Texas Housing Market Trends & The Benefits of Adjustable Rate Mortgages

(0:00) So, what does all this tell us? (0:02) Well, despite what you see in the media, (0:04) getting a good education, (0:05) finding someone that you love to share your life with, (0:07) and starting a family seem to be the best route (0:10) to wealth and prosperity at the very least. (0:12) And if you follow that path, (0:14) home ownership is very attainable. (0:15) It's certainly getting tougher and tougher each year, (0:17) but these things do move in cycles.

(0:19) Life gets hard, then it seems to get better. (0:20) And when you go through hard times, (0:22) it makes us all look at what we're doing (0:23) and try to find ways to do it better. (0:25) So, keep doing the right things and living the right way.

(0:27) And somehow, some way, things tend to just work out. (0:30) At least, that is what I believe. (0:32) What do you think? (0:40) What's up, all you relentless (0:41) real estate rock stars out there? (0:43) This is the Texas Real Estate Finance Podcast, (0:44) market update for the week of January the 30th.

(0:47) And I'm your host, Mike Mills, (0:48) a mortgage banker located right here (0:50) in the Lone Star State. (0:51) And each week, I come to you with news (0:52) about interest rates, the housing market, (0:54) and anything else that might expand (0:56) that real estate reality that we all experience (0:58) every single day. (0:59) However, when I'm not sharing my innermost thoughts (1:01) on the internet, I'm helping people all over the country (1:03) get into the home of their dreams, (1:04) whether it be new construction, rehab loans, (1:06) home equity lines of credit, bridge loans, (1:08) or just your standard FHA, VA, or conventional loans.

(1:12) My team and I are here to help make the process smooth (1:14) and simple for everyone involved. (1:16) And if you're one of our agent partners, (1:17) we make sure that that transaction leads to eight more. (1:21) Wanna know how we do it? (1:21) Give me a call and I'll let you know.

(1:23) All right, now, what is our lineup (1:24) stacked with for today's episode? (1:26) Well, mortgage rates are starting to come down, (1:29) slowly but surely. (1:30) The Fed is meeting tomorrow, and I will tell you (1:32) when to expect the first rate cut of this year. (1:35) Housing inventory has been on the rise (1:36) all across the country, especially in Texas, (1:38) but we might have hit the peak inventory for 2024.

(1:42) We're gonna dive into some of those numbers. (1:43) Also, right now, our government is spending (1:45) like a drunken sailor on shore leave, (1:47) and neither the red nor the blue team (1:49) seems to be raising any alarms. (1:51) I'm gonna show you why our country (1:52) could be on the verge of bankruptcy.

(1:53) After that, we're gonna revisit the NAR rules (1:55) that'll take effect on August the 17th, (1:57) which is just right around the corner. (1:58) We haven't forgotten about everyone's (2:00) favorite story these days. (2:01) Are you ready for the changes coming your way? (2:03) Then, we're gonna look at a recent Zillow study (2:04) that showed that right now, in order to buy (2:06) a median home in the United States, (2:08) you're gonna need to make over $100,000 a year in income.

(2:11) And I'll show you where that income puts you (2:13) compared to your neighbors. (2:14) The numbers might surprise you. (2:15) And for our main story today, I'm gonna reintroduce (2:17) to you a well-known and highly vilified mortgage product (2:20) that most Americans would not dare consider (2:23) taking advantage of.

(2:23) But if used right, could save you tens of thousands (2:27) of dollars over the next five to 10 years. (2:29) You just need to understand how they work. (2:31) So stick around to the end for that.

(2:32) All right, now just a reminder, (2:33) if today's episode brings you any value whatsoever, (2:36) or even if you just like the way (2:37) my silly mind works sometimes, (2:39) then please do me a huge favor, (2:41) share this with your network. (2:42) July was our biggest month for downloads, (2:44) and I wanna make August even better. (2:46) And you guys are the reason for our growth.

(2:48) So, thank you so much for tuning in each week (2:50) and being a big part of this ever-growing community. (2:52) I can't thank you enough. (2:53) And you can thank me by telling a friend about us.

(2:56) So spread the word. (2:57) It would mean so much to the show. (2:58) Now, first up, everyone's favorite segment.

(3:01) Hey, Mike, what are the rates? (3:02) Well, according to Mortgage News Daily, (3:04) as of July 30th, 2024, (3:06) the average 30-year fixed conventional mortgage rate (3:08) is about 6.82%. (3:09) The average 30-year FHA rate is about 6.27%. (3:13) The average 30-year VA rate is about 6.28%. (3:16) The average 15-year conventional rate is about 6.32%. (3:20) And the average jumbo rate right now is about 7%. (3:23) Now, I'm gonna sound like a broken record here, (3:25) but this week will be another big week for rates. (3:28) You can expect some pretty good moves (3:29) coming around on Friday.

