S2E22 – The Housing Market Has To Change, Right?

The 2023 Housing Market has been anything but normal with both a limited supply of available inventory as well as limited demand but house prices remaining very strong. What has to change in the current real estate market to see a change in the overall housing market? Should you buy now or wait? In this episode, we discuss how the current state of the housing market as well as what has to change for you to see a real change in housing affordability and house prices in 2023 as we help you become The Educated HomeBuyer.

✅ – Want to get connected with us or to a local expert in your market, please reach out at http://www.theeducatedhomebuyer.com/expert

Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith

Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

📩 – info@theeducatedhomebuyer.com

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For Show Notes, See Below 👇

[00:00:00] Jeb Smith, Huntington Beach Realtor: Something has to change, right? That’s a common belief out there at the moment in the housing market, a gridlock between buyers and sellers or those that own property and those that don’t. The people that don’t own property believe that, hey, the housing market has to change so that I can become a homeowner while the other side is saying, hey, things don’t really have to change. They might move along like they have been over the last couple of months to years. 

So in today’s episode, I think it’s important to talk about some things that are happening in the housing market now. And what we’re likely to see over the next couple of months to, towards the end of the year.

Josh didn’t really want to get into a forecast video, but there’s some things happening in the market between inventory, between demand, inflation, interest rates, all of the things that we talk about on a routine basis that are not moving a lot. They’re not changing and therefore we’re seeing this stalemate that we’ve talked about many times in the housing market and things just chugging along. But at the same time, people are still buying homes.

Let’s talk about, where things are with rates, where things are with prices, demand inflation, all of these things. And then talk about what has to change so that we see some progress in the housing market. 

[00:01:14] Josh Lewis, Expert Mortgage Broker: We’re gonna talk a little later in the show and make reference back to an interview that we did with Michael Zuber. Was actually the beginning of March, and I was surprised in reviewing that and looking at some of the things we talked about. I said, what’s happened since then? Nothing has happened since then. In terms of interest rates, in terms of sales volume, in terms of inflation, like we’ve had multiple reports, multiple fed meetings.

So we have March data, April data, and now we’re starting to see the May data roll in. And nothing has changed. But that in and of itself is a change, Jeb. So all throughout 2022, starting from about February on, we started seeing inflation readings hot and getting hotter. Fed reaction to that hiking and hiking heavier and harder.

And that pretty much all played out by about November and we saw a little improvement in the market in terms of interest rates, a little improvement in volume of people stepping back into the market. And then we popped back up to the current range where we are today, and it’s been sideways.

We go to the top of that range, which top in, in interest rates is. Six and three quarters- ish and go to the bottom of the range, which is about six and a quarter- ish. So today we sit at 6.5% according to Mortgage News Daily. There’s a million factors that go into that, including the loan level price adjustments that we talked about last week that will dictate what your interest rate looks like. 

But it’s a good national average. It’s consistent over time. 6.57%, we’re right in the middle of that range For something to change for buyers, for something to change for sellers, for something to change for realtors and mortgage professionals in terms of volume of transactions and number of buyers and sellers in the market. Something has to give there, and it all relates back to affordability and how affordability dictates supply and demand. Is that a fair statement to make there, Jeb?

[00:02:56] Jeb Smith, Huntington Beach Realtor: Absolutely. Now, you said something, a moment ago, you said nothing has changed since March, [00:03:00] not entirely true. Because we have seen inflation come down right? As of today, core CPI is sitting at 5.5%, headlines at 4.9. So inflation has continued to moderate, which is something we talked about back in March. At the same time, we’ve seen homes come to the market, their inventory has come to the market. Unfortunately, in most markets out there, it’s being met with buyer demand so the inventory numbers aren’t increasing. 

In fact, since March inventory and a lot of markets out there has actually gone the other way, instead of increasing like we would see in the spring market, we’ve actually seen it decline, which is, not ideal heading into what is normally our hottest time of the year. 

And on top of that, the Fed has continued to hike up until the last meeting, which was what May 3rd but the change was how they came across in, in the commentary after the fed meeting in giving the idea that there’s a potential pause coming.

And as of today, as we’re recording this, there’s a hundred percent probability that the Fed cuts in September. Now you and I have said several times that we don’t necessarily agree with the idea of a cut happening this year that we’d have to see something really bad in the economy, things get way worse to see the fed actually back off after they’ve done, 10 continuous hikes in, in the last, 12 months or just over 12 months. 

So there has been change, but when we talk about no change happening, it’s just chugging along in the market. We haven’t seen a big upswing in demand or inventory or, a big decline in rates or anything that has made a major move that has affected what you said, which is the key, which is housing affordability. 

