Housing Affordability is sitting near the worst levels we’ve ever seen as the percentage of families that can afford the median priced home in the US at current interest rates is near all time lows. Does that mean House Prices need to crash to get back to the long term trend in order to make real estate more affordable? What makes up housing affordability? What are we likely to see in 2023 with wage growth, mortgage rates and house prices? In this episode, we discuss the current state of the housing market and what has to happen to create more affordability in the housing market.
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[00:00:00] Jeb Smith, Huntington Beach Real Estate Broker: Josh, when are house prices going to come down? I think that’s a statement that both of us hear quite often. And so in today’s episode we’re gonna talk about housing affordability. What makes up housing affordability? What’s your best case for solving that problem? If you’re a buyer, is there something you can do to put yourself in a better position?
[00:00:19] We’ve touched on that in previous episodes, but we’ll touch on it a little bit today. But Josh, housing affordability. Let’s talk about what makes up housing affordability and keep moving in the right direction.
[00:00:31] Josh Lewis, California Mortgage Broker: Well let’s look at two things, Jeb. When the average home buyer reaches out to us and is talking about affordability, I don’t think they’re really looking at the NAR’s number that they report, but what I can say is their sentiment always mirrors what that report is telling us.
[00:00:49] It’s in simple terms, the affordability measure that gets reported by the National Association of Realtors is what percentage of families with the median income can afford the median priced home at current interest rates? But what a homeowner is looking at, or a potential home buyer is saying is, at current prices of homes in my area with my income and with current interest rates, can I qualify to buy a home?
[00:01:15] So those three elements are always gonna come into play, because in a future episode here, Jeb, we’re gonna go through mortgage underwriting and explain to everyone what exactly that means when your file goes to the underwriter and what they’re looking at. But probably the most important measure that an underwriter is looking at is debt to income.
[00:01:33] And those are the three things besides what debts you have on your credit report that will determine your debt to income, or at least your housing to income ratio. What does the payment at any given price with current interest rates look like relative to your income?
[00:01:49] So in terms of that saying, where are we at now? If you remember in 2020 and 2021 when home prices were going up pretty rapidly, people were saying, well, this isn’t sustainable. Homes aren’t affordable. And we looked back and said, well, if you look at the affordability figure with rates as low as they are, homes at higher prices are more affordable than they were in 2018 and 2019.
[00:02:10] Now we’re obviously on the flip side of that. We have the elevated home prices and we have interest rates much higher, so affordability is lower. So Jeb, why don’t you walk us through the difference between willing and able demand, because really what affordability is, is a measure of able demand.
[00:02:27] Jeb Smith, Huntington Beach Real Estate Broker: Yeah. We’re never on the short side of people reaching out, wanting to buy houses. Even though people believe that homes are unaffordable, that house prices are too high, those people still want to be homeowners. People want to own property for many reasons.
[00:02:43] And rightfully so, right? Homeowners have a 44 times greater net worth than those of renters and owning helps create that long-term generational wealth and helps provide stability in families and there’s so many benefits to home ownership, but the reality is people want to buy homes. The other side is people that are able to buy homes.
[00:03:02] You often use an example when we talk about this, you and I would love to own a beachfront house in Malibu, right? We’re willing to own that. We’re not able to own that property, and that’s where we are at the moment. Even thoug house prices have moderated.
[00:03:18] Some markets have seen a 5% decline where year over year with regards to, to say the median home price in that area. Homes aren’t any more affordable, even with that decline of prices, because interest rates have gone up so much from this point last year. Or from the point that they’re measuring that year over year decline in prices.
[00:03:37] So, when does it become more affordable? How does it become more affordable?
[00:03:43] Josh Lewis, California Mortgage Broker: Absolutely. So let’s dig into the three elements. The one that is the most predictable and consistent over time is wage growth. So let’s throw a couple of numbers out here. Not that this is normal because we’ve seen a very tight labor market the last few years.
[00:03:59] So wage growth has been a little bit above trend for the last few years, and it’s been a concern for the Fed. The Fed thinks with unemployment at three and a half percent, there are not enough employees for employers to hire. So the number one way to get them is to pay them more. And you have what’s called a wage based inflation spiral.
