Real Estate Real Fast Cover Episode 7

Everything you need to know about current rates and loan products (with Justin Hrabovsky, top 1% mortgage lender) – Real Estate Real Fast EP7

Episode overview

Many buyers are exiting the market because of higher rates. But is that the right decision in the current market?

Despite rising rates, there are a lot of advantages that are coming into the market for buyers. Sellers are also willing to offer concessions.

So if you’re a buyer, how do you buy in the current market? What mortgage options should you be looking out for? What can you expect in the market in 2023?

We’ll dive into everything you need to know about current rates and loan products, with Justin Hrabovsky, top 1% mortgage lender.

Episode highlights

  • What can historic mortgage rates teach us about expectations for current rates
  • What buyers can expect from mortgage rates based on the changing market
  • What are other mortgage options buyers can choose to make their payments more affordable
  • Here are different concessions sellers can offer to make their listing more competitive
  • Why it’s still a good time to buy a home even as mortgage rates peak
  • What are the numbers saying about the short-term future of the housing market
  • How to look at the real estate market heading into 2023
  • What advantages and leverage do buyers have in the current housing market
  • Why the 2008 housing crisis is different than what’s going on in the market today

Episode links:

Key takeaways

[00:03:06] What can historic mortgage rates teach us about expectations for current rates

Although rates may seem high, the truth is that they are pretty average over the last 40 years. The market shortly after the pandemic started was abnormal for rates. We might not see rates that low again for a long time but the market is shifting back to buyers.

“Here in central Texas, you know, we’ve been blessed for a significant amount of rapid appreciation the last several years. In combination with that, we kind of had an artificially, Fed induced and pandemic induced, historically low mortgage rate environment.

That really increased affordability, but that also helped drive prices and demand up. And so now we’re kind of actually getting back into a more normalized market. You know, the average 30 year amortized mortgage rate in the last 40 years is actually 7.7. So anybody that’s kind of experienced the landscape in the last several years, 5, 8, 10 years, et cetera, is really experiencing an abnormal market when it comes to the mortgage rate environment.”

[00:06:36] What buyers can expect from mortgage rates based on the changing market

If the Fed continues to increase the rate, expect rates to keep rising. Justin says we might not see rates like we did before in our lifetime again. As mentioned before though, if you look at the 40 year average for rates, today’s rates are pretty competitive.

“We’re still below the last 40 year average. So we are below 7.7% on average on a 30 amortized loan, but we are about double then, you know, the pandemic lows that we, we kind of seen the rates in the twos and threes.

I don’t know if we’ll personally ever see this in our lifetime again. Since March, we have had the most aggressive federal funds rate height in history as a percentage year over year. Fed funds rates are not directly correlated to mortgage rates but they do ultimately follow trends of where interest rates are gonna move.”

[00:07:47] What are other mortgage options buyers can choose to make their payments more affordable

Fixed rate mortgages aren’t the only option available to buyers. There has been a slight uptick in adjustable rate mortgages (ARMs) as rates continue to climb. ARMs got a bad reputation during the last housing crisis but there are a lot more standards and guidelines that help to ensure consumers can pay back their mortgage. 

If you don’t want to do an ARM, a rate buy down is also a good alternative.

“This market does bring opportunities for other mortgage solutions to get through this period of a higher interest rate environment with the expectation of a lower rate environment at some point in the near future—adjustable rate mortgages. 

I know they had a negative connotation post housing crisis. Most of that connotation was because consumers were taken advantage of. Pre-2008, there were less qualifications to obtain those mortgages. So there’s been a complete overhaul in the mortgage industry when it comes to standards and guidelines to ultimately be a little bit more conservative.”

[00:12:07] Here are different concessions sellers can offer to make their listing more competitive

Sellers are having to make more concessions as the market shifts back to buyers. A few things sellers can offer to help make their listing more competitive: permanent rate buydowns, temporary rate buydowns, or covering costs to closing. Temporary buydowns can be the biggest win-win but any concessions, if offered, can make a listing more competitive.

