It’s Josh Lewis, broker, owner at BuyWise Mortgage, I’m back here with the Mortgage in Real Estate Update.Verify my mortgage eligibility (May 16th, 2022)
We’re gonna go a little bit a different order, we usually kind of go through some data and then end up at interest rates and what that’s impacting in terms of monthly payments and in what you’re able to do in terms of your financing.
We’re gonna start with that tonight. And then we’ll take a look at what are these ultra-low interest rates on mortgages going to be doing to home buyers, what are they doing today? What is it going to be doing going forward?Verify my mortgage eligibility (May 16th, 2022)
This whole thought of going this direction, I have a good friend, she’s actually in the business and was talking that she would like to buy a home, get closer to her daughter who just had her first granddaughter and just wanted to be closer to them and just wondering, hey, is this the right time to do it?
There’s a lot of stuff going on, Coronavirus, weird things going on the economy, a lot of loans in forbearance, what’s that gonna do to values going forward. So we’re gonna take a quick dive into that tonight, hopefully, answer some questions that you guys have. I want to set up my screen share here.
Okay, looks like we have it there. So let’s just jump in and take a look. So the first thing we want us to see here is we still see every Thursday for the last month, about five, six weeks, you see the headlines, “Mortgage rates hit all-time lows.”Verify my mortgage eligibility (May 16th, 2022)
And I would just again want to put that into a context that yes, we are seeing marginally, fractionally better interest rates week after week, but it’s not really due to the mortgage-backed securities. This chart just shows how they trade.
And all I wanted to show you here is this green line shows you for going back to March, we’ve done almost absolutely nothing in terms of what mortgages are worth in the secondary markets.
We had a little dip that this looked like we were gonna have an issue when there’s a dip, it’s a dip in prices and could have pushed rates higher. We quickly got that back and just went right along this same path. So the most important thing that I’m talking to people about right now is still this spread between the 10 year Treasury and the 30 year fixed mortgage.Verify my mortgage eligibility (May 16th, 2022)
So not only are mortgage bonds not going anywhere, this spread is normalizing slowly, very slowly. And what this tells us is when we look at the 10 year Treasury, which is a good proxy for just where our interest rates, and then we compare that to a 30 year fixed mortgage that tells us what we should expect interest rates to be.
So over the last 10 years, we’ve averaged 1.7%. During the last downturn in 2008, that spreads spiked to 3%. When the Coronavirus stuff was at its worst, we were almost 2.8% spread to 10 year treasuries.
So the Fed has stepped in and done a lot of stuff, a lot of bond buying both mortgages and treasuries and they’ve pushed rates really low. The low amount of inflation that we’re seeing right now, the stock market’s being a little bit weird and actually going up while there’s a lot of bad economic news, a lot of bad earnings news for companies going forward.Verify my mortgage eligibility (May 16th, 2022)
But for the most part, what we’re seeing is a low level of inflation, a low level of interest rates and the likelihood that they’re gonna stay there for some time. So what we really wanna look at is this spread here between the 10 year Treasury and 30 year fixed mortgage, we’re right at about 2.4%. So almost down 0.35% from when everything started.
It is quite likely that the 10 year Treasury is gonna be low under 1% for the next one to two to three years. And as lenders, mortgage lenders get more comfortable, both with the volume of loans in their pipeline, and meaning that they’re not overburdened and they want more, and they’re also comfortable with the risk that those loans represent in terms of the potential loss of people who’ve lost their jobs, we’re going to see that normalize, we will get back under 2%.
So that tells us with interest rates going nowhere, interest rates in the general level going nowhere, we’re gonna see rates probably drop another 1/4% to 1/2% over the next one to two years. And that’s gonna have a big impact on home value. So we wanna look at that. So before we move on to that, let’s just say where are mortgage rates currently?Verify my mortgage eligibility (May 16th, 2022)
Loans up to $510,400 which are standard balance. If you’re not in a high-cost area, that’s gonna be your conforming limit. 30 year to 3.125, 15 years at 2.75, FHA and VA also both at 2.75. One thing I wanna point out, you’re probably seeing crazy things advertised. Was even in YouTube trying to watch some videos on rowing the other night and saw three different videos of lenders talking about two and 1/4, two and 3/8.
Those rates are definitely available. But as you’ll notice, we always like to advertise 0.0 lender fees. That way you can see where the market is in terms of interest rate, and if you wanna pay one point, you wanna pay two points, we can look at how far that can buy it down. But we’re talking about rates here.
These are non bought down rates without paying a bunch of fees. So if we go here and say look over 510,400, so the high balance loans, these are still a little bit out of whack. 3.625 on the 30, three and 1/8 on the 15, FHA is at three and 1/8. And as of right now VA is a half point cost at a three and 1/4.Verify my mortgage eligibility (May 16th, 2022)
I can’t even get a rebate on a high balance VA. And the weirdest thing about this is from week to week, that keeps changing. A few weeks ago, we had a lender that was willing to give at three and 1/8, almost a one point rebate. They did it for three days and they took that away with a different lender last week that stepped in for a day or two and was offering those.