(3:30) Why? (3:30) Well, in one word, jobs, jobs, jobs. (3:34) The Jolt report was released today, (3:35) and job openings continue to decline, (3:37) reaching their lowest levels (3:38) that we've seen since the pandemic. (3:39) We're gonna also get the June jobs report on Friday.

(3:42) And this is gonna let us know (3:43) where unemployment currently stands. (3:44) Last month, we were at 4.1%. (3:46) And a bump to 4.2% would trigger metrics (3:49) indicating that we might be headed into recession (3:51) if we aren't already there. (3:52) And with the Fed meeting tomorrow, (3:54) the likelihood of a rate cut right now is low.

(3:56) But the market is pricing in 100% chance (3:58) for that long-awaited first Fed rate cut in September. (4:01) And if and when that happens, (4:03) you can expect rates to continue on their downward trend (4:06) that we've seen over the last couple months. (4:08) So if you were hoping for rates to fall (4:09) to get people back into the market, (4:10) it looks like it might be just right around the corner.

(4:12) Now, many people out there might be looking (4:13) at the reported metrics that we see every week (4:15) and ask, why right now would the Fed start cutting rates (4:19) if the overall economic numbers indicate (4:21) that the economy is still humming along in a great clip? (4:23) Heck, if you watch any political ad these days, (4:25) you're told that we are living in the best economy (4:27) that anyone's ever participated in. (4:28) So again, if this is the case, (4:30) why would the Fed look at cutting rates? (4:32) Because typically rates don't get cut (4:34) unless the economy is in trouble. (4:36) And as of right now, it was reported last week (4:38) that GDP for the second quarter of 2024 (4:40) came in at 2.8% up, which is really strong.

(4:42) And the median home prices reached all-time highs (4:44) at $426,000. (4:46) And the BLS jobs report that we got back in June (4:48) said that we added 206,000 jobs to the economy, (4:51) which is also really good. (4:53) So according to all the metrics that we usually use (4:55) to measure the strength of the economy, (4:57) everything right now is looking awesome.

(4:58) So what's the problem? (4:59) Well, if you believe these metrics are accurate, (5:02) then the answer could be that the Fed is just trying (5:04) to create a soft landing for the economy. (5:06) Remember that the Fed has a dual mandate, (5:08) stable prices and full employment. (5:10) And last week, PCE, (5:11) which is the Fed's favorite measure of inflation, (5:13) came in at 2.6%. (5:14) And right now, they feel like things for inflation (5:16) are starting to trend downward.

(5:17) And they might be willing to cut rates (5:18) before we get to that 2% mark that they aim for. (5:21) But they also see unemployment rising at a steady rate, (5:23) especially over the last couple months. (5:24) And they also might feel that right now (5:26) is the time to start cutting rates (5:27) before those numbers start to get out of control, (5:29) which, oh, by the way, can happen really quickly (5:31) when it comes to unemployment.

(5:32) Now, you can also believe, as I do, (5:34) that these economic numbers (5:35) that we're getting reported each month (5:37) aren't entirely accurate. (5:38) We're even just not reflective (5:40) of what is actually happening in the economy right now. (5:42) GDP numbers reflect a large amount of government spending.

(5:44) Inflation numbers aren't reflective (5:46) of things that the Fed can actually control, (5:48) which is discretionary spending, (5:49) which is much lower than the things (5:50) that the Fed cannot control, (5:51) like energy costs, insurance costs, rent costs, and food. (5:55) And the biggest one is the unemployment rate. (5:56) We are adding jobs to the economy, (5:58) but almost all of these jobs are part-time jobs.

(6:00) And, oh, by the way, (6:01) a large majority of these jobs reports (6:02) that we've seen over the last several months (6:04) have all been revised down significantly (6:06) from the initial numbers reported. (6:08) So overall, things look and sound really good, (6:10) but ask anyone on the street (6:12) if the economy is doing as great (6:13) as the media would lead you to believe. (6:15) My guess is the answer you're gonna get is no.

(6:16) And if that is true, (6:18) then rates will be coming down faster (6:19) than we even believe they will right now. (6:21) Because at this time, (6:22) the Fed only plans to cut rates one time (6:24) for the rest of this year. (6:25) Then they wanna see what the impact of that cut will be (6:27) through November and December, (6:29) and then decide for 2025 how they wanna proceed.

