Market Update Feb 20, 2024: Rates, Mico-Homes, NAR out of Insurance & Realtor Commission Changes

Mike Mills (00:00:08) - Hello and welcome to the Texas Real Estate and Finance Podcast, your weekly dose of all things real estate and finance right here in the Lone Star State. And I'm your host, Mike Mills, a seasoned mortgage banker with Geneva Financial and your guide through the ever evolving landscape of our market. So in today's episode of the market Update, we're covering the week of February the 20th, and we have got a packed list of items to cover today. So let's get right to it. First, we're going to dive into the recent surge in mortgage rates hitting their highest level this year. What does that mean for buyers and affordability. Next we'll explore some surprising market trends, including the rise of micro homes in San Antonio, Texas. We're also going to tackle the topic of inflation. Is the economy still booming or are we facing a slowdown? Plus, I'm going to have a little discussion on how real estate investors are impacting entry level home markets. And finally, we have an update in the National Association of Realtors and how they ran out of insurance funds.

Mike Mills (00:00:58) - What kind of implications might this have for you and your business now? As always, if you could do an old bald guy a favor and hit that like and subscribe button, it goes a long way to helping us build our audience and grow our network of listeners. I appreciate each and every one of you, and the more people we can bring into the community, the better. And if you want extra credit, shoot me a comment or drop me a review. I'd love to hear what you guys think. As always, let's get into our first topic, which is everybody's favorite mortgage interest rates. Mortgage rates hit the highest level of the year last Friday. So what does that mean for buyers and their affordability? So according to Mortgage News Daily, last week, the average 30 year fixed rate mortgage hit 7.14%. That's the highest level that we've seen so far in 2024. And this is up from around 6.75% that we saw in January earlier this year. So what's with the sudden jump. Look no further than CPI and PPI.

Mike Mills (00:01:44) - The Consumer Price Index report and the producer Price index report both came in higher and hotter than expected for the month of January, and this higher than expected number caused a massive sell off in the bond market and a flight to treasuries, causing mortgage rates to spike back up again. So good news and bad news on this. The good news is, if you're a real estate professional, is that much of this higher inflation is tied to lagging indicators that don't actually give a good representation of where real time inflation is. And the overall expectation is that these numbers are actually going to be lower in the coming months. But those lagging indicators just haven't quite caught up yet. Like, for example, the cost of housing that's built into these reports, which is heavily tied to rent, which lags in real time because of the way new leasing contracts are signed up for and renewed. The bad news is that even when rates do start to settle in, which is likely more and more homebuyers are going to be getting into the market this summer, especially compared to last year, which sounds great, except that we still don't have enough homes for sale.

Mike Mills (00:02:37) - And recently builders have started to pull back on their construction permits because many expect the economy to experience some sort of downturn this year. So we have inflation showing the economy is hot and the stock market is hitting all time highs. Heck, even Bitcoin is getting close to eclipsing its high set back in 2021. But yet builders, CEOs and many market analysts don't see a situation in which the economy doesn't pull back in the coming months, which, if they're right, would lead to rates continuing their downward trend and maybe even at a greater pace. Only time will tell. But for now, they're higher than we've seen all year. But the data in the coming months may start to bring them down. And when they do, as you know, home prices are going to go up, Mark my words. But where do you think rates are headed? Let me know in the comments. Now for some good news. There is affordable housing coming to the market in 2024. Bad news is is it might not be what you expect.

Mike Mills (00:03:26) - So The New York Times and Lance Lambert of Ritzy Club recently reported on a neighborhood in San Antonio, Texas, where the average price of a starter home was around $159,000. Sounds amazing, right? Well, when you read the fine print, it tells a little bit different story. You see, these homes are one bedroom, two bath and 661ft². Give you a little context, a two car garage is about 580ft², so these homes are just slightly bigger than your average two car garage. So the price is nice. But that whole shrinkflation is really a killer here. Kind of like how when you open up a brand new bag of chips and it's only half full. You see, builders are starting to create products that are under $200,000 in price. But if you have more than a bed, a couch, and a small table to eat on, you're going to be running out of room really quickly. So it is an affordable option, albeit not a great affordable option. Now, just to be clear, there isn't a flood of these homes coming to the market.

Mike Mills (00:04:18) - Builders have to test them out in certain markets to see if buyers really have an appetite for this type of property. But again, companies are out there trying to figure out how to help solve this affordability crisis that we're going through right now. And this is just one example of a solution that may or may not be effective. See, builders are trying to adjust for size in order to bring the price of these homes down to a more affordable level. In fact, 2023 marked the ninth year in a row that new single family homes have gotten smaller on average across the board. And that trend is expected to continue, especially in more urban areas. But the bottom line on all this is that as long as rates stay high and prices stay high, less and less people can afford to buy. As a matter of fact, if rates were back to the. 3% range, there would be more than 50 million people in this country that could afford a $400,000 house. But at the 7% interest rates today, only 27 million can afford that exact same home.