[00:04:19] It hasn’t happened. But in looking at that, in December, our average hourly earnings were up 4.6% year over year. So from the prior year the employment cost index, which we’re due later here in January to get the fourth quarter. But in the third quarter it was up 5%, so telling a similar story there. If you look on indeed.com, the job postings in December the wages offered were up 6.3%.
[00:04:44] So inflation was up a lot. In the middle of the year we were seeing measurements at seven, eight, 9%. So that doesn’t keep pace with it. Now here we are moderating to a level that that five or 6% is in line with wage growth. But when you look at that, even though five to 6% is above the long-term trend, wages have for the most part, kept pace with inflation.
[00:05:06] Inflation’s been about two to 3%. We can count on over time incomes going up two to 3% per year. I was having that conversation with a borrower yesterday, Jeb and we were talking about people think a hundred thousand dollars is a high income. In high price areas like Southern California, it’s a solid income.
[00:05:22] And the comparison that I made, when I was in junior high, I remember like the idea was if you could make 60 grand, like 60 grand is a lot of money. That was the yuppie, the young urban professional, they’re making $60,000, they’re driving a BMW. And here we are from 1987 to now we’re 35, 36 years later, $65,000 is barely above average in income.
[00:05:41] And you need to be up into the six figures if you want to have that upwardly mobile income in high cost areas. $60,000 will still get you a long ways in many parts of the country, but in high cost areas, not so much.
[00:05:53] Jeb Smith, Huntington Beach Real Estate Broker: Well, I think it’s important also to note Josh at a time when companies, like as of today, Google came out, said they’re laying off 12,000 employees, Amazon laying off employees, apple laying off employees. How are you continuing to see job postings up? How are you continuing to see wages remain strong? A lot of it had to do with the pandemic. The pandemic kind of created this issue with regards to boomers and those close to retirement age, just said, screw this, I’m out. Like, I’m done working. They left the workforce entirely, which left a lot of job openings out.
[00:06:26] And if you’ve been out in the market at all over the last year, year and a half, assuming you haven’t been locked in your house since the pandemic started. If you have, you need to get out. But if you’ve been out, you’ve seen help, wanted signs. Jobless claims again dropped last week, 190,000. The expectation was 214k.
[00:06:44] So the numbers with regards to employment are still remaining strong. Why? Because people leaving the workforce, there’s still a lot of job openings out there, and so for that, wage growth has remained strong, right? A lot of these employers are looking for good workers.
[00:06:59] That’s one of the biggest complaints is they can’t find workers, they can’t find people that want to work. When they do, they need to pay them accordingly to keep them there. And so wage growth has remained strong. So if you’re a buyer out there, Josh, how does that benefit you?
[00:07:13] Josh Lewis, California Mortgage Broker: Well, obviously , the more money you make, the more you will qualify for or the less of an impact that rise in interest rates will have on your ability to qualify. I think the important part that we should look at, you had talked about five minutes ago saying the impact that home ownership has on wealth building.
[00:07:30] For most parts of the country with interest rates and home prices where they’re at right now. If you buy a home, you’re going to be paying more than if you rent the property. But what you’re getting is a 30 year fixed payment. Yes, your taxes and insurance can increase a little bit over time, but the bulk of that is going to be a fixed payment for the next 30 years. And you are qualifying for it at today’s income.
[00:07:51] So let’s say we return to more normal wage inflation of 3%. So at 3% inflation in 24 years, your income will double. So when you get 10, 15 years into this loan, you’re looking at the payment going, this is really affordable. And you look at rents going up and you look around and you’re like, wow, it would cost more to rent than it does for me to own this property.
[00:08:15] So that is a big portion of it. We don’t realize, we can look back and say how much more we make than we made five years, 10 years ago. But we don’t really look and project forward and realize how much more we will make five, 10 years from now. Again, even at 3% wage inflation in five or six years, you’re making 20% more than you’re making right now. That goes a long ways towards making housing affordable.
[00:08:38] Jeb, why don’t we just transition from there into interest rates, cuz there’s another portion of that that I think is important. We can all look at the numbers and we know, plus or minus, depending on the type of loan you were getting this time last year, January of 2022, you’re about 3% in interest rates.
[00:08:54] If you’re awesome, maybe you get 2 75. If you’re bad, maybe you get three and a half. We call it 3%. Today we’re more like 6%, almost double, at least two and a half percent higher. That goes a long ways towards eating into that affordability. Now what happens over time?