(6:31) And they've already stated that in 2025, (6:33) they wanna take the Fed funds rate from 5.25 down to 4.25. (6:37) And that would mean a cut of a quarter of a point at least (6:39) for four meetings next year. (6:40) And in 2026, they project a cut from 4.25 to 3.25. (6:45) Again, a quarter of a point at least four times next year. (6:48) And as we understand it right now, (6:49) the Fed has stated that the goal (6:50) is to get the Fed funds rate just slightly lower than 3%.

(6:53) And if you remember, (6:54) when rates were the lowest that they've ever been (6:56) in the history of the country, (6:57) the Fed funds rate was only 0.25%. (7:00) So mortgage rates may be in the low sixes (7:02) by the end of this year, (7:03) and most likely in the mid fives to low sixes (7:06) by the end of next year. (7:07) And if they get lower than that, (7:08) then the economy is doing much worse than it is right now. (7:11) And I'm not sure anybody really wants that.

(7:13) So buckle up, it's about to get interesting. (7:14) All right, next. (7:16) As many of you've seen and are starting to experience, (7:18) inventory levels are up and rising.

(7:20) And listings have been a plenty lately, (7:22) especially here in Texas. (7:24) So then the question is, (7:25) why haven't prices come down significantly to reflect this? (7:28) Well, first of all, (7:29) we have to understand that this is all relative. (7:31) When you come from the lowest level (7:32) of available inventory in history, (7:34) jumping up inventory levels, (7:35) even at 40%, like it is here in Texas right now, (7:37) isn't as impactful as it may seem.

(7:39) Because 50% of two is one, (7:41) and that'll get you to three. (7:42) So it's almost double, but double of what? (7:44) All right, so with that backdrop a little bit, (7:45) let's look at a few of the national numbers. (7:47) So nationally, new listings added last week were 68,407, (7:51) compared to 61,707 in 2023, (7:54) but 73,462 in 2022.

(7:58) So listings are up slightly, (8:00) but they are slowing as compared to earlier this year. (8:02) And overall weekly inventory also grew (8:04) from 668,000 single family units for sale (8:07) to 677,000 single family units for sale. (8:10) But remember, at this time in 2015, (8:13) active listings were nearly double that at 1.2 million.

(8:16) And right now, we also have more people in households (8:19) compared to 2015. (8:20) Over 7 million more households have been formed since then. (8:22) So we have half the inventory of 2015, (8:25) but 7 million more possible buyers.

(8:26) Now, pending sales this week were at 381,000 (8:29) compared to 375,000 this time last year, (8:32) but still below 2022, which was at 417,000 pending sales. (8:37) So we got more sales this year than last year (8:39) at the same time, but still well below even 2022, (8:43) which was a declining year for home sales. (8:44) Now, the real data point that you wanna keep in mind (8:46) when looking at all this are mortgage applications, (8:48) because right now we are running 15% (8:50) behind this same time last year and 34% below 2022.

(8:55) And mortgage applications are an indication (8:57) of where the market is headed for the rest of this year. (8:59) Now, overall applications have had a slight increase (9:02) over the last couple of weeks (9:03) because of the declining interest rates, (9:04) but they are still running well below (9:06) the last several years. (9:08) In fact, right now, mortgage applications (9:10) are at the lowest levels that we've seen in over 30 years.

(9:12) So listings are building, (9:14) but buyers are still tough to come by. (9:16) All right, now what about here in Texas? (9:18) Well, a new report from Redfin says that Texas and Florida (9:20) are seeing the fastest growing inventory of any other states (9:23) for stale real estate listings, (9:25) or listings that are not moving off the market very quickly. (9:28) Remember, this again is all relative.

(9:30) Both Texas and Florida also had the lowest level (9:33) of inventory of any state in 2021 and 2022. (9:37) So we're in a bit of a recovery here. (9:38) Now, the data from Redfin says (9:40) that the number of stale listings is up 60% from a year ago (9:43) due to high housing costs (9:44) and an increasing supply of homes for sale.

(9:46) The report also says that nearly 65% of homes (9:48) on the market in June were listed for at least 30 days (9:51) without going under contract. (9:52) Now, this year over year increase (9:54) marks the biggest annual increase in a year (9:56) and the highest share of any June since 2020, (9:59) with over 40% of homes remaining on the market (10:02) for at least 60 days. (10:03) June was also the fourth month in a row (10:04) that homes remained on the market for at least 30 days.

(10:06) But keep in mind that prior to 2020, (10:09) the average days on market for a home in the United States (10:11) ranged between 50 days during those seasonally busy months (10:14) to 90 days during seasonally slow months. (10:17) So we're just starting to move into that normal range. (10:20) And oh, by the way, this is the type of year every year (10:22) where homes sit on the market a little bit longer (10:24) than they typically do.