Mike Mills (00:05:10) - So that's 23 million people that just can't get into a house that size unless rates change. Something has to give eventually. And right now, lower rates seem the most likely variable that's going to change sometime in the near future because until we get more inventory, be it sellers or builders, these prices are here to stay and they're only going to go up. So let me ask you, would you live in a 600 square foot house at that price point? Let me know. All right. Breaking news. Inflation is on the rise again. So the economy is still booming, right? Well, you tell me, are you doing better today than you were in 2021 financially speaking? So earlier this month, CPI inflation reported to have risen 0.3% over the previous month and 3.1% more than this same time last year. That's a 0.1% higher than analysts had predicted. It doesn't seem like much, but this rise in inflation caused mortgage rates to spike up, and the stock market to tick down. You see the market reacted negatively because higher inflation numbers would indicate that it would be less likely for the fed to start cutting rates in March, as many had expected and predicted.

Mike Mills (00:06:10) - In fact, the likelihood that the fed will begin to cut rates in March is now next to zero. And when you compare that to the end of 2023, when the market expected at a 90% certainty that the fed would start to cut rates this March, it basically just means that we don't know anything until we know it, regardless of what any of the pundits say. Now, rent and owner's equivalent rent increased by 0.4% and 0.6%, respectively, being one of the biggest culprits in the higher than expected figures and increases in insurance and medical expenses also played a big role in this uptick. While decreases in used cars in apparel help to offset some of the other categories. But most economists are predicting a bumpy path ahead, with potential rate cuts being delayed until at the earliest June of this year. And locally in Dallas-Fort worth, the inflation rate was actually 5.3%, more than the national average. Because rent prices remain high, with a 6.8% increase from the previous year impacting the overall consumer price index. In fact, Dallas Fort Worth led 23 major metropolitan areas in inflation, with only Miami having a slightly higher rate.

Mike Mills (00:07:12) - And remember, inflation is the rate at which prices are increasing. So when that number starts to decline, it doesn't mean that prices are declining. It just means that the rate they're going up is declining. Prices have not come down from where they were back in 2020. So overall, it just means that things keep getting more and more expensive. And overall American consumer debt is going right up along with these prices. But there are indicators that are showing that we might have just gone through and experienced the height of spending and the economy as a whole, because lots of retailers out there are starting to show signs of declining spending after the holiday season, meaning that we could be headed towards a less rosy outlook of the economy in 2024. But as always, a bad economy typically means lower mortgage interest rates and lower rates typically means more people willing to buy and sell. The only thing we don't know is if the economy goes south. How much will that impact people's ability? Ability to buy and sell? But right now, there's nothing for certain.

Mike Mills (00:08:03) - These days, all we can do is pay attention, watch and plan our business around it. So I'm curious, are you rooting for a recession? Give me a message and tell me what your prediction is. Home prices and rates are high, but there is still one class of buyer gobbling up properties like the Cookie Monster at a Girl Scout convention. See, Housing Wire reported last week that real estate investors snagged up more entry level homes than ever, according to a Redfin study. In fact, real estate investors bought up 26.1% of the lowest priced homes in the US in the fourth quarter of last year. That's the highest share ever recorded. This was an increase from 24% in the same quarter of the previous year. You see, this shift towards affordable homes is similar to consumer home buyers due to high mortgage rates and high home prices. Now, Redfin categorizes home sales into three price tiers low, mid and high. Low priced homes made up 46.5% of investor purchases in Q4 of 2023, just slightly down year over year.

Mike Mills (00:08:53) - Now. High rates and high prices have certainly slowed overall demand for housing in 2023. In fact, total US home purchases fell by 12.2% from the previous year. But investors, still more than any other class of buyers, see, real estate is a great investment, but the guys that are out there making their living on real estate are still buying homes at a high rate and more than the average home buyer. What does that tell you about the future of real estate? It might still be in a pause or somewhat of a plateau on the price of homes right now that you have to pay, but it's not going to stay there for long. See, investors are taking this time when there is a pause and demand to snatch up everything that they can. Because when other people are buying, you sell and when other people are selling, you buy. That's the general mantra for almost every successful investor out there. And as an industry, we definitely get this. And I think we drive this point home to our consumers.