[00:09:11] We talked about wages. Wages are pretty predictable. If we go back and look at the last 50 years, it’s a slow and steady march upwards. Interest rates have been a slow and steady decline over that timeframe, but the most important part is if you bought at the absolute wrong time in terms of high interest rates, we’ve had a refinance market every three to five years.
[00:09:31] So you and I are gonna talk here about what we expect to happen in the next six to 12 months in terms of interest rates, which will improve affordability. Because we believe interest rates are gonna go down. But even if it’s not in the next one to two years, let’s say we get three years down the line, 3% wage inflation, you’re making 10% more.
[00:09:47] You took out a 6% mortgage, and we get the chance to refinance it down to 5%. That affordability equation for a homeowner works for them across time, because you have options. You have options to take a better job, to educate yourself, to be upwardly mobile and make more money, and you have options to refinance that loan to a lower payment as it comes into play.
[00:10:11] But with that, Jeb, why don’t you talk a little bit about inflation and expectations for interest rates here in the coming months.
[00:10:17] Jeb Smith, Huntington Beach Real Estate Broker: Yeah, I mean, we just saw interest rates come down. What? Reach a four month low and with that we saw 28% jump in mortgage demand. So that alone just shows you how much that interest rate affects the buying market , and home buyers.
[00:10:32] Right? rising rates affected buyers in multiple ways. It pushed some buyers out of the market entirely to the point where they could no longer afford the home that they wanted because the payment just increased.
[00:10:42] You had some people that could still get approved for the payment but just said, I’m not paying that. That’s crazy. Like I was approved six months ago for this. I’m not moving forward. And so now that rates have eased a little bit, some of those people have gotten off the fence and come back to the market.
[00:10:55] And some of that has to do with inflation going down. Some of that has to do with disappointing news with regards to PPI and retail sales and typically as the economy suffers a little bit, interest rates tend to improve. If you believe that we’re headed into a recession, that we’re in a recession, inflation aside, the government typically steps in at that point and does some sort of either quantitative easing or they help the market, right? And in turn, that typically drives interest rates lower.
[00:11:29] We’re not there yet. But if you’re somebody that believes the economy is not in a great place then that’s something to consider. But at the same time, you gotta have solid, job and money in the bank. I’m getting off on a tangent here, Josh, but we’ll get into that in a minuet and how you can put yourself in a better position to buy.
[00:11:47] But inflation. So what’s gonna happen with inflation? Well, at the moment, , the guru with regards to interest rates, Barry Habib, is predicting that May 10th is the start of a, a bigger decline in rates. And a lot of that has to do with the replacement values on core inflation and shelter when it comes to how they calculate the inflation numbers year over year. There’s gonna be high, higher numbers dropping off should be replaced with lower numbers, and in turn, inflation comes down.
[00:12:16] And if you’ve guys have been listening to us for any period of time or you read a bit, you know interest rates tend to follow inflation. So as inflation comes down, that should bring interest rates down. Now, we have no way of knowing exactly how much rates are going to come down, but what we do know is that we’ve seen already inflation come down and interest rates come down a little bit, but any little improvement in rates, Josh improves affordability.
[00:12:42] What did rates improve last week? And we saw that huge jump, maybe quarter.
[00:12:47] Josh Lewis, California Mortgage Broker: Yeah. Kind of what you had said, Jeb, we’re at a four month low in interest rates and most people are not getting that message because the headline and what they see in here is fed hikes rates. And Fed is saying they’re going to hike rates two more times this year at least, and at least a quarter of a point.
[00:13:04] So what you said is very important. Mortgage rates follow the trend of inflation. So last year, inflation was trending up and trending up rapidly. Mortgage rates were going up. The fed reacted by aggressively hiking rates.
[00:13:20] So the message that the media put out and that the public got is fed is hiking rates so your mortgage rates are higher. Not at all. Investors in mortgage bonds were requiring a higher return because inflation was trending up. So we’re at a four month low because now we’re coming off of three months of much better CPI figures.
[00:13:38] On the live show this week, Jeb, we showed that chart that literally over the last six months, if you, instead of taking a 12 month aggregate, you look at a six month aggregate, CPI is below the 2% target that the Fed has. So it’s trending in the right direction and that is why we are seeing mortgage rates come down, despite the fact that the Fed is and will continue to hike.