(10:25) We just don't really remember it (10:26) because we just came out of four years (10:28) of absolute insanity. (10:29) Now, active home listings for Texas (10:31) reached 125,000 in the second quarter of this year. (10:34) The overall statewide median home price is about 345,000.

(10:38) And that was just about 0.6% higher (10:40) than the second quarter of 2023. (10:42) While the overall numbers of homes sold (10:44) decreased by 3% to 93,000. (10:46) So listings are up, but slowing.

(10:47) Sales are down and slowing even more. (10:50) But prices are only flattening out (10:51) and not really falling much yet. (10:53) Because even though inventory is increasing, (10:55) it hasn't gotten to the point (10:56) to where it's far outpaced demand.

(10:58) And oh, by the way, this winter might be one of the slowest (11:01) that we've seen in some time. (11:02) But the good news is, is that we have a very strong likelihood (11:05) with lower rates and bigger inventory (11:07) of getting a big bump come next spring. (11:09) So hold on just a little bit longer.

(11:11) The light at the end of this tunnel is coming. (11:13) All right, now let's move on (11:14) to a little bit of national news (11:15) that will impact people's ability to buy and sell homes (11:17) that you might have not been paying attention to. (11:19) So right now the US government is spending at a rate (11:22) that we've never seen before.

(11:23) Our economy has for a very long time (11:25) been engaged in what's called deficit spending, (11:27) which just means that we're spending more (11:29) on an annual level than we take in in revenue. (11:31) Now, in reality, this has been a pretty standard practice (11:33) over the last 30 years. (11:34) Okay, so the idea being to some extent (11:36) that as inflation grows at its 2% clip, (11:39) that the debt that we are paying on in the past is devalued (11:42) and a little easier to maintain with more dollars (11:44) in the future economy with the higher money supply.

(11:47) Now, I'm not arguing that's a good way to do it. (11:48) I'm just saying that's how it works. (11:50) But in the past five years alone, (11:51) we have increased the rate of the deficit spending (11:54) at an exponential level like we have never seen before.

(11:57) In fact, US federal debt just hit another record (11:59) and is 2.5 billion from reaching 35 trillion (12:03) for the first time in history. (12:04) Since 2019, the US federal debt (12:06) has skyrocketed by $13 trillion. (12:08) That's a 37% increase in the national deficit (12:11) in just five years.

(12:13) Federal debt in the United States (12:14) has never grown so rapidly (12:15) relative to the growth of the economy. (12:17) And because of this, (12:18) we are on an unsustainable fiscal path (12:20) and neither party in charge (12:22) seems to be very concerned about it. (12:24) The US deficit, in fact, (12:25) is currently at World War II levels.

(12:27) So we are spending at a level like we were (12:30) when the entire world was at war. (12:32) So why are we spending at recession levels (12:34) while the Fed and the US government is saying (12:36) that the economy is still booming? (12:38) And how dangerous is this US debt crisis going to become? (12:42) And what kind of consequences are we gonna have to pay (12:44) if it all comes crashing down? (12:45) And again, just in the last four years, (12:47) the US debt has skyrocketed by $11 trillion. (12:50) And by comparison, (12:52) reaching the first $11 trillion worth of debt in the US (12:55) took us 220 years.

(12:57) That's right, 220 years (12:59) to get what we've just achieved in four. (13:02) Interest payments alone on the debt (13:03) are expected to exceed $1.14 trillion this year. (13:07) In June, interest payments consumed 76% (13:09) of all personal income taxes collected.

(13:12) And that number is only expected to increase (13:13) over the next several months and into next year. (13:15) Interest on the national debt (13:16) was the government's single largest expense in June alone, (13:19) surpassing critical public services, (13:21) such as the Department of Health and Human Services (13:23) and the Social Security Administration, (13:26) which is our largest budget item to date. (13:28) Now, in my personal opinion, (13:30) this is the biggest threat (13:31) to our economic stability out there right now.

(13:33) Because how can this level of spending be maintained (13:36) without crashing this whole thing? (13:38) And why is no one in charge (13:39) raising alarms about this right now? (13:41) Not one major political party (13:42) is making this a focus of their platform (13:44) and no presidential candidate (13:46) is talking about this at any of the rallies. (13:48) In fact, we're talking more about cutting taxes (13:50) or increasing spending than anything else right now. (13:52) Now look, I don't claim to be a Harvard economist here, (13:54) but even I can see that this is not sustainable.