So don’t really know what’s going on with secondary marketing desks with high balance VA loans. We’ve talked about why high balance rates are a little bit higher. They’re normally about 1/8% higher than standard balance loans. And right now we’re looking at more like 3/8% to 1/2%.
It’s normalized some since the worst of it, but not quite where we would want it to be. But with that, let’s now take a look and say what are these ultra-low mortgage rates doing to home values. So what I wanted to start out with, this is a chart going back to the 70s, showing home prices in the United States.Verify my mortgage eligibility (May 16th, 2022)
Basically been a straight line up, except for as we all know, the big downturn in 2008/2009/2010. One of the things that housing experts like to tout prior to the bubble in 2008, was that home prices on the national level had never dropped. And that’s largely because we didn’t have these more speculative markets, sort of overwhelming the market, in California, for example.
So I’m in California, a lot of my lens is filtered through that lens, a lot of my view of the market is filtered through the lens of California, in Orange County, LA County, San Francisco, we’ve had this boom-bust cycle going all the way back to the 70s. So this is really the only housing bust we’ve seen nationally.
And it was painful enough that everyone thinks in terms of when’s the next one coming when do I have to worry. We’ve seen now, you know, almost 10 years of increasing home values. I’m worried that if I buy now, home values are gonna drop.Verify my mortgage eligibility (May 16th, 2022)
So let’s jump in and say, this is California. So we had a run-up until the early 80s. And then a little bit of a dip and then flattened. And this, again, is California-wide. If we went down to the county level of Orange and LA County, we actually saw dips here in the early 80s. We saw a run up into the late 80s, and another dip in the early 90s. We saw the mother of all run ups and a big dip here.
So just in general wanna show if we made a smooth line, over any 10 year period, these home values have gone up. But we have to take into account that there are cycles and what has impacted the cycles and where we are currently in the cycle. So we don’t wanna forget about inflation. So what this chart does here you see real residential property prices.
And what does that mean? All that does is that they have adjusted for inflation. So although home values are now higher on the median level than they were back in 2008. Because we have 12 years of inflation, people make more, everything else costs more. Relative to the price of living homes are a good bit cheaper than what they were. Almost 20% cheaper than where they were at the peak in 2008.Verify my mortgage eligibility (May 16th, 2022)
I was trying to pull another chart, First American Title does a really cool report that they call their Real Home Price Index. And it takes into account a couple of other things. Not just inflation in incomes and wages, but also interest rates. And unfortunately, they have a cool website so cool that it rarely works.
And I was having a hard time pulling the data out of it. So I wasn’t able to show the impact from that of the ultra-low mortgage rates, but we’re gonna take another approach and look at it from a different angle. So remember these homebuyers, whether you’re a home buyer or you’re a professional watching this.
Homebuyers don’t ask themselves if they can afford the home. They ask if they can afford the monthly payment. So no one says no, don’t show me $800,000 homes, they say don’t show me homes with a payment over $3,000 a month. And that’s not, it sort of falls back to on the mortgage side, what do we do?Verify my mortgage eligibility (May 16th, 2022)
Lenders have determined what percentage of the houses income can go towards their housing payment before they don’t have money for other things and they get themselves in trouble. Homeowners intuitively do that themselves. They have a number in their head of what is their maximum they’re gonna be able to afford in terms of a monthly payment.
So it’s rarely about the home price. It’s what is the maximum home price I can get within the comfort level for my payment. So two elements make up that payment. One is the home price, and the other piece of it is the interest rate. So when interest rates are decreasing, and home values are going up, it depends on what we’re gonna see in terms of affordability.
So what we’ve seen over the last year is that all the home values have gone up, interest rates have gone down at a faster rate. So the price of a home last year that might have been 3% to 4% cheaper, the monthly payment is now cheaper because interest rates have dropped faster.Verify my mortgage eligibility (May 16th, 2022)
So when you look at that rationally, you would expect home values to be increasing. And they are in fact increasing. Not as much on the high end, but anything that we can consider entry-level in your market if that’s $300,000, or if it’s $500,000, or here in Orange County, it’s really $750,000 as an entry-level home, those homes are seeing extensive bidding wars, and it’s due to the fact that there are enough people, so supply versus demand.
There’s a strong supply of people who are able to afford the monthly payments for homes that are priced at the entry-level. So when there’s a limited supply of those homes, and a lot of demand, able demand, people who can buy them and afford those monthly payments, we’re going to see home prices go up. So let’s just take a look here.