So, we talked about rates. We could talk about some other things that make up housing affordability, which is, prices as well as wages, Josh. 

[00:04:52] Josh Lewis, Expert Mortgage Broker: Jeb I do want to correct myself a little bit. Nothing has changed, but that in itself is a change. When we had for a year rates moving steadily higher, three to four months now of going sideways is a change. That’s a market, putting in a base, saying, this is our ceiling. Could they go higher? They could. But more likely it’s waiting for data to go back in the previous direction that we were at.

Doesn’t mean all the way down to 3%. And it’s part of the discussion that we’re gonna have here today. But all of these things factor into prices, supply of homes, both new construction and existing, meaning sellers that own a home and being willing to sell it. And what that means for you in the market.

One of the things, Jeb, that you had mentioned here as we were brainstorming going through this is the difference between nominal home prices and real home prices. So everyone was predicting, one of the surest ways to making money on YouTube over the last two, three years is crash porn.

You just throw out videos that the market is gonna crash. Don’t ever buy, get out. It’s gonna be terrible. And we had a couple of reads in the fall where we were seeing, a percent month over month, which would translate to a 12 or [00:06:00] 15% dip year over year. Certain markets, primarily Silicon Valley, Austin, a little bit in Boise.

You’ve seen numbers like that. In our market we haven’t, most of the markets where our friends operate, we haven’t seen that. But now we’re going on two months of data where we’re seeing positive home price growth. So it doesn’t mean that’s right. It doesn’t mean that what happened in the fall was wrong.

It means that we’re just bouncing around. Small gains, small loss, small gain, moving side to side, but Jeb, do you wanna talk about the difference between nominal home prices the price that you actually pay for your home or could sell your home for, and real home prices and what we mean by that in the context of the inflation debate?

[00:06:40] Jeb Smith, Huntington Beach Realtor: Yeah. But you just said something though that sparked something with me. You said there was a an easy way to make money over the last three years, and it was the whole idea of crash porn. It really comes back to headlines. And the reason this sparked something with me is because I flagged two different articles today that are talking about the exact same thing.

One of them says, seven in 10 metros saw home price gains in the first quarter of 2023. The second headline, talking about the exact same data, says home prices fell in third of the US during the first quarter. Now, which one of those Josh, do you think gets the most clicks? The ones that, that, that shows seven out of 10 markets went up, or, Hey, a third of these markets declined.

[00:07:28] Josh Lewis, Expert Mortgage Broker: I if it bleeds, it leads Jeb. So I’m gonna go with the negative news was the one that got more clicks,

[00:07:32] Jeb Smith, Huntington Beach Realtor: I think too, but it just shows you how easily twistable, if that’s even a word, data is. Taking a headline and it’s accurate. It’s not a lie. But it’s just how it’s used to spin what you as a consumer see.

So when you’re out there, this is a just a side note, guys, when you’re out there looking at. Buying in the market. Just make sure you’re getting all the information and if you see the latter article that I mentioned, that headline, just read the article and realize that, okay, three markets did decline, but seven actually posted gains during that period of time.

Because it’s really easy in this environment as a first time home buyer to get scared because of all the negativity out there in the market, all the doom and gloom when in all reality. Things aren’t as bad as the market seems, and they’re probably not as good in some cases as the market seems. 

So just make sure you’re just following a reputable source.

[00:08:25] Josh Lewis, Expert Mortgage Broker: Yep, a hundred percent. And you said something really important. We are partially responsible for the bad news that we get. Again, positive feedback, it gets clicks, then we get more of that. But most importantly, the algorithm feeds you what you click on. So if you click on the negative news headline in any topic, I’m not saying you’re a negative Nancy, or a negative Ron for that matter, and you’re out there just clicking on negative news, you only get negative headlines. 

But if you’re out of the market and you’re wanting to buy in and your hope or expectation is that home prices are gonna drop 20%, enabling you to buy at a much better level, and [00:09:00] you’re only clicking on those negative headlines, the Google algorithm in your Google feed is only gonna feed you those, or primarily those. 

The YouTube feed is gonna provide you those videos. So it’s important. Confirmation bias is real, especially in the age of algorithmic news. Force yourself to step out of your lane. If you believe the market’s gonna crash and you subscribe to three different crash channels, cool.

Subscribe to a couple of other reasonable people who don’t see that and try and see the argument from their side. So that’s good for basically any topic you’re interested in or follow, but, In this space when you know only, the extremes seem to get attention and the middle of the road, reasonable thoughts get drowned out.