(13:56) So my question is, is there some other bigger threat (13:59) that we aren't aware of (14:00) that we'll look back on in five years (14:01) and find this one to be insignificant? (14:03) I have no idea. (14:04) I honestly just wanna know (14:05) what the plan is to solve this issue. (14:07) Because if this economy tanks, (14:08) the government's gonna have to take out more debt (14:10) to prop it up or print more money to dig us out (14:13) than rates and inflation will stay high.

(14:16) And where does that put us overall? (14:17) I really would love to know your thoughts. (14:18) I have no idea. (14:19) What do you think? (14:20) All right, next up, August 17th is quickly approaching (14:23) and all the new NAR rules will be in full effect (14:26) for all you realtors out there.

(14:27) So my question is, are you ready for this? (14:29) Now, many outside the industry are expecting these changes (14:31) to have dramatic effects on realtor commissions (14:33) as we move into 2025, (14:35) possibly causing many to leave the industry altogether. (14:38) Now, I do feel like that that still remains to be seen (14:40) and thus far, even with historically low sales and volume, (14:43) many agents have been able to weather the storm (14:46) with some even having some of the best years (14:47) of their career. (14:48) So the question is, (14:49) which category are you gonna fall into? (14:51) All right, with that said, (14:52) here's a reminder of the changes coming our way (14:54) so you're ready to put these into play.

(14:56) Number one, the changes will eliminate (14:57) and prohibit any requirement of offers of compensation (15:00) in the MLS between listing brokers or sellers (15:03) to buyer brokers or other buyer representatives. (15:06) So no offers to buyer agents (15:08) anywhere on the MLS for compensation. (15:10) Or on your listing description.

(15:11) And I would be very careful (15:13) of putting these anywhere else in public view (15:15) as there are gonna be lots of people (15:17) looking for you to slip up and break the rules. (15:19) Remember, there are going to be (15:20) a lot of hall monitors out there. (15:21) So be very careful with whatever tricks (15:23) you have up your sleeve to try to let buyers know (15:26) that you're willing to pay buyer compensation.

(15:27) So these rules will require the MLS (15:29) to eliminate all broker compensation fields (15:31) and compensation information from the MLS. (15:33) So you cannot put it anywhere. (15:35) It will also require the MLS to not create, facilitate, (15:37) or support any non-MLS mechanism, (15:40) including providing listing information (15:42) to an internet aggregator's website for such a purpose.

(15:45) For these participants, subscribers, or sellers (15:47) to make offers of compensation to buyer brokers (15:49) or other buyer representatives. (15:51) So Zillow, Redfin, Homes.com, (15:52) or any other aggregators out there (15:54) will also not allow offers of compensation (15:56) to be listed on their sites. (15:57) Now these rules are also gonna reinforce (15:59) that MLS participants and subscribers must not, (16:02) and MLSs must not enable the ability to filter out (16:06) or restrict MLS listings that are communicated (16:08) to customers or clients based on the existence (16:11) or level of compensation offered to the cooperating broker (16:15) or the name of the brokerage or agent.

(16:17) So don't steer your clients away from a listing (16:20) because they aren't offering compensation. (16:22) Not that you would be doing that anyway, (16:23) but again, there are going to be lots (16:25) of hall monitors out there and litigation (16:27) is the zeitgeist of the society (16:29) that we live in in real estate. (16:30) So lawyers, consumers, everybody's gonna be looking (16:33) to find you making a mistake.

(16:35) So don't do anything dumb. (16:36) Now these changes are also gonna require (16:37) compensation disclosures to sellers (16:39) as well as prospective sellers and buyers. (16:41) And these have to be very clear and upfront (16:43) to the buyer and seller as to what is being paid out (16:46) to who and when during the transaction.

(16:48) Now this should be a pretty general practice anyway (16:50) that most agents were following, (16:51) but they are gonna be cracking down more. (16:53) And again, people are gonna be watching. (16:55) Now this will also require MLS participants (16:56) working with a buyer to enter into a written agreement (16:58) with the buyer prior to touring a property.

(17:00) To me, this is gonna be the biggest one. (17:02) As this was a practice that was always suggested, (17:03) and I would say generally followed, (17:05) but not really enforced. (17:06) And now it's going to be much more enforceable (17:08) if you do not do this.

(17:10) So you have to establish upfront with your buyer (17:12) how much you will be compensated based on the house (17:15) that you write an offer on. (17:16) Now to my knowledge right now, (17:18) you can have multiple agreements with buyers (17:20) on different properties if you like, (17:21) or even just a temporary agreement (17:23) that doesn't require compensation just to see homes. (17:25) But this is a piece that you need to get (17:27) with your broker on and decide how you're going (17:28) to approach each individual situation.