So again, this varies by area. If you’re in the middle of the country, you’re gonna hear a median purchase price of 615 and your eyes are gonna bulge out. If you’re in California, 615, you’d be happy to find a nice home priced at that level. So let’s just say we go back historically, I remember in 2000, we had the tech-wreck, the Fed jumped in, they cut interest rates, and we were able to get rates in the mid fives and people were losing their minds, a five and 1/2% interest rate was just amazing.Verify my mortgage eligibility (May 16th, 2022)
So with that five and 1/2% interest rate and 10% down, that payment would have been $3,142 a month. Now if we look, we’re saying rates today are closer to 3%, It’s 2333 a month, that’s $808 monthly savings, 25% lower. So how many more people can afford a $2,300 payment versus a $3,100 payment, a lot more. So when we have a limited supply of those entry-level homes, and we’re now increasing the supply of people who can afford them, meaning increasing the demand for them as more people are able to kind of push higher on those prices, we’re gonna see those prices continue to go up.
So let’s just look at it from another level. If rates are at 3%, roughly right now, and I’m telling you that with normal spreads to treasuries, we could see anywhere from 1/4% to almost 3/4% drop in mortgage rates without the absolute level of interest rates decreasing any further. Let’s take into account if we went from three to 2.75, that $615,000 house, which, 615 at 90%, it’s a $553,000 loan. So that loan can go up to 571.
So I apologize I was working on loan amounts here, but 571 with the 10% down, that 615 house can go up to 634. If we drop down to two and 1/2, the 590 house or the 615 house can go up to 655 if we’re at two and 1/2. And then two and 1/4, it could go up to $675,000. That’s if incomes stay stagnant and interest rates drop. So even if you think, hey, interest rates are as good as they’re gonna get, they should stay at this level, which most everyone agrees.Verify my mortgage eligibility (May 16th, 2022)
If you look at what the Fed’s saying, you look at what market experts are saying, most believe rates are gonna stay at this level or are going to go even lower. So from that perspective, just keep that in mind. I don’t think we have any downward pressure on home prices nationwide, or especially here in California, unless you’re at a really high price point. And high wage earners suffered more than others, which they’re generally more insulated from any downturn in the income.
So just wanna take that into account. If you’re thinking of buying and you’re worried of where home values are and you’re wanting to get into the better price point, I don’t think it’s coming anytime in the next few years. I also because we have a finite amount of people that can afford prices that are relatively high, I don’t know We’re gonna see a huge jump of 5%, 10%, 15% in home values.
But definitely would expect to continue to see that three to 5% increases in prices, and largely driven by really low interest rates and interest rates that continue to move lower. And the great thing is if you were to buy today, and home prices or interest rates are at 3%, as long as you’re not paying a bunch of points and a bunch of fees on the way in for your loan, you can take advantage of the lower interest rates and move your payment downwards, as interest rates likely fluctuate down over the next 12 to 24 months.Verify my mortgage eligibility (May 16th, 2022)
So as a mortgage professional, that’s the message that I’ve been giving to my clients and people that I’m talking to and advising, don’t pay a bunch of points for a loan and lock yourself into some costs for a loan that’s likely going to be free in the future.
And when I’m talking to buyers, I don’t want you to go out and rush and overpay for a home, but what I would say is if you’re looking at an entry-level home in Orange County at $600,000, and you get into a bidding war and you have to pay another extra $4,000 to win that bidding war, it’s going to cost you $24 more on the monthly payment. If that home goes up 5% in the next year, it’s gonna be $30,000 higher next year, and that is likely to happen.
I don’t really have much of a forecast on the three, four, five-year time horizon, but in the next one to two years, home prices are going to go up at a nice steady clip as payments come down as more borrowers refinance down lower and those new buyers get excellent interest rates on their way in. So hopefully, anyone having any questions here, feel free to reach out to me.Verify my mortgage eligibility (May 16th, 2022)
I see one of our good friends and clients here, Heather Gonzales, glad you were able to watch and you’re one of those folks that shortly here we’re gonna be able to take advantage of the lower interest rates. Also wanna say we got Mark Gross here, thank you for the compliment saying here it’s great information. And any of you guys that are watching, even if you’re catching this on a replay, I know everyone’s not sitting on Facebook or YouTube watching while we’re live, shoot me a message here. If there’s any questions you have, anything that you wanna go over in all of this.
We’re more than happy to go through the info. If you’re here on the page and you wanna get notified of this stuff, because again, most people aren’t online when we go live, don’t really do it for the purpose of thinking there’s 100 people sitting here, watching their phones or their computers, but definitely we wanna get this information out there.
Like our Facebook pages, like our YouTube channel, we’re gonna be creating more and more of this content and hopefully just educating people that home ownership is truly a key pillar if not the biggest pillar for wealth building and the biggest difference between getting ahead and falling behind. So it doesn’t mean that home ownership itself makes you better off financially but it is a tool for those who have positioned themselves well financially to get further and further ahead. So if you have questions, you wanna reach out to me directly just throwing up my email address, my phone number, give me a call, shoot me an email. Hit something up here in the comments section, if you just wanna get me to cover something additional in the report going forward, all right? So thank you for joining us whether you’re watching this live or catching it on the replay, hope you enjoyed the info.Show me today's rates (May 16th, 2022)