Just force yourself to step out of your lane and look at it from the other perspective and see if there might be some valid points on that side. 

[00:09:45] Jeb Smith, Huntington Beach Realtor: No. And again, doesn’t mean Josh and I have all the answers, cuz we clearly don’t. But just it’s good to get different sources, get different opinions, and make your decision.

But with that said, going back to what you asked, nominal versus real. The easy way to look at it is real prices are adjusted for inflation. So you have inflation, what’d we say today? Headline inflation sitting at 4.9%. So if you saw home prices increase 3% month over month, you’d actually have a decline in home prices on a monthly basis or a yearly basis based on how it’s adjusted for inflation. 

[00:10:19] Josh Lewis, Expert Mortgage Broker: So in real terms, Jeb, then what we’re saying is, despite the fact that most of the year over year reads are still positive in housing prices in the US, inflation is strongly higher, 4.9%. So whether you’re looking at a number that says we’re 1% or 3% positive year over year, you have actually had a real loss in home value in terms of actual dollar purchasing power of that home over the year. Does that matter to a homeowner, home buyer, home seller? 

[00:10:46] Jeb Smith, Huntington Beach Realtor: That was my question. 

[00:10:47] Josh Lewis, Expert Mortgage Broker: So tell me your thoughts and I’ll give you mine. 

[00:10:50] Jeb Smith, Huntington Beach Realtor: It doesn’t matter. To me it doesn’t matter. There’s a lot of things that you can pay for that, because of inflation adjusted prices, whatever they’re going to go down but, the additional things you get from home ownership that aren’t factored into that quote unquote value of your home, that can’t really be measured. Those are a way larger benefit in my eyes than say whether or not you’re looking at a real price versus a nominal price.

[00:11:18] Josh Lewis, Expert Mortgage Broker: Two pieces to it for me, Jeb. The reason why almost no one considers real home prices is that they buy and sell in nominal prices. So if I bought my home for $500,000 and I sell it for $600,000, I’m concerned with my real, not in the terms that we’re using, but my real a hundred thousand dollars profit there that I’m gonna use to buy another home. 

This concept of it went up 7% a year, but the 3% inflation, so my real gains were 4%. Most people do not care. But Jeb, let’s talk about, we talk about a correction in home prices. Normalization in home prices inflation at 4.9%. We’ve seen wage inflation, so the average worker about the same four to 5% year over year.

So if we say home prices are up [00:12:00] 1% year over year, but wages are up 4% year over year, homes have gotten more affordable. Relative to wages. Now the problem is interest rates because of that inflation are much, much higher. So the percentage of your household income that goes to the payment has made that home less affordable.

But in terms of, a lot of people want to quote, Hey, home prices have to come down because homes are at a record multiple of income to home price. It doesn’t account for any number of things and it doesn’t account for the changes over time. And that’s part of what we’re here to talk about. 

So in general, in real terms, over the last year, home prices relative to wages, homes have gotten more affordable in the actual terms of you qualifying and writing a check every month. They’re much more expensive because of the big increase in the interest rates over the year. 

[00:12:46] Jeb Smith, Huntington Beach Realtor: So we’ve talked a little bit about rates. We’ve talked about prices. The real measure here or the real big picture item that we need to talk about is inventory, because the lack of inventory is really what is keeping prices from declining further than what we’ve seen, right?

If you saw a huge surplus of inventory come to the market, We wouldn’t be having the conversation that we’re having at the moment because that in itself would change the dynamic of the market as a whole. But what we’ve seen in a lot of markets out there, like I mentioned earlier, is inventory’s actually gone the other direction.

If I’m talking about. Orange County, right? I know we have people listening everywhere. I don’t know the nationwide inventory exactly where we started, but we’re about to pass under, nationwide. I know we’re about to go under levels that we saw prior to 2021 and 2022 nationwide inventory.

So even though inventory spiked in the third quarter, fourth quarter of 2022, Because there’s less new listings coming to the market. Demand is still there. We’ve seen inventory trickle sideways down a little bit, and we’re about to go under the 2021 and 2022 levels, which isn’t a good thing.

I mentioned Orange County a minute ago. We started the year about 2,500 homes on the market. As of today, shooting this video, we’re sitting somewhere around 2050 homes. So we’re about 20% less than we were at the beginning of the year. And demand is muted, right? So demand isn’t this catalyst that’s driving the market up.

It’s the lack of inventory and demand and inventory almost being balanced to some extent, Josh, that’s keeping prices from moving down. 