“When it comes to a seller incentivizing their property to take advantage to make a deal work, there’s a few ways to do this—there’s price negotiation, there’s seller concession where seller concession can go towards closing costs to reduce the cost for the buyer. Or you can use seller concessions towards a permanent rate buy down. That is money lost, by the way, if a buyer ever refinances. What’s most common we’re having success with right now is a temporary buydown.”

[00:21:43] Why it’s still a good time to buy a home even as mortgage rates peak

Even though rates are increasing, buyers are receiving a lot more advantages as the market shifts. Because demand is slower, buyers now have more leverage on price negotiation, avoiding multiple offer situations, being able to put less down, and also not having to waive appraisals.

“You have a lot of negotiation to take advantage of right now comparatively because you have less competition out there. You’re not having to pay all cash for a property. You get to leverage. Maybe put less down.

Lower down payments can get accepted. No problem. Contingency contracts. You have a house to sell or maybe you have to get a lease on your existing home if you don’t plan to sell that home to buy another property. Those are becoming more commonplace. The ability to not have to wave appraisals.

Those are all positive aspects as a buyer right now to take advantage of the current market.”

[00:25:14] What are the numbers saying about the short-term future of the housing market

The market is down right now but it won’t stay that way forever. There are a lot of younger buyers expected to be looking for homes in the next few years.Additionally, rates are expected to drop at the end of next year. With that, the housing market could bounce back quickly.

“There’s really a national severe problem of undersupply of housing in the US that we have. Some demographic forced demand is coming too. The typical buyer being a 34 year old millennial buyer, is the number one buyer right now.

And look at population growth of the current 33, 32 and 31 year olds that will become the largest buying profile and years to come. The fundamentals of home ownership haven’t changed. It creates a great opportunity to purchase.”

[00:29:16] How to look at the real estate market heading into 2023

There’s no hard and fast rule when it comes to timing a home purchase to the market conditions. Justin shows that even during a recession, median home prices can go up. The comparison to look at is with a 401k. Most don’t just invest when a market goes down, they invest over time to build compounding returns.

“Even during economic recessions, home prices continue to go up. If you’re sitting on the sidelines thinking about buying a home or not purchasing a home, you know there’s gonna be a lot of opportunity missed.

Use this example right now with an employer retirement plan. How do you invest in that retirement plan? Do you just try to wait until the market goes down?

No, you stay methodical. You invest in the long run. And ultimately that plans for retirement. Same thing with real estate.”

[00:32:02] What advantages and leverage do buyers have in the current housing market

Justin says now is a good time to take advantage of the leverage you have as a buyer. With less demand, there is opportunity to negotiate prices, ask for seller concessions, etc. When rates finally go down, the competitiveness of the market may make it difficult to get in and you may end up paying a lot over list price.

“Once we start to get some good news and we start to see rates start to fall, and we start to see a little bit of inventory out there and we start to see headlines that are looking a little bit rosier and we start to get consumer confidence starts to go up.

There’s so much pent up demand that it could easily see you winding up in the same spot. If you wait too long, you’re in multiple offer situations. Again, you’re in a spot where it’s getting a little bit harder. So right now I’m looking at it like, you know, we have a lot of homes out there that are sitting on the market because we have buyers that are just waiting on those rates to fall or waiting on good news.”

[00:33:50] Why the 2008 housing crisis is different than what’s going on in the market today

During the last housing crisis, supply was at the right balance at 6-9 months of inventory. Today’s market is well below that supply level. Because of that, there is a great opportunity to build equity on a purchase today. Looking back, everyone that held onto property through the last recession and shortly after ended up seeing good returns on their property.

“Right now is an amazing time for a buyer to go find a smoking deal, educate yourself on some really good loan products that are out there to get you where you want it and need to be right now when it comes to your monthly payment and your household expenses, and then look for your opportunity when rates do fall into the low to mid fives, to refinance and put yourself in a better position long term.”

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