What does “normal” mean to you? What does “normal” mean to you in real estate, or specifically, with mortgage rates?
Whatever your answers are, they probably don’t align exactly with your neighbors, or your friends, colleagues or even family.
To some degree, particularly in economics, real estate, and mortgage interest rates, normal is relative. Normal is also generally shifting and evolving.
A generation ago, it was normal for people to die in their 60s. That’s why social security started at 62. Most people didn’t live that long after beginning to receive their benefits. Thousands of years ago, the elders were in their 40s.
A generation ago, in 1950, the median household income in the US was $3300. PER YEAR (US Census Bureau). Normal is often defined by the times.
Heck in the time I’ve been in the mortgage business, 20 years and counting now, we’ve had three periods during which 30yr fixed rates in the 3%s seemed normal. During the most recent of those, from roughly March of 2020 through March of 2022, 30 yr fixed mortgage rates below 3% seemed normal.
On the other end of the spectrum, during that same 20yr span, we’ve seen rates bounce between 5.5% and 7% from 2003 through to the Great Recession into 2009. That subsequently ushered in a “new normal” of interest rates never rising above 5%. They hit that peak on two occasions, and made another solid run towards that ceiling once, but basically from 2009 all the way through March/April of 2022, 5% had nary been seen. It was unheard of.
So what now? Is 7% normal? Yes! At least for now. But there’s one thing that’s certain, what we think of as normal now, won’t be for too long. It may be months. It may be years, but it will change.
Meanwhile, the same fundamentals exist.
We’re a small mortgage brokerage with four highly experienced and knowledgeable loan officers, and we helped close over 15 purchases in August. That’s not bad!
One of those was a $248,000 home a first time buyer bought – he’s 33 – in Live Oak, CA. Is it a mansion? No. It’s a home, with 2 bedrooms, one bathroom, a thousand square feet, with a quarter acre lot. That meets his needs and budget.
Another was a recently divorced woman, buying her first house on her own, for $349,000 in Placerville. Again, a small home of 897sq ft, two bedroom, two bath, but with a gorgeous Consumnes River frontage.
On the other end of the spectrum, we had a family with two young girls get blown out of the water on a 2200 square foot home on the hill in Redwood City, with a peekaboo Bay view with $2.2million cash offer, apparently by an older couple who were buying it for the “potential future use” of their kids.
We had a refinance in Coeur D’Alene that just closed on a house appraised at $1,200,000, where the appraiser adjusted the subject property UP by $181,400 for time, from one of the closed comparable sales, because it closed in November of 2022. That’s basically a $20k/mo bump in price (or 15%) in nine months, because of the appreciating market dynamic there.
It’s all relative. And real estate is always local.
You buy a house for housing. You compare the benefits of ownership to renting, and let the math be your guide. If you’re an investor, you buy to either make money renting, or by fixing up and gaining appreciation. In either case, if the math works, it works.
And what about the stickiness of home prices we’re seeing now? It’s a supply and demand story. There’s still demand, with relatively limited supply. Is that normal? It sure seems like it, for now.
I’ve been wondering, since we first saw 3% mortgage rates circa 2012, if those rates would preclude people from wanting to move, even for jobs with more pay, better location/s closer to family, or other intangibles?
It took a while, but it seems that’s part of the issue now. According to Goldman Sachs, and Redfin there’s roughly 28% or 23% of homeowners, respectively, who have rates at or under 3%. If you look at those under 4%, they found that 72% and 62%, again respectively, were in those buckets.
We can quibble about the discrepancies in their studies, but no matter how you slice it, that’s a lot of people with mortgage rates that are way, way lower than current rates. So, no wonder they’re reticent to sell?
Additionally, those doggone baby boomers, who’re aging in place, aren’t helping either. They’re not freeing up the housing inventory that prior generations, who primarily died in their 60s, did, vs. this generation that’s living relatively healthfully through their 70s and in many cases their 80s.
Is that normal? It is now. Will people increasingly live healthfully into their 100s? Maybe.
And, of course there are the challenges with building new homes to meet the demand for housing. But, even if new home construction could ramp up quickly, the existing home market is roughly 4x to 5x that of the new home market, so it’s unrealistic to think that just building more homes can solve the supply/demand imbalance, as well.
So what’s going to break? Who knows?
What seems unlikely to happen any time soon, is to see a flood of inventory on the market. Baby Boomers are unlikely to face a mass extinction. And, even the institutional investors (like Blackrock, Goldman Sachs, etc.) who bought tens of thousands of homes out of foreclosure during the Great Recession aren’t going to release their inventory en masse. If they don’t just hold them for the cash flow, as they sell them, they’ll do so strategically, to maximize their own sales prices.
So what about interest rates dropping?
Some people theorize that if (or when) interest rates dip again, that will shift peoples’ realities, and they may be more willing to put their home on the market, take their equity, and roll that into a new home, freeing up some inventory on one side of the equation. Leaving a 2%, 3% or even 4% rate may not look that bad if you’re going into 4%, or 5%. But, if they’re buying, that’s more demand, as well, so that’s potentially a wash on the supply and demand curve.
Additionally, as rates dip, the theory goes, prospective buyers who’ve been sitting on the sidelines hoping financing becomes more attractive, will jump into the market, further spurring demand, with already relatively limited supply.
This could lead to another leg up in home prices. Some people, like real estate tycoon Barbara Corcoran, think that could generate another 10% to 15% surge in home prices.
So, what’s the solution?
First, there is no one size fits all. Everything is relative and is generally, when it comes to buying a home, pretty subjective.
If the math works for you, it works for you. And, if rates subsequently drop to where you can cost-effectively refinance? Perfect. You can refinance and either pay the difference towards principal, shortening your payoff term, or put the money in your pocket, or a combination of both.
If rates don’t dip again? You got into your home with a payment you can afford. In general, over the long run, homeownership has been a key driver in building personal net worth relative to renting.
Is that normal, or will it be different going forward? One thing I’m pretty sure about is that what we think is normal now, probably won’t be for that long.
Time will tell.
In the meantime, here’s your snapshot of where rates ended this week. Call or email if you, your family or friends have any questions or would like to discuss refinancing, or buying a home. Or the mundane aspects of loan level pricing adjustments. Cheers!
|30 yr fixed mortgage||6.750%||0||6.800%||$ 300,000.00||$ 1,946|
|15 yr fixed mortgage||6.375%||0.125||6.425%||$ 300,000.00||$ 2,593|
|5/6 ARM||6.000%||3.75||6.250%||$ 300,000.00||$ 1,799|
|7/6 ARM||6.000%||4.375||6.325%||$ 300,000.00||$ 1,799|
|Jumbo (ask me about Super Conforming limit, per your zip code)|
|30 yr fixed mortgage||7.500%||0||7.530%||$1,000,000.00||$ 6,992|
|15 yr fixed mortgage||7.500%||1.5||7.670%||$1,000,000.00||$ 9,270|
|5/6 ARM||8.000%||4||8.390%||$1,000,000.00||$ 7,338|
|10/6 ARM||8.000%||4||8.590%||$1,000,000.00||$ 7,338|
|Rates subject to change without notice.|
|Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics (780+ fico, owner occupied SFR with 75% loan to value ratio or less and $200,000+ loan amount), your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. NMLS: 239756. Equal Opportunity Housing Lender. If you’d like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:firstname.lastname@example.org and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.|
EZ Mortgages, Inc.
4535 Missouri Flat Rd. Ste. 2E
Placerville, CA 95667