[00:14:32] Josh Lewis, Expert Mortgage Broker: And Jeb, it’s funny in terms of people entering the market. We talk all about affordability. Affordability is low because even though wages are up, home, prices are at record highs and interest rates are the highest we’ve seen in 40 years. But, the reality is it’s the same issue on the seller side, leading to supply and the affordability is a little bit different.

Affordability is a brick wall for first time buyers looking to enter the market. Like I cannot do that. I cannot qualify for [00:15:00] that, or I am unwilling to make that large of a monthly payment. Jeb, let’s use you as an example. You’ve got three growing boys. You have a decent size house, but it would be nice for you guys to have 700 to 1000 square feet more for your boys.

[00:15:12] Jeb Smith, Huntington Beach Realtor: 700,000 square feet more. 

[00:15:14] Josh Lewis, Expert Mortgage Broker: 700 to a thousand. 

[00:15:15] Jeb Smith, Huntington Beach Realtor: Oh, I thought you said 700,000 square feet. I, 

[00:15:17] Josh Lewis, Expert Mortgage Broker: that’s a big house. That’s a big, 

[00:15:18] Jeb Smith, Huntington Beach Realtor: that would be a really large house. 

[00:15:20] Josh Lewis, Expert Mortgage Broker: Like the fantasy factory for you and the boys to ride go-karts and do all sorts of stuff. I like that. I It’s a good plan. I like your aspirations there, but no you need a bigger home.

You don’t have to have it, but it’s a very much like to, almost need to. But the reality is you’re saying in the current market with prices where they are and interest rates where they are, I am unwilling to do that. Now so that home doesn’t come to market. It is not available for a buyer to buy.

And that’s largely what we’re seeing. Although it’s not an affordability issue. We’ve gone through the numbers. I can get you qualified for the house that you want. You look at that and you go, that sucks. I do not want that payment. 

[00:15:56] Jeb Smith, Huntington Beach Realtor: Yeah. I’m not, I just had this conversation with my mother-in-law. Let’s just be transparent. My mortgage payment’s about three grand a month with everything included. To buy what I want to buy and with the size that I need, that payment’s close to 10 grand a month. I’m not willing to 3x my mortgage payment to get a little bit more space that we don’t have to have.

Like you said, nice to have, not have to have. Therefore, I stay put, sit on equity and if an opportunity presents itself, great. If it doesn’t, We’re gonna be just fine. 

[00:16:27] Josh Lewis, Expert Mortgage Broker: So depending on where you are in the country, those numbers can sound insane. But maybe you’re somewhere where an entry level is 300 and a move up is 500. Maybe you’re somewhere where an entry level is 500 and a move up is 800. The scale of that doesn’t matter. 

Sellers around the country are looking at the same thing. Hey, I would like to be closer to work. Hey, I would like a house with a pool. Hey, I would like to trade my cool condo for a nice house with half an acre.

And they’re looking at it going, Those are nice to have things. I don’t have to do it. So until something normalizes, I’m not going to. So to me, we have two issues in terms of supply. We have 15 years post 2008 of under building in the United States. Most urban areas like Southern California, the Bay Area, are close to built out.

There’s some infill building there. But other than going up high density, which is not the American dream, having a condo and a 20 story condo building is not what most people’s idea of home ownership is. But short of doing that, we can’t build in most areas that are built out and builders haven’t built, they’ve been very prudent.

Part of the reason why we’re not gonna see a crash is they’ve carefully managed the supply of homes they’re putting into the market. Doesn’t mean they can’t dip, doesn’t mean they couldn’t lose money, but they’re not going to lose out the way they did the last time. So we have underbuilding. We have a demographic shift.

Millennial’s, the biggest generation since boomers coming into prime home buying age. No matter what people want to tell you, there is a natural human desire to own your own home, to nest, to build a family, whatever that family looks like. Vastly different than 20, 30, 40 years ago. But that’s where we’re at.

So we have affordability problems, we have a lack of supply on top of that sort of [00:18:00] exacerbates the issue and pushes it out there even further. But what is likely to fix it? The premise of the conversation today, Jeb, is what changes to get us a different outcome in the near or distant future. 

[00:18:12] Jeb Smith, Huntington Beach Realtor: No, absolutely. And I want to talk about that, but we wrote down some numbers, some real numbers that I want to throw out there just so people have some real context. So inventory is up 40% year over year. So that sounds crazy, right? Because I was just saying we have no inventory, but it’s down 53% from 2019.

And based on the trend that we’re currently at the moment, the way the graph shows we’re, there’s a really good likelihood hood that we’re gonna be lower year over year in the next couple of months with the direction of inventory. At the same time, we’ve talked about this when we talked about Zuber is the real crash that happened, Josh.