[00:14:00] Jeb Smith, Huntington Beach Real Estate Broker: Well, I think you said something really, really important that could be overlooked pretty easily. And that’s the fact that the media, a lot of what you read out there just talks about rate hikes, right? They don’t go into detail and talk about what that truly means for the market and I think that gives us an opportunity, Josh, to talk about that.
[00:14:19] At the moment, the market is more or less baking, 100% probability, 96% as of today that the Fed is going to raise the Fed funds rate by a quarter percent on February 1st. . Okay, so that’s already baked in.
[00:14:32] So why that’s important is that when the market comes out on February 1st, when the Fed does exactly what the market is predicting and they raise a quarter percent with the Fed funds rate, that does nothing to the market. Nothing. Why? Because it’s already baked into the cake. In fact, it’s been baked in for a couple of weeks now. Because the Fed is transparent most of the time in how they come out with their commentary and the statements that we’re releasing, because they don’t want this volatility in the market.
[00:15:00] Volatility can create issues but at the moment, Fed’s been pretty transparent. The market is more or less delivered on these expectations and with that we’ve seen interest rates more or less move sideways, slightly down. So Josh, with that said, do you expect, we said May 10th, right? Is what Barry Habib is saying.
[00:15:19] But we should still see inflation moderate, maybe not significantly like we have seen. Some of the replacement numbers on core and shelter. Some of the replacements say come February are gonna be a high replacement on core, but a low replacement on shelter. And so you might not see quite the move.
[00:15:36] But when you don’t see quite the move, but inflation continues to moderate, move sideways, are interest rates going to follow that trend? Or are we like a sitting duck waiting for big numbers to happen showing that there’s a meaningful progress being made with inflation.
[00:15:51] Josh Lewis, California Mortgage Broker: There’s a couple of pieces here. As inflation continues to trend lower, mortgage rates will trend lower. If we get a big surprise… So every month, whenever a report comes out, there’s whisper numbers, numbers that Wall Street is expecting before the number comes out.
[00:16:07] If the numbers are better than that, we get a positive reaction. If the numbers are worse than that, we get a negative reaction. So what we’re saying is for the next couple months, CPI is gonna continue trending better, but they’re probably gonna be right about at expectations. Where we can and likely will get a surprise to the downside of a much lower CPI number is in May when the April figures come out, when we start seeing moderation in the way the shelter component is calculated inside of CPI.
[00:16:34] And I think it’s really important, you’ve mentioned Barry twice here… no man is God. No man has a crystal ball. What Barry does really good is digs into the numbers and reverse engineers what is happening inside of CPI.
[00:16:45] And CPI isn’t the only measure, in fact the Fed’s preferred measure of inflation is PCE. Why is CPI I more important right now? Because last June, CPI was the first report that came out with a really hot figure on inflation, high inflation. So the market traded that. The Fed came in and met a few days after that and hiked three quarters of a point.
[00:17:07] So from that time forward, the last seven months now, the markets have been looking at CPI even though PCE is what the Fed looks more closely at. So until something changes with that, CPI has been the big market driver over the last six to eight months, and it will continue to be for the next four to six months.
[00:17:25] Next year it could be something totally different that we’re looking at closely, but as long as inflation is the figure, and CPI is the number, that’s what we want to look at and what the Fed is doing going forward is not important.
[00:17:37] It’s important for to remember that we always say that Fed hikes will lead to lower interest rates. They don’t lead to lower interest rates immediately because what happens is rates start trending up because people feel inflation is getting outta control. The Fed hikes and as soon as the market thinks that inflation is under control, then rates start trending back down. So the fed’s gonna continue to hike, they’re going to keep them elevated.
[00:17:59] I don’t think we will see a fed cut this year, even though they could probably justify it depending on what happens to the rest of the year. But the projections are, it’s probably justifiable by the end of the year, but they are deathly afraid of repeating the same mistake of the 1980 Fed 43 years ago when they cut after thinking they had inflation under control to see a big rebound in 1982 and much higher inflation.
[00:18:20] So they’re gonna hold rates high, and it’s going to limit economic growth. It’s gonna limit home price growth going forward just with the policies that they are going to have. Before we jump into that last component, which is the obvious one, Jeb, is home prices.