(17:30) And if you haven't done this already, (17:31) this should be a top priority for you (17:33) over the next couple of weeks. (17:34) Because listen, conversations about compensation (17:36) can be very tricky and complicated depending on the buyer. (17:39) So you need to have a game plan now (17:41) on how you're going to approach these conversations.

(17:43) Because like I said, in my opinion, (17:44) this is going to be the most impactful (17:46) and most challenging part of these changes. (17:48) And you need to become an expert really, really quick (17:51) in navigating these conversations. (17:53) Because it could be the difference between you (17:55) staying in this career for the long haul (17:56) or looking for another job.

(17:57) All right, next up. (17:58) According to a February 2024 Zillow analysis, (18:00) Americans need to earn around $106,500 annually (18:05) to comfortably afford a typical home in the United States. (18:08) Now this is an 80% increase from the 59,000 yearly income (18:11) that Zillow predicted back in 2020.

(18:13) And Bankrate estimates that the Americans need to earn (18:15) about $110,000 annually to afford a median price home, (18:19) which currently is over about $400,000 nationally. (18:22) So does this mean that the average American (18:23) can no longer afford to buy a home? (18:25) Do you have to be an upper class citizen to be a homeowner? (18:27) Well, I guess it all kind of depends on what we define (18:29) as average or upper class. (18:31) So the term upper class evokes images (18:33) of wealth and privilege.

(18:34) But what does it truly mean in terms of income? (18:37) While there's no definitive line, (18:38) typically they say households in the top 20% of earners (18:41) are generally considered to be upper class. (18:43) And according to the US Census Bureau, (18:45) the median household income in 2022 was about $74,500. (18:49) Now this is the middle, not the average.

(18:51) So to reach the upper class in 2024, (18:53) you typically need an income exceeding about $153,000, (18:57) which is more than double the national median income. (18:59) And according to the Pew Research Center report in 2022, (19:03) the median household income (19:04) for a three person upper class family was about $257,000. (19:09) And for the middle class, (19:10) the median income was about $106,000 for a family of three.

(19:13) So for a family of three, (19:15) which typically includes two incomes, (19:17) the average American household (19:18) can still afford the median home price, (19:20) at least according to these numbers. (19:21) But income and net worth are two very different things. (19:25) You may have a good income, but no savings and no assets (19:28) because you have to spend every nickel you make (19:30) and live paycheck to paycheck.

(19:32) Now the US Census data from 2021 (19:34) shows that the median net worth (19:35) varies considerably across economic classes. (19:38) The upper class possessed nearly 67 times (19:41) the net worth of the lower class. (19:43) Here's a breakdown of it.

(19:43) So the average lower class net worth is about $12,000. (19:46) This is net worth, not income. (19:48) The average lower to middle class net worth is about $61,000.

(19:52) The average middle class net worth is about $145,000. (19:56) The average upper middle class net worth was about $269,000. (20:00) And the average upper class net worth was about $805,000.

(20:05) And by the way, (20:05) if you wanna know how to calculate your net worth, (20:07) you take your assets and their value, (20:09) whether it be checking, savings, real estate, (20:11) and you subtract any debt that's owned on that, (20:14) and that is your net worth. (20:15) So how much money do you have saved? (20:17) How much do you have in assets (20:18) versus how much debt you have? (20:19) And there's your net worth. (20:20) If you were to sell everything and cancel all your debt, (20:22) how much cash would you have left over? (20:23) Now in this study, they also show that college degrees, (20:25) which have been kind of downplayed recently (20:26) in most communities, (20:27) especially as it relates to the cost (20:29) versus the benefit of these degrees, (20:30) that actually played a pretty crucial role (20:32) when it comes to wealth accumulation.

(20:33) In 2021, households headed by individuals (20:35) with graduate or professional degrees (20:37) had a median net worth of about $556,000, (20:40) compared to just about $8,500 (20:41) for those with just a high school diploma. (20:43) So at least as far as wealth accumulation is concerned, (20:46) education is still a big determining factor, (20:48) at least up to this point. (20:49) Now, according to the same study conducted in 2022, (20:52) men were also slightly more likely than women (20:54) to be in upper income households, (20:56) with 18% of men and 16% of women (20:58) falling into this category.

(20:59) However, marriage appears to be a significant boost (21:02) to the economic status of Americans. (21:04) Among those married in 2022, (21:05) 24% are in the upper income households. (21:08) In contrast, only 7% of those who were separated, (21:11) divorced, widowed, or never married (21:13) were in the upper income household.

