going into elections, stability is really nice.
You don't want a ton of fear and volatility going on. The second thing is that kind of looking back at where rates have been, it's actually almost 12 months since we first eclipsed a 7% rate. Now we've gone below it a little bit, but in general, we've now remained in that seven, seven and a quarter range for almost 12 months.
We've gotten a little bit of like used to the stability of that rate and we've tested the seven and a half a couple of times and we keep hitting it and dropping below it. And so there is a thought, is that a ceiling that's going to hold and it has held over the last year or so, will it continue to hold?
So when I'm advising my clients right now, I'm kind of stepping back. I'm not making an exact rate prediction, but I'm telling them I believe in the next 24 months we will see rates lower than it is today. I don't know if it's a quarter a percent, 2%. I don't know how much lower. And I don't know if it's going to be month 23 or month six.
But at some point, as we get through the election and kind of this this time horizon spreads out, I do think rates are going to come down.
But your theory isn't just a prediction like you think or you believe trying to help people get home and say, oh, you can always refinance later. It's actually because of what you're seeing these banks do where it's almost forcing people to pay down the points on their. Yes.
So it's it's nearly impossible. I'm not going to say totally impossible, but it's very difficult to get what's called a no point loan at the moment, which was the common thing that everyone got a couple of years ago. The reason for that is the servicing of loans that the collecting your monthly payment is not a profitable or desirable place to be right now because lenders believe that that length of time they're going to be collecting, that is very short.
Right. So they're not going to be collecting it for eight or ten years. It may be a year or two. And so there's actually no value. In a weird way, in collecting or servicing the loan, the debt instrument. So what's happening is in order to make a profit, lenders are now charging points, which is an upfront fee that you pay to get a rate and to get a loan because that's the guaranteed profit to them.
Not knowing what's going to happen with rates and how quickly that can turn.
So they want the profitability day because they're worried that somebody might refinance with somebody else and present at a lower rate somewhere else. And that's just a theory that, you know, or a prediction that that could potentially come from. Absolutely. One of the things that makes single family homes a lot different than multifamily apartments and commercial and retail and other types of real estate is the types of loans that people use to buy the real estate.
So the reason why there's probably opportunity in commercial or multifamily is these large institutions. They didn't get 30 year mortgages. The 3%. Mm hmm. Like the consumers.
They got, you know, these ten year adjustable because they were like, oh, we'll refinance or sell this building down the road. So that's the biggest difference. Would you agree?
Yeah, I mean, it's a big challenge right now. Everyone loves that. There were 3% rates a couple of years ago. And yet a lot of people are really upset that no one's turning over real estate wealth because they're sitting in 3% rates. And so it's a little bit of a double edged sword in that sense. But yeah, I mean, you look at an opportunity, not at the moment, but even at the moment to borrow money for 30 years and at the rates, whether it's three, four or five, six, even 7%, like that's a pretty good rate to be borrowing that long term loan money on.
And we're not even getting into the fact that you're borrowing against an asset that in all likelihood will appreciate over that time or the tax benefits of being a homeowner and the write offs you get. Like there's all these other factors that add on top of it to make investing in real estate and taking out debt that you can afford, you know, pretty desirable for people.
Thanks, Brian. One of the things that I enjoy a lot about working with you is your dedication towards people understanding what they have and what options are available to them and the education component that that you go into. So not only are you there to help educate and find the right solution for clients, but you also take that extra mile to, you know, help people secure those loans or those properties.
Yeah. By doing short little videos and explanations, why are your clients qualified or what's available to them? We were talking recently about why would anybody refinance out a 30% interest rate loan and you had some good.
Yeah, they will. I mean, here's what I try to do. Buying a home and getting a mortgage is is emotional. There's an emotional aspect to that. And I try to not step away from that, try to get to know my clients, understand that. But at the same time, there's just some numbers to look at. And if we remove the emotion, I can sometimes help educate clients on numbers.
So I had a client come to me actually referred by a financial advisor, and sitting in one of these three, three and a quarter interest rates but had a home equity line second that was about to balloon and come due in the bank. With all the volatility in the banks, the bank was unwilling to redo the loan. They said, Nope, I want my quarter of $1,000,000.
So her options were to go get another home equity line that much higher? Yeah, 11 12%, whatever it was. Or for me, which on the surface seems like, well, of course I'm going to go do that because I don't want to get rid of my 3% rate. But in this situation it hurt her home equity line was actually a bigger loan amount than her first.
So I did a side by side comparison, didn't know what the results were going to be. I just showed it to her and it actually made sense to do a cash out refi to pay off the first. She lost that three and a quarter interest rate, but to avoid the ballooning second, we combined into one loan at, I don't know, high six as I think at the time we did it and it put her into a fixed rate, that will not change.
She's in retirement age. So for her, stability is key. And it was just a wild thing and just even talking to her and even her financial advisor afterwards of this idea of like, I never even thought this would be the route we went. But when you present it and just look at the numbers, it makes sense.
Well, I think that goes into what makes you different in terms of how you are solving this lending problem for a client.
Yeah, there's a big unfortunately, there's a problem I won't deny in our industry where it's becoming, you know, a bit robotic, a bit, you know, biggest marketing dollars when click, get the fastest loan quickest rate. And the irony with that is I could have ten buyers in front of me right now and they all ten get a different interest rate based on dozens of factors in their profile.
Right. And so there isn't one rate for everyone. There's not even the best loan for everyone is someone getting an FHA loan or an adjustable loan. A 30 year or 15 year. And are they self-employed and looking at a bank statement loan because they want to still take advantage of the tax write offs. There's all these different customizations that you have to do to a client, and that takes time and energy.
And a lot of lenders just aren't willing to put that in right now. But for us, when I started in this industry, I said I'm going to be client based and referral based and in order to do that I have to build trust. And it may mean I do a little bit less loans and I have to spend a little more upfront time with the client, but it allows me to really build a relationship with them and start keeping them as clients for life.
You know, Brian, thank you so much for today. I mean, a couple of really important things that you shared with us is, you know, don't wait for interest rates or price to come down because nobody knows what's going to happen when you know you need or want to go buy, you know, single family home. There's lots of predictions out there, but you can't really believe all of them.
It might even make sense for some people to refinance out of really cheap loan into a higher one. But single family homes are much different than other types of real estate that you're hearing that are going to have some problems in the future. And that's typically because of the types of loans that people are getting to buy those assets.
Larger pieces of property tend to be shorter loans and adjustment rates. And then single family homes tend to be those 30 year mortgages. And that's the supply is more than anything the difference. Absolutely. Yeah, for sure. Brian, thank you so much.
Yeah, thanks for having me.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