Mike Mills (00:09:41) - But it cannot be said enough. The big money interests out there are going to continue to buy homes. Whether you personally think it's a smart move or not, and the corporate media that all these big institutions own are going to continue to encourage you to rent and live that free wheeling lifestyle. Meanwhile, in the background, they're buying up all the homes while you're living out of your van. Look, buying a home is. It for everybody. But if you want to put yourself in the best position to not have to work for the rest of your life. Sure seems like a good place to start to buy land because they're not making any more of it. Okay, alarm bells are going off in the real estate industry right now. Why, you may ask? Well, the National Association of Realtors just ran dry on insurance funds, and you might be the one who starts feeling the pain. You see, housing wise reported last week that the National Association of Realtors has reportedly run out of live liability insurance funds.

Mike Mills (00:10:24) - Industry analyst Rob Haines highlighted the issue in his email newsletter notorious Rob. Now Nar offers two insurance types to associations in MLS professional liability insurance and patent infringement insurance. The liability insurance provided by Chubb has a 1 million limit per policy in a 10 million aggregate limit. Chubb they couldn't come up with a better name than that. So NAS insurance funds, including excess coverages, are depleted. NAS professional liability insurance was extended through June 30th of 2024, but has not been renewed. And Chubb is not offering new excess coverage policies going forward. Now, larger MLS and realtor associations with their own independent liability insurance are going to be less impacted, but smaller associations without such coverage are going to face significant challenges. If this doesn't resolve itself, because these smaller associations previously relied on NAS insurance for legal defense costs, and the inability to afford legal defense could force associations to settle lawsuits or consider bankruptcy. And with all the copycat commission lawsuits flying around out there, this issue is going to be exacerbated. The exact date when NAS insurance coverage actually runs out is still kind of unclear.

Mike Mills (00:11:31) - But when Housing Wire, who wrote the article, reached out to NAS, they chose not to respond. So lawsuits are being filed, MLS's are being sued, and NAS just ran out of cash to help. It's not exactly an ideal situation if you're a local agent hoping your business doesn't get impacted by all these possible changes. Now, this doesn't mean anything is imminent. As far as any changes to how real estate is currently being transacted. But what it is is another wrench thrown into the mix that causes the future of how real estate commissions are being paid out to be in doubt. And unfortunately, only time is going to answer these questions. But the biggest advocate for your business as a realtor just ran out of money to fight the fight. So you tell me what you think that means. So that brings us to our main topic today. The real question on every agent's mind, at least those that are actually paying attention to all this. Are we witnessing the end of seller paid buyer agent commissions? Well, the Department of Justice latest move might shock.

Mike Mills (00:12:25) - So last week, the DOJ shocked the real estate industry by recommending against approving the MLS Property Information Network settlement. In the nostalgic commission lawsuit filed against MLS pin, Keller Williams, Remax Anywhere and HomeServices of America for artificially inflating real estate commissions. You see, at this point, most brokerage defendants have reached settlement agreement, but the Department of Justice felt it was time to intervene and express significant concerns about the settlement. So MLS pen proposed amending its compensation rule from requiring a minimum offer of $0.01 to $0, which the Department of Justice claims doesn't address the underlying issue of seller and listing brokers influencing buyer broker compensation. The Department of Justice argues that these practices led to a lack of competition in broker compensation, and can result in steering, where buyer brokers favor properties with higher commissions. The Department of Justice also suggested that prohibiting sellers from making commission offers to buyer brokers would promote competition and innovation in broker services, and buyers would directly negotiate compensation with their brokers. So what does this all mean? Well, right now it doesn't mean anything.

Mike Mills (00:13:35) - Yet. The judge can still approve the settlement that was offered, even with the DOJ acknowledging its displeasure with the outcome. But what's impactful here is this is the first time that the DOJ has made a public statement about its explicit desire to see sellers no longer be required to pay buyer agent commission. They're basically saying that the buyers need to compensate their own agents, and the sellers need to compensate their agents. So let's break this down just a little bit. Now, on one hand, you could argue that sellers should only have to pay their agent in. A buyer should only pay their agent. That only seems fair, right? But you gotta understand what the true intent of this system that was put in place decades ago has always been. You see, a seller helps a buyer by paying for their representation in the transaction. This allows for a buyer who often has limited funds, limited experience in the transaction, and limited options on how they could finance their representations. Compensation. But once they are able to get a home in this way, then they're basically paying it forward to the next buyer, because when they go to sell the house that they bought and didn't have to pay commissions as the seller, they'll then pay for the buyer on their home and so on and so on and so on.

Mike Mills (00:14:42) - Because in this situation, the seller is typically sitting on equity. And this equity has been the tool to help compensate the agents to facilitate the transaction. Now I'm not going to argue how much it should be 6%, 5% flat fees hourly. That's not the argument because that number has always been. That hasn't changed. And oh, by the way, it always will be negotiable. Now, there have been customary amounts to pay, like it's customary these days to tip a waiter 20% if they do a good job serving you your food in a restaurant and that manner, it's always been customary to pay 3% of the transaction to the buyer's agent and 3% to the seller's agent. But again, sellers have always been able to negotiate. For instance, in a seller's market, maybe they don't pay as much to the listing agent at a full 3%, because the houses are moving fast and don't require as much effort to sell the property. But on the other hand, in a buyer's market, the sellers may be willing to pay the full boat.

