PODCAST EPISODE 252: Mortgage Rates are Not What They Seem

 

WHAT WAS COVERED

      • 00:00 – Episode begins Paul welcomes listeners.
      • 02:25 – Article Breakdown: That Benchmark Mortgage Rate Typically Isn’t Offered
      • 10:40 – Article Breakdown: Mortgage rates causing ‘lock-in effect,’ limiting nation’s housing supply
      • 13:50 – Why would some one move mortgages right now.
      • 19:25 – closing thoughts.
      • 19:50 – Episode ends, thank you for listening.

 

 

LINKS

Article: That Benchmark Mortgage Rate Typically Isn’t Offered (WSJ)

Article: Mortgage rates causing ‘lock-in effect,’ limiting nation’s housing supply (TND)

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Full Episode Transcription


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0:05

Hello, and welcome to your business, your wealth. My name is Paul Adams, I am co founder.


0:11

And


0:13

I must say, friends of a man, who will mortgage rates go up. The only thing that happens to Cory is his rate at which he comes up with good ideas for the podcast also go up. Glad to be here with me, Cory.


0:31

Man if I, if I was, I mean, I was talking in the in the 80s. But, you know, if I had had some education, back then fully grown, that was my time, however, we’re back to 12% rates. Oh, don’t, don’t even say it. Oh, I remember that. I remember being a kid driving past the bank. And the CD rates were on, you know, the high end, little lightning signs like when those were coming out. They were like, show the temperature and then it would switch to CD rates, and temperature and CD rates and a cold day in Colorado, it would be like 6.6 degrees, and then it would be like 6.6 percentage.


1:16

Well, I’m kind of psyched about our kind of two articles we’re going to talk about today and also talk about just some general knowledge stuff around real estate because there’s some unique things happening in the real estate market right now. We’ve got increasing interest rates, making homes slightly less affordable, while simultaneously having had record breaking money printing by our government. We also have inflation that is pushing up home values and it’s like in this fight with intersects. Exactly why pals doing it COVID causing people to not move in homebuilders ramping down production over the last two years. Like


2:02

it’s a it’s quite the confluence. Indeed. And I say I hear Quinn in the background Corey. So if Quinn comes to the room, just put her on camera. We won’t even break stride. We’re gonna have we’re gonna have a baby today on the podcast.


2:18

We really won’t she’s she’s locked on locked away.


2:23

It’s better that way. I love her. But she’s disruptive. Alright, well, well, let’s hit our first fun article. And this one, y’all is out of the Wall Street Journal, by Jace, Josh ZM. John, a boy, you gotta really enunciate that. Well, Holy mackerel, some brother. So I just need to point out something curious that I noticed right away. Right above the name of the author is a video with a caption.


2:58

And the videos title is should you rent or buy a home? This one down here and the captioning? Oh, for me, it shows up right above the author’s name. That’s really funny. That is, that is exact. Like, here’s the thing.


3:12

Okay, back to just Korean i because this is the thing that if I don’t want to be the guy that’s mad every time I do this, but I’m angry you kind of do you know, I, I don’t, I didn’t say I wasn’t that guy. I’m saying I don’t want to be this guy. That literally just between Cory and I, a website is that’s to give us news to help us make dependable decisions for the rest of our life is a B testing how well we will interact with their other content. And I respect the game. But it is just one more example of the degree to which you have to be a discerning reader to take this knowledge and authority double publications like The Wall Street Journal, like they’re not even trying to trick us. Imagine the the ones that are they’re just making money. They’re just making money, which they they have to the models changing. People aren’t buying the paper in the same way. So they mean, we wouldn’t be reading this article without it. But here’s what’s crazy. So the caption says economists have long said that renting and investing in the stock market is a better investment than owning a house and in 22, that could be especially true. Now, what I what I didn’t realize at first is that it’s it’s nothing related to the article that we’re actually reading. It’s an entirely different piece of content. That video is standalone, but it feels like it’s a lead in because that’s what newspaper was the picture right there the caption and it leads into that. That article. So that’s issue number one, issue number two, took me a second to realize there’s no I mean, actually, I guess the video could be giving some reference to those economists so we haven’t watched the video but


5:00

Just reading that caption, there’s no referencing, like which economists, which economist said, you know, that’s


5:08

many, many people say, Cory, that you’re difficult to work with many, many, many people.


5:15

And then, and then I have to fight that. Right? And I haven’t even answered it. That’s the way you do it. So anyway. And of course, he said that, to me, many people find you difficult to work with I would go Yeah, I know. I know. So this.


5:31

So here is the, we’re gonna give you the premise of this article. There is an index that’s often used and talked about in the news. And it’s the Freddie Mac Index, and the Freddie Mac index gets surveyed TWICE, TWICE, by my my voice self muted twice a week. And in those times that they do their assessment is not the same as the mortgage rates that are available that week, because there’s over a week delay, and


6:03

that used to be fine in the 1970s, when mortgage rates on average went slightly above or below 7.29%. That worked. But today, and I’m gonna give you guys an example from earlier this week, but let me go down so everybody can see this graph. Cory, this one here. Oh, yeah. So this is the mortgage News Daily, actual 30 year rates from surveys of rate locks that are occurring in real time.