(21:14) So there is still a lot to be said (21:16) about family and community being something (21:17) that builds us up, (21:18) and that this single live in your best life lifestyle (21:21) doesn't really translate to wealth, (21:22) at least for the long term. (21:23) So what does all this tell us? (21:25) Well, despite what you see in the media, (21:27) getting a good education, (21:28) finding someone that you love to share your life with, (21:30) and starting a family seem to be the best route (21:33) to wealth and prosperity at the very least. (21:35) And if you follow that path, (21:37) homeownership is very attainable.

(21:38) It's certainly getting tougher and tougher each year, (21:40) but these things do move in cycles. (21:42) Life gets hard, then it seems to get better. (21:44) And when you go through hard times, (21:45) it makes us all look at what we're doing (21:46) and try to find ways to do it better, (21:48) at least those of us that have success.

(21:49) So keep doing the right things and living the right way. (21:52) And somehow, some way, things tend to just work out. (21:55) At least that is what I believe.

(21:56) What do you think? (21:57) Okay, for our final topic today, (21:58) let's revisit an often vilified loan product (22:00) that was the poster child of the great recession. (22:03) But in the current market environment, (22:04) it may actually be one of the best debt instruments (22:06) available to you that could save you (22:08) tens of thousands of dollars over the next several years, (22:11) if you understand it and know how to use it in the right way. (22:13) Yes, I am talking about adjustable rate mortgages or ARMs.

(22:17) Okay, now, before you turn this off (22:19) and say that you would never do this (22:20) or suggest it to a client, just hear me out for a second. (22:23) So let's start first by defining (22:24) exactly what an adjustable rate mortgage is. (22:26) An adjustable rate mortgage is a type of home loan (22:28) with an interest rate that can change periodically.

(22:30) With almost any ARM, there is an initial fixed rate period. (22:33) ARMs usually start with a fixed rate (22:34) of a certain period of time, (22:35) typically three, five, or seven years. (22:37) Then after the initial fixed rate period is ended, (22:39) the loan will go through an adjustment period.

(22:41) And during that time, the rate can adjust up or down. (22:44) Yes, it can adjust down, but it only does it once a year, (22:48) not every week or month or anything like that. (22:49) And it adjusts based on market condition (22:52) and the index that the ARM is based off.

(22:54) So these seem simple enough, right? (22:56) There's no calculus here. (22:57) So why did these loans get such a bad rap? (22:59) Well, during the housing boom of the early 2000, (23:01) many borrowers took out ARMs with low initial rates (23:03) and low initial monthly payments (23:04) without fully understanding the risks. (23:06) Now, there are many out there that would say (23:07) that you're an adult and you should have known (23:09) what you were getting into.

(23:10) But I say that there were many out there doing my job (23:13) who took advantage of people's ignorance (23:15) and just saw dollar signs and chose not to explain to people (23:18) how these work and warn them of the risks. (23:20) And in a lot of cases, (23:22) these loan officers didn't understand them themselves (23:23) and were hired to dial out and get people committed (23:26) because there was so much money (23:27) flying around for these loans. (23:28) And this was just the reality of mortgages (23:30) and real estate in the early 2000s.

(23:32) Just go watch the movie, The Big Short, (23:33) and you'll see exactly what I'm talking about. (23:35) It was a great movie and it really explains everything (23:37) that happened in a very simple, understandable way. (23:39) So then what happened? (23:40) Well, buyers experienced what's called a payment shock (23:43) when their initial low rate period ended (23:45) and their payments ballooned by hundreds of dollars a month.

(23:48) And people who had multiple properties (23:50) or qualified with income that wasn't real (23:52) because it was only stated and not verified, (23:54) these people could then not afford to make those payments (23:56) and therefore had to foreclose. (23:58) And then a flood of homes hit the market (23:59) because of the frequent use of these products (24:01) and the lack of education on how they work. (24:03) But also because lenders were incentivized in many ways (24:06) to give out more of these loans.

(24:07) And they didn't have to verify the income or assets (24:09) like we do today. (24:10) And I would argue that piece of not verifying (24:13) borrowers' ability to repay these loans (24:14) once they adjusted was the real cause of the collapse (24:17) and not just the adjustable rate itself. (24:19) This is what led to lenders often approving loans (24:21) without proper income verification, (24:23) resulting in borrowers taking on more debt (24:25) than they can actually afford.

(24:26) Scary stuff, right? (24:27) And you don't wanna be a part of that kind of game. (24:29) But let's look at where they are now (24:30) and take a little bit different approach. (24:32) So for the last two years, (24:33) interest rates have been higher for longer (24:34) than most of the industry expects.