Isn’t a crash in prices, it’s a crash in the number of transactions taking place, and largely due to affordability of the things that we’ve talked about so far. But on the current pace annualized we’re expected to sell 4.4 million homes nationwide in 2023. Sounds like a lot to a lot of people, but it’s down 22% year over year.

At the same time, demand it, which is the primary reason that we’ve seen that due to a, to housing affordability is made up of a couple different factors, but what we’ve seen is applications to buy a home are also down 32% year over year. And that’s largely due to housing affordability. We talked about, willing and able before. Less people able to buy a home at the current position in the market and some people that are able, but just not willing to do it, right?

Kind of me, I’m able to do it, I don’t want to do it. Therefore, applications, all of that brings prices down. Because of that first time home buyers were 28% in March. That’s down from 30% same time last year. Investors make up 17% of the market compared to 18% last year. 

And everybody talking about foreclosures. It’s a non-issue. Nothing really to discuss on the foreclosure front. So that is not going to be the shoe that drops, that brings everything back in line. So Josh, let’s talk about the direction we see. Let’s talk about interest rates. I think it’s a good place to start because interest rates have a larger impact on housing affordability than anything out there. 

Everybody wants to talk about prices coming down. Prices coming down is great, but interest rates coming down have a bigger impact on your monthly payment. Now I know people are gonna say it’s always better Josh to get a lower house price than a lower interest rate, and that is true.

Not disagreeing at all, but what I can tell you from experience is people care more about the payment than they do the price. So if they saw a drop in price, monthly even if the price of the home stayed the same, if that home was more affordable monthly. That would cause a spur in buyer demand. [00:21:00] The market would pick up for that reason. 

[00:21:01] Josh Lewis, Expert Mortgage Broker: But not only that, Jeb, it assumes that you have the option of one or the other or both at different points in time. With the lack of supply, we do not have a recipe for significantly lower home prices. So the thing that can move the needle largely in affordability, in favor of buyers, that is likely to happen, is interest rates.

We could go through some of the jobs numbers also. The size of the working age population in the US is at a record low and going to move lower. That’s going to support wages? People fear AI is gonna put people outta jobs. Wages are gonna be well supported. We’re probably gonna see four to 5% wage growth going forward, which is healthy in the long term trend if we’re seeing one to 2% inflation.

So if we can get inflation down and we have the wage growth there, home price is unlikely to come down. Wages even increasing at 4% a year, you need 4, 5, 6 years of that type of wage growth, without home prices going up, to change it. So the one thing that can move in a short timeline that can impact affordability is interest rates.

[00:21:58] Jeb Smith, Huntington Beach Realtor: No, absolutely. So let’s talk about that. We talked about inflation has moderated, right? And with that, Josh, let’s go back to March. I don’t have the inflation numbers in front of me, but inflation has come down since March. Interest rates, pretty much the same, right? Since March they’ve we’ve seen them come lower.

We’ve seen them bounce back up. We’ve seen them come lower, seen them bounce back up. This, I don’t know if there’s a trend at the moment with rates, but we aren’t really seeing any real progress. So when we talk about, as inflation comes down, interest rates will follow. We haven’t seen that yet, so why haven’t we, and what is likely to change that?

Look at long-term treasury yields. So 7, 10, 30 years, we have this yield curve inversion that everyone talks about being a signal of recession. We know inflation is high. We know that the Fed is combating it. The market has looked at it and said we think inflation’s a short-term problem. That’s why three month, six month, one year, two year treasuries are more expensive than seven and 10 years right now.

And what we’ve seen over the last 3, 4, 5 months is just bouncing around within this range without going anywhere because we’ve seen improvement on the inflation front. But markets want to see a solid move back towards that 2% range. And until we see that, we’re not likely to see a big improvement in treasuries.

So we talk about treasuries related to mortgages. Have a relationship. They never get too far away from treasuries. When treasurers are going up, mortgage rates are going to go up. When treasurers are going down, mortgage rates are going to go down. We’ve seen treasury yields double in the last year and a half, and mortgage rates have far more than doubled.

Historically, going back to 2000, the spread between the 10-year treasury, which is what most closely tracks mortgages over time, not right now, but over time, that is about a 1.8% spread to mortgage rates. So right now if you have a three and a half percent treasury yield, it tells you should have a 5.3% mortgage rate.

When we talked at the top of the show, we’re about six and a half [00:24:00] percent. The reason is there’s a much bigger spread between treasuries and mortgages right now. The reason for that is Treasuries have no duration risk, meaning if you buy a one year treasury, you’re gonna get paid out your interest for the year.