[00:18:36] I want to point out we also have a little bit of an anomaly in mortgage rates. Right now, the 10-year treasury is sitting at plus or minus 3.4% today. So normally that would tell us that mortgage rates should be about 5.4%, maybe even a little bit lower. Well, mortgage rates are closer to 6%, so we are seeing a bigger premium versus 10 year treasuries to mortgages than what we normally do.
[00:18:59] And that’s because you have that optionality, that ability to prepay your mortgage if rates go down. You’re taking out a 30 year loan, the lender can’t get their money back in less than 30 years unless you voluntarily give it back to them. So you have the option to take a lower rate. They don’t have the option to get a higher rate if rates move higher.
[00:19:17] So they’re pricing mortgages very poorly relative to what the required market return is for interest rates. As things normalize, and we see less volatility, that big increase behind us and we get to a point where lenders don’t believe there’s a big decrease coming like they do now. They believe we’re gonna get rates somewhere in the 5% range, and all the loans that were done at six and a half, seven, seven and a quarter are going to refinance , then they will start pricing more normally.
[00:19:44] So we need six, 12 months of normalization, lower rates and that will continue to put more downward pressure on mortgage rates relative to other interest rates, which will increase the affordability of homes. As we’re talking about that equation here, and as affordability is better, it puts a floor under home prices. With that, Jeb, what is the expectation?
[00:20:07] Jeb Smith, Huntington Beach Real Estate Broker: Before we move into that, again, something important said there. So the Fed is still expected to keep rates high, right? Brainard has basically said that it’s too soon to say that inflation is really under control, and a lot of the Fed members believe that rates have to stay high.
[00:20:21] Now, when they say that, that doesn’t mean that interest rates, mortgage rates can’t move lower. Now, are you gonna see a significant movement? Are you gonna see interest rates back in the 3% range? No, probably not. But that doesn’t mean rates can’t moderate in other ways as the market stabilizes, like Josh says. And we’ve been pointing out a lot of positives, Josh, like inflation’s down, rates improving…
[00:20:44] What could actually cause the adverse affect? Because part of this, part of the reason we’re where we are now is not only was the Fed getting a more aggressive stance on hiking the Fed fund’s rate back in early next year, but we also had some black swan events, right? We had Ukraine, Russia which put some strain on oil and energy and all of that.
[00:21:05] But, Black swan, that’s something we haven’t talked about. They’re rare, but if you do have something that isn’t expected to happen in the market and happens, is there a chance that you see higher inflation? Is there a chance that you see rates go up? Is there a chance that you see a bigger decline in house prices?
[00:21:24] Josh Lewis, California Mortgage Broker: Let’s remind you that the government puts out two CPI figures Core CPI and headline. Core CPI strips out food and energy. And you say, why? I mean, food and energy, other than shelter are the two biggest line items in my household budget.
[00:21:38] Why would we strip those out and give this core number? Well, it’s because the Fed doesn’t really control them. The Fed can hike all they want, they don’t control oil prices, they don’t control food prices when a lot of food, it’s imported. So we have a global food supply chain that is impacted.
[00:21:54] So those things, the Fed does not control. We saw a shock to both fuel and food with the Russian invasion of Ukraine, which no one really thought was gonna happen. We knew something was going on there, but no one really thought or expected was gonna happen. We also have a situation where the current administration has a very negative relationship with most of the Middle Eastern governments, and they are pushing towards China and making deals to sell oil at more friendly terms that way.
[00:22:22] So one of the interesting things is energy, whether natural gas, oil, those things feed into fertilizer costs, finished goods, everything. So the Fed can lose control of inflation if something totally outside of their control, like energy, really goes through the roof. So there are solutions on the horizon, but in a short timeframe, 1, 2, 3 years, anything can happen.
[00:22:48] So I like to say, Jeb, I’m very comfortable looking at what’s gonna happen the first six months of this year. Let’s get back here in June and have the same conversation and we’ll have a better insight into the next six months. Much beyond that is hard to say.
[00:23:00] Jeb Smith, Huntington Beach Real Estate Broker: And the only reason I bring that up is to think like Josh and I, it’s not that we’re not thining about those things, cuz we are, but it’s just, Hey listen, what can we do with the information that we have now, with the information that’s out now, with the information that’s expected to come out with regards to data? What are we predicting with interest rates? What are we predicting with wages?
[00:23:18] What are we predicting with the last thing, home prices? So the last measure of housing affordability really comes down to house prices. And I started today’s ,episode saying, House prices have pulled back in a lot of markets out there and decelerated, right, not appreciating at the same rate.