(24:36) And we are just now starting to see (24:37) these rates come back down. (24:38) Now, I don't believe that we're headed back (24:39) to the 2% to 3% mortgage rates, (24:41) but we could be in the 4% range (24:43) within the next couple of years. (24:44) So with that backdrop, (24:46) let's look again at how these adjustable rates could work.

(24:48) First off, in many cases, (24:49) arms typically offer lower initial rates (24:52) compared to fixed rate mortgages, (24:53) which can result in a lower monthly payment initially. (24:56) Recently, however, this has not really been the case. (24:58) Fixed rates have had the same (24:59) and sometimes better rates than arms in the recent history.

(25:01) Why is that? (25:02) Well, the Federal Reserve increased short-term rates, (25:05) making it harder for lenders to offer competitive arm rates. (25:07) This is due to an inverted yield curve. (25:09) Now, an inverted yield curve occurs (25:11) when short-term interest rates (25:13) are higher than long-term rates.

(25:15) This particular situation is unusual (25:16) and often signals economic uncertainty (25:18) or expectations of future economic slowdown (25:21) because normally long-term rates (25:23) are higher than short-term rates (25:25) because lenders demand more compensation (25:27) for the risk of lending money over a longer period of time. (25:30) Does that just make sense, right? (25:31) So when the Fed starts to lower these short-term rates, (25:34) which is most likely what is going to begin (25:35) occurring in September, (25:36) the immediate effect is a decrease in interest rates (25:39) for short-term bonds and loans, including arms. (25:41) Now, long-term rates might not decrease as much, (25:44) and in some cases, like crazy national debt, (25:46) they actually can go up (25:47) if investors expect stronger future economic growth (25:50) due to the Fed's action.

(25:51) Now, this expectation of improved economic conditions (25:53) could lead to higher demand for long-term investments, (25:56) driving yields up. (25:57) So as the Fed begins lowering these short-term rates, (26:00) you should start to see arm rates (26:02) reacting at a much faster pace (26:04) than the standard 30-year fixed, (26:06) meaning that these arm rates might be cheaper (26:08) much sooner than the fixed rates. (26:10) Add to that a declining rate environment (26:12) over the next several years, (26:13) and that means that if you chose to do an arm (26:16) to buy or refinance your home, (26:18) the likelihood that you wouldn't have to do (26:20) another refinance every few years, (26:22) adding more cost to your loan each time (26:24) that you do it, increases.

(26:26) So in the very near future, (26:27) an adjustable rate mortgage could have a lower rate (26:30) for a fixed three, five, seven, or 10 years (26:33) than a 15- or 30-year fix. (26:35) It's also very likely to automatically adjust down (26:37) when your rate adjustment period begins (26:39) to the lowest rate on the market at that time, (26:42) saving you thousands in interest on its way down (26:45) and adjusting every single year downward. (26:47) And this also means that you would not have to spend (26:49) thousands of dollars refinancing (26:51) each time that the market rate falls, (26:54) saving you money on your current fixed rate.

(26:56) Now again, you need to intimately understand (26:57) how these arms work, (26:58) which is why having a mortgage professional on your side (27:01) explaining all this and guiding you each year (27:04) on the next move is incredibly important. (27:06) You also need to feel secure in your job and your income, (27:08) so that if the time does come (27:11) when the market starts to turn to a higher rate environment, (27:14) then it'll be time to pull that trigger (27:15) on the permanent refinance into a fixed rate (27:17) as we enter an increasing rate environment. (27:19) I hate to say that debt is a game (27:21) because it's a very dangerous one (27:22) if you don't know what you're doing, but it is a game.

(27:25) And the wealthy play it all the time (27:26) and they play it really well. (27:27) And if you know the rules and have someone (27:29) to help you navigate through the rough spots, (27:31) it can be a game that you can win. (27:33) So if you wanna know more about it, give me a shout.

(27:35) I'm happy to walk you through it. (27:36) Well, Padres, that is all for today. (27:38) Thank you for sticking around to the end.

(27:40) I hope I was able to help you understand the market (27:42) in this real estate game just a little bit better today. (27:44) I'm learning with you and sharing what I know as I go. (27:47) So thanks for being on this journey with me (27:48) and join me live on Friday when I talk to Joseph Noor.

(27:52) Joseph's using technology to help property owners (27:53) manage and cut costs on their assets, (27:56) focusing on slaying that tax dragon (27:58) that we all have to fight once a year. (27:59) So tune in and learn how to save money on property taxes (28:02) without lifting a finger. (28:03) Check it out if you like money.

(28:04) But until then, be great humans and keep grinding (28:07) because life is what you make it. (28:09) So make it great. (28:10) See you later.