You buy a seven year treasury, you’re gonna get it paid out for seven years. You buy a 30 year, you’re gonna get paid out for 30 years. If you buy a mortgage, you may say, this is great. I bought a mortgage. The person is really well qualified. They took out a rate at the absolute wrong time at 7%. That’s not a guarantee you’re gonna get interest at 7% for 30 years. 

As soon as that borrower has the opportunity to drop to 6%, 5%, four and a half percent, they refinance. So investors in mortgage backed securities are saying, I have significant prepayment risk. I am not going to get that yield for the long haul, so I want an even higher yield.

So until we see that normalize, which we may not see it normalize anytime soon, all the way down to that normal average of 1.8. I think we’re gonna have a hard time in the near future seeing a 10 year treasury under 3%. And that’s lower than where we’re at now. It could be a quarter, a half percent lower. But I think we will get somewhere in the low twos versus almost 3% in that spread right now.

So if we get a spread of two and a quarter and the 10 year goes to 3%, you have a five and a quarter interest rate relative to the six and a half that we’re at right now. And that is a massive difference in terms of the monthly payment. Does that mean that affordability in Southern California, which is under 20% right now, does it mean that it goes up to 40 or 50% and half of the population can afford to buy the median priced home?

Nope. Not even close to that. But in terms of prices going up or bringing sellers into the market and increasing supply and demand. All you need is to go from 20 to 22 to 24% of the population can buy. That relatively small swing can affect the demand in the market. But Jeb, let’s say, if that happens, we’re talking about first time buyers, people entering the market, but what does that do to move up buyers like yourself if interest rates go from the current six and a half to five and a quarter? 

I think it definitely unlocks some of the sellers out there. Here in California, I believe the stat is something like 90% of homeowners have an interest rate below 5% and 70% have an interest rate below 4%.

The nationwide stat reads a little bit differently and says that 62% of mortgages are under 4% and 82.5% are under 5%. So with that said, the large majority of people are sitting on an interest rate below 4%. So that means you have to be willing to pay a little bit more than you’re currently paying.

And likely still having an issue finding some inventory out there. But I do believe it unlocks some property, but I don’t know that it changes the dynamic yet because, take somebody that has an interest rate at 3% and they bought a house for 500,000.

That’s where I’m at. Okay. I go to a million and a half house and my interest rate’s at five and a half or five and a quarter, whatever the rate, my [00:27:00] rate’s almost double. My house price tripled and my property taxes are going to triple. So it definitely helps out, but it doesn’t make it this easy, ” Hey, yeah, absolutely. I do it tomorrow.”

But it gives sellers an opportunity to unload a little bit more. What I think it does more so than anything else is it puts those that are potentially in a position to buy, Josh, that don’t need to sell their home. It says, okay, I’m now willing to buy that new home at this price.

Pay a little bit more for it with the idea that maybe in the future I can refinance. I’ll keep my current property cuz the interest rate’s really low. I’ll rent that out. I’ll use some of that positive cash flow to help subsidize that higher cost on the new mortgage. And yeah, I’m paying a little bit more, but I’m getting some more over here.

And therefore, a little bit of a trade off. But what that doesn’t do is it doesn’t create really any new inventory for the market, which is still in my eyes, one of the bigger problems that we have out there. 

Josh, so I’m gonna ask you a question. We’ve talked about this before. Where do we need to be on interest rates to get a sizable increase in inventory, not just a little bit of more and this question’s a little bit differently than the last time we asked it because I’m saying, what do we need to do to see more inventory? Where do rates have to be to get people off the fence saying, I’m willing to do this now.

[00:28:26] Josh Lewis, Expert Mortgage Broker: It’s a really good way to ask the question. Jeb, because we talked about do rates going from six and a half to five and a quarter, take affordability through the roof where we have a ton more able, buyers able demand entering the market? No, it moves it at the margins enough to significantly increase demand, mortgage volume, sales volume, all that type of stuff.

Now, on the other side, it’s almost the same thing. If you go from six and a half to five and a quarter, how many sellers does that really motivate? If we’re saying 70% of ’em below 4%, some of ’em are under 3%. So let’s say that average is three and a half and we’re going from three and a half to five and a quarter.

That is a full 50%. Increase in your interest rate, and most of these people are legitimately moving up. They’re not moving laterally, they’re not downsizing. So they’re gonna be getting a bigger mortgage at a higher interest rate. What you said, Jeb, is 100% correct. We see people on the live that tell us all the time, if and when we move I am never selling this because the monthly payment is so low that as a rental it makes more sense and use the positive rent to offset the payment on my new purchase. 