[00:23:34] Some areas home prices are still higher than they were last year. Some areas they might be a little bit lower than they were last year, but even with that little pullback in prices, you haven’t seen housing affordability improve significantly in any markets. In fact, like I said, it’s probably worse than it was this time last year because of where interest rates are.
[00:23:53] Josh, When we talk about home prices, we talk about affordability, how does that play in?
[00:24:01] Josh Lewis, California Mortgage Broker: it’s a smaller part of the equation because paradoxically changes in home prices with ultra low interest rates like we’ve had, and even historically, 6% has been a very low interest rate. I bought my first home in 1997 and we got 6.875 on a seller carry financing.
[00:24:18] I’m old I, and at 6.875, I told my wife, I, I said, We’ll never refinance this. This is the most amazing interest rate anyone’s ever got. And now, we hit that level last year and everyone’s like, oh my God, this is the worst thing that has ever happened, having 6.875% interest rates. So, what does it do to home values or what do home values do to the affordability equation?
[00:24:38] It’s important to remember at 3% interest rates, you pay about $5 per thousand of home price. So if a home drops a hundred thousand dollars, you dropped $500. So is it big? Yeah, it’s big. But most people who said, Hey, you can take a hundred thousand dollars off the price of a home, they would expect a much bigger difference.
[00:24:55] Now with rates at six, six and a half, right now, that’s over $6 per thousand, maybe $7 per thousand. So it’s $700 cheaper per a hundred thousand. But when we look at a median home price, plus or minus $500,000, if you have a 10% drop, $50,000, it’s maybe a $300 difference in the monthly payment.
[00:25:13] Well, if you say the person that’s qualifying for that has a household income of maybe 80, 85, $90,000, we just talked in the next four years at four to 5% wage growth, they’re gonna be making $18,000 more a year, $1,500 more a month. It dwarfs the difference on the home price.
[00:25:30] So the home price is important. And this kind of goes back to why we were saying people were freaking out in 2020 and 2021. Oh my God, these home prices are going up so fast. That’s unsustainable. It’s absolutely sustainable. People that have jobs are making good money and getting raises, and interest rates are low and going lower.
[00:25:45] So the percentage of household income that is going to the debt service to make that mortgage payment is going down so people will continue buying. And that’s what we saw what happened last year, primarily due to the doubling of interest rates. But secondarily, due to the effects of home prices reaching a cumulative appreciation of like 40%, 38% over the previous two, three years.
[00:26:06] Affordability got outta hand, so I don’t think that home prices dropping significantly is going to be the answer. I think this is what’s going to happen. Again, I don’t have a crystal ball, but looking at this, what I think it’s more likely to happen is interest rates moderate over the next few years.
[00:26:21] Incomes continue to go up and homes kind of bounce along sideways because we don’t really have the recipe for home price appreciation. They’re not super affordable. We don’t have a lot of able demand out there right now. But affordability through small decreases, staying level, very small increases in value depending on where you’re at and the desirability of the area and the economy in the area. I think we’re, we’re likely to trade sideways as affordability corrects through lower interest rates and higher incomes.
[00:26:48] Jeb Smith, Huntington Beach Real Estate Broker: Yeah. And, and we talk about that, and that’s one reason that you need to have a longer term time horizon because there’s a chance that the market does move sideways. I think, a large percentage of home buyers have very short memories.
[00:26:58] And what they remember is that the last couple of years, homes have appreciated substantially well above the long-term trend of four, 4.6% or whatever it is long-term. And they’ve seen 10, 15, 20% appreciation year over year in some of these markets. And so they think I need to buy a house because, if not it, it’s gonna continue to appreciate 20% year over year. And at some point I’m not going to be able to afford it.
[00:27:22] Or I just wanna get in and make some money so that I can buy it and sell it next year and make that money. And the reality is, there’s a really good chance, like Josh says, that home prices don’t appreciate at that level, right?
[00:27:32] You have some sideways movement, you have maybe a little bit of downward movement in some areas, but more or less moving sideways for a couple of years, allowing wages to catch up, hopefully interest rates come back down a little. And it gives you a little bit more affordability when it comes to buying a house.