6:28

And then this, like very boxy line, and you can see why it doesn’t get updated as often is why it’s boxy. But that is what Freddie Mac’s is. And it trails all the way through an increasing interest rate environment. It’s nearly always lower than what folks were actually getting that, right. That’s exactly right. And earlier this week, I was talking to a client who’s moving across country. So you know, they’re not moving for speculative reasons or anything like that. But they’re a little concerned because the house is getting built, and they’re moving across country, etc. And after that fed increase, because remember, while mortgage rates are very close to the 10 year Treasury, and overall interest rates influence mortgage rates, they’re not like directly causative. And so Powell made that announcement of a three quarter point increase the other day, then I’m in the meeting with the client. And when I’m in the meeting with the client, we just googled what are 30 year fixed mortgages today, from like, bankrate.com, so pretty up to date as of today, what somebody could look at, and it was seven and a half.


7:42

And then after the jitteriness in the mortgage companies settled down a little, it’s back to like, 6.3. At the recording of this podcast. The the thing that can lead people astray is if all you’re counting on is what the news said, or all you’re counting on is this Freddie Mac Index, you might make a decision to make an offer on a house, not realizing that you don’t have a loan rate that is commensurate with the kind of payment you want to make on the house.


8:12

You know, it’s and it’s also kind of like, what you can experience if like life insurance, if you see watch daytime TV, which it’s been a while since I have it. I remember, you know, like was Dallas, your thing


8:26

was General Hospital your wife’s a doctor, I could see why it was


8:32

It wasn’t no, no, it was the Bold and the Beautiful. I mean, that was my that was my jam. I know you won’t be surprised mine was Jerry Springer.


8:43

I have met him in person and he’s actually quite lovely man. It just really was.


8:49

You’d have to be I mean, he’s just get all the like, all the agitation out early in his career, he’s got to be the most easygoing guy ever after seeing that many people mad man, here’s what I mean is that the ads on in between captions and fights of Jerry are like, you know, 999 a month for $100,000 of coverage or whatever Well, it’s either you know, it’s only for the best possible health rating in the world never been say like it’s very rarely what anybody actually gets. Same with a Freddie Mac rate because there’s all kinds of other things that can change the equation like how much is the total amount of your loan because if you’re over conventional limits, which is different from not just state to state but county to county, then you go to a jumbo loan which is a whole other set of considerations and rates you can buy points to change to lower your your rate so whatever that was, you could pay it in st you can pay a lots and lots of money to lower it Weigh Down whether or not that is good or not depends on your whole situation. But you know, it’s just looking at the news.


10:00

has nothing to do with what you’re actually going to get to get it. You got if you ask someone this is my other favorite thing is that you’re comparing mortgage providers, and you ask someone for a quote on a rate and then you’re like, Okay, well, I should find someone else. And then like a week and a half later, you ask a second person, except the first person would have given you a totally different rate a weekend weekend to in this environment for sure.


10:27

When wait a day, yeah, like I mean, even when interest rates are way low, so like gather 3%. And they’ve been 3% for like, months and months and months. And now suddenly, six, seven and a half, etc. And that leads us to the next article we want to talk about that really ties into this real estate and mortgage conversation. And it’s this idea that mortgage rates are causing a lock, in effect, limiting the nation’s housing supply. So Cory, you want to take this one to start? Yeah. So basically, the real estate market is effed permanently by everything that’s happened over the last two years, and it’s not permanently but we have


11:14

interest rates on the rise. So folks are locked in those 4% 3% 2%. And two and a half percent mortgages, don’t want to lose that amazing rate. Home Builders are,


11:30

you know, are still have ramped down in their capacities have fewer new homes coming on the market, fewer people wanting to sell. So home prices are staying higher interest rates, going higher means that people trying to get new mortgages can’t afford as much house because they their cash flow just went up for the same mortgage because rates are going up. So it’s causing this kind of gridlock in the real estate market. Indeed. Now, while and there’s there’s some positive things are happening is of course, normalization and expectations for what people are going to get for home. You know, we, it was just a year ago, people said, Yeah, I’m listing my house for 995,000. And my realtor says, we’re gonna get bid up to 1.3, we heard that a lot. And it happened.


12:18

And now in 2022, people are saying, now we need to price it below the market to get the traffic. And then we hope you kind of get one or two bids up to just kind of get your market rates. But you’re not gonna get higher than market now. And that is causing this lock in that a to chorus point builders releasing less inventory.


12:43

Now part of that is also so today, it was in the news that lumber prices just came back to their pre COVID lows. Oh, really, I didn’t hear that. That’s curious. So now go back to when these housing starts were so six months ago, or nine months ago, where the house is being sold today, you would have had to order the lumber for. So of course they slow down.