So back to your question of what does it take to move the needle in a major way when we just said, what does it take to bring people into the market?

I said, well under 5%. So is that 4.7, 4.5%? I don’t know, but I think most sellers with a rate in the three and a half range. So anywhere from three to 4%, they would be willing to go over 4%, but not much. So low fours. 

[00:29:58] Jeb Smith, Huntington Beach Realtor: Yeah. And you you made a little mistake there, you [00:30:00] said under 4% you meant well under 5% earlier.

[00:30:02] Josh Lewis, Expert Mortgage Broker: Yeah. Yeah. Well under five. Under five. Yeah, well under five. 

[00:30:04] Jeb Smith, Huntington Beach Realtor: Yeah. So you’re thinking… yeah I don’t disagree. I made the reference earlier 4.5 to 5% is I think you would see more inventory. I don’t know that it’s sizable. It’s tough, right? When you say, I guess there’s 20% of people out there that have an interest rate between four and five.

If you’re doing the calculations that, working your way back into the numbers that we talked about earlier. That creates some inventory. I don’t disagree with what you said. It is somewhere in the low 4% range probably. That gets some real motivation for people to, to be willing to make that jump.

It’s difficult to say. We have from what we said earlier, Michael Zuber, who’s someone we had on the podcast said 4%. If rates got back to 4%, that, that is definitely a game changer in the market.

But Josh is there a likelihood that actually happens? Between you and I right now and the couple thousand people that are listening to the podcast are is that a reasonable… 

[00:30:56] Josh Lewis, Expert Mortgage Broker: let’s go back to your conclusion earlier today. There were people expecting that this April CPI report was gonna be the inflection point with lower housing costs in the CPI component there and it was slightly tamer than expected. 

We’ve seen treasury yield just yawn and improve a little bit. So we’ve seen improvement, but we are still way above where the market wants to be. And your point or conclusion was I don’t think we’re gonna see a big stair step down in this CPI number. It’s gonna be a slow grind back to 2%.

So I don’t wanna put words in your mouth. I firmly believe that we will see inflation back at 2%. But, I agree with that, that it’s gonna be a slow grind down there. So if you wanna see rates at 4%, you need inflation at 2%. We’re a couple years out from that, most likely. 

[00:31:43] Jeb Smith, Huntington Beach Realtor: Let’s talk about why I said that. Because there was an expectation in the market that this data that came out, we were gonna see a, this big decrease in the shelter and rent component of inflation, for the headline inflation number that was going to essentially you’re gonna see a major drop in the number. And we did see inflation and the rent data actually improve quite a bit from month over month numbers. But here’s the catch right with that, we actually saw an increase in some of the other components that make up the inflation number.

So what we thought would come down, came down. Something that we didn’t think was going to really be a factor, became a factor, and kept inflation from coming down as much as we thought. And so what I said, Josh, is that I’m not an economist clearly. And there’s way too many things that go into making all this stuff up.

But I can tell you from being out there in as a father of three kids, as a husband, as somebody that likes to travel, get out and do things, There’s a lot of people still doing a lot of activity in the market for numerous things, traveling. We traveled recently, hotels were packed.

And I realize, a lot of areas of the country, you’re not seeing that. There’s less people flying, there’s whatever, right? It’s like real estate to some extent. It’s local. But what I’m [00:33:00] seeing right is and that’s what goes into to how I believe things is that there’s still a lot of money being spent.

So when people spend money that directly in many ways, inflects inflation. So I’m not confident enough to say that, everything is just going to slow down at once. So I think you might see a slowdown in one area and a little bit of pickup in another area that keeps that inflation number from coming down.

I hope that I’m wrong. I hope that we see it come down quicker, but. That’s just my, my non-economist thought process 

[00:33:31] Josh Lewis, Expert Mortgage Broker: To get anywhere near that 4%. You need a treasury in the low twos and you need a 1.8% to 1.75% spread to treasuries from mortgages. So it’s a couple years, probably a couple years out.

Do I think that we’ll just slowly grind our way there? I think we’ve put in the highs. We’ll have periods where they drop a half percent, then they pop back up a quarter, and then they drop a half percent and they pop back up a quarter. I definitely am a believer that we’ll have rates in the low to mid fours in the next two, three years. But it’s not gonna happen fast.

Jeb. We try to keep these things a little shorter. We’ve already been going for 37 minutes, but let’s wrap it up in terms of what does that mean? Something has to change. Something will change, but what I think we’re changing from is these big booms in volume booms in prices to, we’re gonna see a slow and steady slide forwards with prices increasing a little bit due to low supply, but not a ton due to low affordability. 