Mike Mills (00:15:30) - Get that full 6% out there just to get the house sold, because buyers can be choosy when there's more inventory available for sale. But in this case, the Department of Justice just signaled to the world that they want all that to change. And today, I'm not going to get into what it would mean for buyers and sellers, because in many ways, I think it's going to be bad for both. Buyers won't have the same level of representation. Sellers and their agents may be required to do more in the transaction, and therefore maybe the cost goes up to sellers. I don't know how all this shakes out, and nobody does, but today I want to talk about what it means for you as an agent, because right now it's mostly business as usual. But if the Department of Justice decides at some point to make this a mandate, and it looks increasingly like that's going to be the case at some point in the near future, then the real estate industry as a whole is going to be turned upside down really quickly, because right now, more than ever, buyers are struggling to find affordable options when it comes to owning real estate.

Mike Mills (00:16:22) - And as a mortgage lender, I come across people every day that can afford to make the payment on the house they'd like as far as their income is concerned, even though the price is extremely high and a lot of them have good enough credit to qualify as well. But one of the biggest hurdles I often find is the cash needed for the down payment and the closing cost, because unless they have a nicely funded retirement account, a generous family member to help out, or they use an even higher rate down payment assistance program that have early refinance penalties, then they don't have much cash to pay for the ever increasing costs when it comes to buying a home. And now the Department of Justice is telling them that they'll need to pay their agent as well. And just to give you an idea on a $350,000 house with minimum down, save 3.5%, which is $12,250 closing costs of, say, around $12,000 with taxes, insurance, title appraisal, lender fees, etc. and now add on top of that a 3% and buyer commissions.

Mike Mills (00:17:15) - Well, you're well on your way to needing $35,000 in cash to get into a $350,000 home. And at this point in time, the average American at 30 years old only has about 20,000 in savings. And oh, by the way, that's average. The median, which is the middle that doesn't include the ultra wealthy and ultra poor, is only about 5400. So that means the average American only has about $5,400 in savings right now in their third. So how is a buyer going to pay their agent? Because right now, unless there's changes made, they can't finance it. Now, the seller could offer to pay some of their closing costs, but there's a cap for that. For a conventional loan with a minimum down payment, the seller can only pay 3% of the total purchase price towards the buyer's costs. So that doesn't save the money. It just pays for the agent or some portion of that. But just like all things, often when the market sees a need, businesses will come along and fill it.

Mike Mills (00:18:04) - So if buyers can't pay large fees to buyer agents to represent them, then who or what steps in to fill that gap? I don't know yet, but my money's on the Zillow's Redfin's or homes.com of the world stepping in to offer a buyer a rep fee. That's a flat fee, or an hourly fee, or some fill in the blank transaction. They go online and compete every day, but in that case, it's just a race to the bottom when it comes to service and buyer representation. And if that happens, then every good realtor out there goes to the listing side of the table, and all buyers are left with is some version of legalzoom for buyers representation. And that's not good for the industry at all. So what do you do if you're a buyer agent right now? Well, nothing yet, but questions will start to come and listings are already lowering significantly the buyer agent commissions in many competitive markets. And honestly, if I was a realtor, I'd focus my attention on sellers or try to come up with some cheap, creative way to represent as many buyers as you can.

Mike Mills (00:18:56) - If these new rules come into play at some point, maybe you're an incredible innovator out there and you come up with the Teladoc version of real estate buyer's agents helping clients one at a time over zoom. Look, I don't have any answers yet, but what I do know is the tea leaves are pointing to the fact that change is coming, whether you like it or not. So if I'm you, I plan, I prepare, and I make changes to your business where they're needed. Because if you don't, you're just going to get left behind. Well, that's all for today, guys. I appreciate everyone that stuck around with me till the end. Our industry is changing. There's a lot happening right now, so I encourage you to tune in each week because changes are happening rapidly and you have to be informed so you can be on the forefront of telling your clients and letting them know what's going to impact their ability to buy or sell homes, and what's going to impact your future in real estate.

Mike Mills (00:19:40) - None of this means good or bad. It just means change. And in order to be prepared for change, you have to be informed. So I hope you keep coming back and tuning in each week, and I hope I keep providing content that keeps you in the loop. I'll be back on Thursday to talk about how big Tech is coming into your world and impacting your business, so don't forget to. Tune in on that one. In the meantime, I hope everybody has a great week. Just like always, be great humans and keep grinding because life is what you make it. So make it great. See you next week.