[00:27:50] But with that said, Josh, flip side, interest rates go higher, right? What happens if interest rates go substantially higher, higher than the peak that we saw last year that could bring house prices down? Now, I don’t believe that’s going to happen, but I think. Again, it’s important to know that if you’re out there and you’re buying a home and you see rates go substantially higher, then there’s a chance that home prices come down.
[00:28:11] But the reality is, I think, like Josh says you start to see interest rates again, trade in a range for an extended period of time, and with that provides a little bit of stability in the market, gives buyers the confidence to come back in. It gives sellers the confidence to know that, Hey, listen. I’m in a position now where I have an idea of what the market’s doing, what I’m gonna get for my home.
[00:28:35] Do I need to sell? Okay, I do. I’m comfortable selling and buying something else, but you’re not likely to see a bunch of homes come to the market because of people having super low interest rates locked in, sitting on low monthly payments. A lot of these home buyers having equity, which prevents this opportunity for foreclosures to come to the market, distressed sales, to come to the market.
[00:28:55] Which again, when you don’t have a lot of sales taking place, which I think is probably what 2023 is gonna be a year of just kind of a blah year in real estate. Not a lot of transactions taking place, home prices moving sideways, things just. Moving along, chugging along a little bit. And so with that, I don’t know that you see any meaningful change in housing affordability this year, Josh, but what are your thoughts?
[00:29:17] Josh Lewis, California Mortgage Broker: It’s meaningful for everyone. I have an example, a client right now, they’re at a 49.9% debt to income ratio, and in their area they are making offers on the most affordable homes. So let’s say homes drop. 2% in their area, that’s $15,000. So that would make a difference. If rates drop a quarter or a half percent, that gives us a little bit more wiggle room where they could maybe pay another $15-20,000.
[00:29:40] So I think it does get affordable. Who it affects and impacts and helps is the people that are right there marginal, on the borderline. That if we were talking to them in October when rates were near their highest levels, we would be saying, “You didn’t really qualify for anything. You’re 600,000 instead of $660,000, which is the bottom for the market that you are in.
[00:29:58] So it’s going to help people, but I don’t think it’s going to make any appreciable change where, you know, we’ve talked about this concept of animal spirits before and what is that? It’s what you had in 2021 and 2022, where it’s this indefinable thing where everyone believes this is a good thing, everyone should own, buy at all costs…” and you don’t get back to that immediately.
[00:30:19] So I have no expectation that in the near term future, we’re gonna see that. Those are unique events that happen every 10, 12, 15 years. So I think we will see a sideways market. You hit the nail on the head that if rates go back to that almost 7%, above 7% level that we were, you had said that mortgage activity is up 28% from the lows. Well, it’s still down 35, 40% year over year.
[00:30:41] But that means we were even lower. We were off 50%. And that’s what you could expect, both in terms of sales, mortgages, prices, everything if rates were to stay at that level for an extended period of time, go back there and stay there for an extended period of time.
[00:30:55] So rates are the driver this year. I think income is going to improve and that will help some people. If rates stay high, most people are not gonna be comfortable entering into the market. If we continue moderating like we have and we’re getting people with rates with a five handle on ’em, even if it’s 5.99, 5.875, we’ll see people buying homes and keeping prices in the similar range.
[00:31:15] The nice homes will sell at a premium. The middle of the road homes will sell at appropriate prices and the properties that are distressed, need work, in bad location, they’re gonna sell at a discount. And that’s a more normal, more healthy market. So I would watch interest rates for the direction, or do we trend more towards, a down number, a five to 10% decrease, or do we tend more to a three to 5% increase?
[00:31:37] It’s largely gonna come down to interest rates because of the affordability equation that we’re discussing today.
[00:31:42] Jeb Smith, Huntington Beach Real Estate Broker: Yeah. Good stuff. And so if you’re thinking of buying again, It’s a time to just kind of analyze your situation. Do you have job stability in a recessionary environment? Do you have money in the bank or are you comfortable with the payment? And more importantly, do you have that longer term time horizon?
[00:31:58] Not because we believe the market is crashing, but because there’s a good chance that you see some sideways movement in the market and you just need to be in a position where you’re comfortable holding onto that property long term.
[00:32:09] So hopefully today we provided a little bit of information with regards to housing affordability, how it works, how it affects your situation, and what you’re likely to see in the future.
[00:32:18] So for now, we appreciate you listening, we appreciate all your support. Until then, adios.
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