There’s just not the ability of buyers out there to push prices significantly higher. Affordability will improve, wages will go up, but it’s muddling through. I don’t see a recipe for home prices coming down. I don’t see a recipe for them shooting up, which kind of always leads me back to what do we tell people who are thinking about entering the market? How do you make the decision if now is the right time for you based off of what we just talked about? 

[00:34:58] Jeb Smith, Huntington Beach Realtor: It’s not the answer that people want to hear. Everybody wants the answer that gives them the exact pathway to go out and buy a house. And unfortunately there’s never a one answer fits all type of home buying equation. And so that’s not gonna be the answer. 

The answer is buying when it’s the right time in your life. So me, for example, if I were in an apartment situation and I had three kids and I was busting at the seams, I would have one of two options. I could either go buy a house or I could continue to rent something. And I would look at the market and see what I was able to get, what I was able to do.

And in some cases it makes sense, depending on where you’re in the country, other areas it doesn’t. But for those that can’t at the moment, I would continue to work on my credit score. Credit really impacts affordability more so than most people think. Most people think, “Hey, I have a 700 credit score. I’m golden.” 

No, you need 780 plus in this market, so work on your credit. Work on your down payment, cutting expenses, [00:36:00] work on budgeting. Those are the things that lead you to the next level of home ownership. And maybe, if you live in Southern California, you look at the market and go, it’s just way too expensive.

Maybe you end up moving out of the area. Maybe Southern California as much as you want to be here, doesn’t give you the opportunity that you want to have. If you are trying to accomplish the American dream. Or maybe you continue to do what you’re doing and you buy a property in an area where it is more affordable and start getting some of the benefits of home ownership.

But nevertheless, I think you have to have a longer term time horizon. Like we’ve discussed Josh, you have to have some money in the bank. Job security, while there’s no guarantee out there, you probably wanna have some stability in your decision making process. And that’s really it.

You, I’m sure you have some thoughts to add to that. 

[00:36:47] Josh Lewis, Expert Mortgage Broker: Same thing, income and employment stability. You’re comfortable in your job and your career. You’re not gonna be making changes, you’re not going back to school. Stability in your relationship situation. It could be, I am devoutly single and never going to change. It could be I’m likely to get married soon. It could be, Hey I have a domestic partner and we are never getting married, but we’re together. But at least you have stability where you know what your housing needs are. And you’re on the same page together.

You should have a financial base. We have people all day, every day, and I am not knocking these people. I understand the desire. The natural, we talked earlier, the natural human desire to own a home. But they’ll call and they’ll say, Hey, I got a 560 credit score. Can I buy a house? I go, “Possibly. But should you?”

No. No. We should not be trying to buy a house with a 560 credit score. We should be doing everything you can to be the person who can successfully become a homeowner. We talk a little bit about politics on the show, mainly the politics of stupidity on both sides of the aisle. In the nineties, both Republicans and Democrats concluded that home ownership was awesome and we should incentivize it at all costs because of the positive outcomes around housing.

And what we did is we forced people into housing, we lowered the bar so people with lower credit scores, with less savings, less stability in their life were able to get in. And that played a big part of the 2008 crash. It wasn’t the only one or even the biggest, but it was a big part of that. Build a safe financial future of stability for you in your relationship, in your job, your career, your geographic location.

You’re where you want to be, and you’re going to stay there for a timeframe. You’ve put your finances in order, you’ve saved some money, even if that’s in your 401k and you’re gonna take a 401k loan. You’ve got your credit score to a good point. You have your liabilities have been worked out. 

We talk a lot, good and bad, about Dave Ramsey here on the show. One of his sayings is live like no other, so that you can live like no other. If you want to buy a home, make some sacrifices. Ego integrity, delayed gratification. No one wants to hear these things, but home ownership is that important. If for two to five years you’ve got to not do some things so that you can become a homeowner. That’s how important home ownership is. 

We talk about income inequality in this country. The government has lots of hair-brained ideas of how they’re gonna, legally mandate equality. [00:39:00] This is one of the things that you can do for yourself. 

Owning assets is how you get ahead over the long haul, how you fix your housing costs, how you build up forced savings each month in that monthly payment and get rich slowly over the next 20 to 30 years, 

[00:39:16] Jeb Smith, Huntington Beach Realtor: Or better said as Buy Right, Borrow Smart, Build Wealth. 

[00:39:22] Josh Lewis, Expert Mortgage Broker: I like it. 

[00:39:23] Jeb Smith, Huntington Beach Realtor: Until next time, audios 

[00:39:25] Josh Lewis, Expert Mortgage Broker: and Vaya con Dios!.

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