13:07

Right, because their lumber prices were two or 3x, what they’re used to paying. And now as those have come back down, I think you’re gonna watch builders get back to work, they’re gonna have a little more freedom in the budget. And because the building cost will be lower, they’ll have more room on the downward side to change pricing. Like you’re starting to see builders offer incentives, again,


13:30

you know, pay points on mortgages, or whatever they need to do. So if you’re somebody considering going into a new community right now, it’s probably a really good idea. Just take a little bit of time, and just call the builder to Hey, Do this. Do any incentives for brand new people coming in? And is there anything I can do to be a part of those incentives? If you don’t ask, you’re definitely never gonna find out.


13:52

Now, here’s the other thing I think is important about this lock and feel that folks are getting, there is no law against you trading in your 4% mortgage that you got a couple of years ago for a 7% mortgage today. And they maybe came down a little bit from seven but they there’s no law stopping you from doing that wouldn’t be a good reason why somebody might consider that Corey, why would somebody dispatch have a 4% mortgage not even moving? Let’s say I’m gonna get rid of my 4% mortgage and go with today’s higher rates. So and I even had an example about moving to but let’s say without even moving, let’s say you had a whole bunch of credit card debt at a lot higher than 720. You could look at a cash out refinance, that would lower your total rate below what it was today. Now it may be higher mortgage and you had yesterday, but the total interest rate that you’re paying just got lower. That’s one thing that you could do now. I wouldn’t do that lightly and I would have a lot of planning going into that because folks who


15:00

don’t address the reason that the credit card debt got built in the first place are going to be right back in that position just a year or two later, sometimes in more debt than they were before. So you gotta have a plan to follow that through and actually make it a win, not just laying and balances around, I was gonna say, because your pay off, let’s and I think good examples, let’s say you tried to start a business or something else the business didn’t go as well, now you got a good paying job and all that. But you have the leftover credit card debt from the thing, that’s a good one. So that’s we got to clean that up, but it’s not going to repeat because then that business anymore sets.


15:35

Because of home prices going up really fast. last few years, folks, were taking out home equity lines at really low rates to help with different different things. And right now, you know, the last statement you might have gotten on your HELOC might have been four and a half or five. But with rates going up these last couple of weeks next time you get a statement, it might be six, it might be right. So those can be rising.


16:01

At in BC us that’s a big credit unit up here in the Pacific Northwest, I was looking yesterday. And even their published rate for their HELOC is 5.99. Now,


16:12

so they’re they’re creeping up. But the thing that I would love for everybody to leave with today is just the idea that each decision should not be made on a rule of thumb don’t refinance, because interest rates are higher, or don’t move and get a new house because interest rates are what they are.


16:34

It’s all comes down to your aims, what you want to accomplish for you and your family. And your own individual financial circumstances and having a guide that’s going to take you through that. Because the I think it’s so easy to just forget one thing.


16:52

You know, like, you did all your calculations, all that but just easy overlook, you forgot to put in the taxes and you’re in a state as a $14,000 tax bill on that property, that’ll trip you up.


17:04

That’s that’s the stuff that we want to make sure our clients are thinking about. Because getting a mortgage and a higher interest rate environment is just another financial tool that just matters how it integrates in your financial picture, it’s not a good tool, it’s not a bad tool, good or bad is only going to sort itself out as whether it gets you closer to your aims. So look, spending less on your house may not be part of your aims, right? Maybe there’s you can pay more for your house, knowing that some other parts of your life are going to be better off. And that may be a good part of the equation, you’re allowed to make that choice. But here’s another one, let’s say you have a big house at a 4% mortgage, and you’re like it’s time to downsize. So you trade mortgages, same mortgage size, you just move it all over to less equity in a smaller, smaller house, and you’re paying a 7% mortgage now. But you have lower property taxes, lower maintenance, lower just spending on everything in the house, and you got some free capital go do something with that’s not a bad equation either. So there’s lots of reasons why higher lower mortgage rates doesn’t really matter so much is what you’re out to accomplish. And one last fun thing we could do to tie this into financial markets, is I want y’all to imagine that let’s say the stock market was down year to date. Oh, you don’t have to imagine much.


18:31

But let’s say it goes down, you know, 20% they’re saying the Dow is now in bear territory.


18:40

So do you think it’s gonna go to zero? No, because trends don’t work that way. If it certainly if they drop our taxes, I’m not going to imagine they’re going to zero nor if they raise my taxes do I think they’re going to the moon, there’s like a reasonable assessment. So even if you get into a 7% mortgage now. And maybe the payments are a little bit more than what you wanted or 6% mortgage, they’re more than what you would ideally want. There will be a time in the future where refinances can occur and you will capture a tremendous amount of that cash flow on your balance sheet and keeping in mind that fixed rate mortgages are one of the only places where inflation is helpful. Your mortgage payment despite the fact that inflation made everything else expensive in the last year, it also diluted the cost of your existing mortgage because it didn’t change. Right. Anyway guys, we hope that this was useful to you guys that you got something cool out of today something you could take away or something or just settle your mind a little bit around this high interest rate environment weird real estate market that we’re in. And we hope as always, that this episode has been a contribution you being able to design and build a good life. We’ll see you guys next week.


 


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Podcast production and show notes by Greater North Productions LLC