Market Update Oct. 23, 2023: Rent Price Fixing, Buydowns Explained & How to win listing presentations

Mike Mills (Host) | 00:00:09 to 00:00:40

Welcome to the Texas Real Estate and Finance Podcast. I'm your host, Mike Mills, a seasoned mortgage banker in the Dallas Fort Worth metroplex with over 13 years of experience in banking and finance. Today, I'm thrilled to bring you the latest installment of the real estate market update for the week of October the 22nd. Every Monday, I'm here to deliver the essential headlines that impact both the real estate and finance sectors, ensuring you stay well informed about the latest developments affecting your business. This concise 15 to 20 minutes episode is designed to complement my weekly interviews with top professionals in and around the real estate industry.

Mike Mills (Host) | 00:00:41 to 00:01:16

Last week, I had the privilege of chatting with Sue Buswell, where we delve deep into the world of credit. We covered topics such as initiating proper credit management for your children, the intricacies of credit score calculations, strategies for managing debt, and maximizing your credit score. So if you have any future plans involving credit, this is an episode that you don't want to miss. Later this week, I'm excited to have a conversation with Nicole Christopherson, an accomplished Austin based realtor who has successfully launched the Work Hard Smile Large brand in Texas. This brand is all about fostering a supportive community, encouraging connections, and supporting each other on life's journey.

Mike Mills (Host) | 00:01:16 to 00:01:39

Nicole hosts the Work Hard Smile Large podcast and will be sharing her inspirational story with us. I trust that you'll find this market update both helpful and informative, and if you do, please consider hitting the subscribe button and sharing it with a friend. Your support means the world to me, and it enables me to consistently deliver fresh episodes every single week. If you have a topic or a story you'd like to explore further, don't hesitate to reach out to me. I value your feedback and would love to hear your thoughts.

Mike Mills (Host) | 00:01:40 to 00:01:58

Can find my contact information in the show notes. Once again, thank you for tuning in, and I invite you to stay tuned in for more valuable insights and updates in the world of real estate. All right, so what are we talking about today? Well, we've got four topics to cover. First, I'm going to give you a brief rundown of the news stories affecting the real estate market this week, along with where mortgage rates are right now and where they might be headed.

Mike Mills (Host) | 00:01:58 to 00:02:23

Then I'll let you know about a Texas based company that's helping drive more people towards homeownership, but not necessarily in a good way. I'll share the secrets of interest rate buydowns and how to determine if they make sense for your clients or if they're just catchy buz terms used by mortgage companies to get the phone to ring. And if you stick around to the end, I'll give you some ammunition that will help you get more listings in this highly competitive market. So I hope you find this episode helpful and informative. All right, let's get going.

Mike Mills (Host) | 00:02:23 to 00:02:47

All right, let's start with the news you can use so Redfin reported last week that a homebuyer in the United States must earn $114,000 to afford the median priced US. Home. This is up 15% from a year ago and more than 50% since the start of the pandemic early in 2020. That's the highest annual income necessary to afford a home on record. Meanwhile, wages have only increased by 5% since 2021.

Mike Mills (Host) | 00:02:47 to 00:03:07

The median American household income makes $75,000 a year. Right now, that's household, not individual. The median price for a US. Home was $420,000 in August, up 3% compared to August of 2022. To give you a little perspective, at the start of the pandemic, the median sales price was $260,000.

Mike Mills (Host) | 00:03:08 to 00:03:38

However, the median asking rent right now is almost $2,000 a month. So the median homebuyer right now is spending $2,900 a month on a mortgage. The average new car payment is $740 a month, and the average student loan payments are about $500 a month since they started up back in the beginning of October. So a house, a car, and student loans will cost the average American $4,100 per month. That's 80% of the average American's post tax household income going to pay for just three things.

Mike Mills (Host) | 00:03:38 to 00:03:56

That's probably the reason that the percentage of subprime auto borrowers 60 plus days past due hit a record 6.1% in September. That's the highest delinquency of all time. And bankruptcies are up, credit card delinquencies are up, and everything is just way more expensive these days. How's this going to be sustainable? I don't really know.

Mike Mills (Host) | 00:03:56 to 00:04:27

Okay, so inventory remains one of the driving forces in this really difficult housing market. According to another study by Redfin, 2023 is poised to end roughly with 4.1 million existing home sales nationwide. That's the lowest number since the housing bubble burst in 2008. Now, according to the Realtors Confidence Index, properties typically remained on the market for 21 days in September, up from 20 days in August and 19 days in September of 2022. Now, 69% of homes sold in September were only on the market for about a month or less.

Mike Mills (Host) | 00:04:27 to 00:05:00

So that means homes are sitting longer, but they're still moving at a pretty good clip. And as the 30 year fixed mortgage rate increased for the 6th consecutive week to 7.8%, mortgage applications also slumped, hitting their lowest level since 1995. Which is probably why in quarter two of 2023, the number of licensed loan officers fell to 89,000. That's well below the high of 181,000 achieved in quarter three of 2021, and even the average of about 146,000 since early 2019. Also last week, the Real Estate Board of New York announced some major policy changes.

Mike Mills (Host) | 00:05:01 to 00:05:39

Starting January 1, the REBNY new rules will prevent the listing brokers from paying buyer agents and instead will require sellers pay commissions directly. The rule will require listing agents to clearly outline the seller's offer of compensation to the buyer's agent. Steve Murray, the Cofounder of RealTrends Consulting, told HousingWire that he sees three possible outcomes. Worst case scenario, the broker representing the buyer will have to negotiate their own fee with their client, and the seller can no longer be compelled to make a blanket offer of compensation in order to list on the MLS, murray said. The second thing that could happen is that more and more buyers will go directly to listing agents, in which case they are clearly unrepresented.

Mike Mills (Host) | 00:05:39 to 00:06:23

And the third thing that could happen is a whole new kind of buyer's brokers arise that charge an hourly flat fee to represent buyers, according to Murray. Also, right now, multi generational housing is growing to combat affordability pressures. One in five Americans now shares their home with adult children, parents or grandparents. And while many multigenerational families are living together under one roof, potentially leading to feelings of overcrowding, there's a new development called Accessory Dwelling Units ADUs, which have emerged as a practical solution for affordable housing that allows family to stay close together while maintaining some separation. An adu, or accessory Dwelling unit, is basically just another small structure on your property that you can build to house additional adults in your multigenerational family.

Mike Mills (Host) | 00:06:23 to 00:06:37

And last week, China injected $100.2 billion into their lending market. Things are starting to get pretty bad there. And of course, right now, the US. Is involved in multiple wars around the world, including Ukraine and Israel. We're starting a new trade war with China.

Mike Mills (Host) | 00:06:37 to 00:06:53

Our strategic oil reserves are at a record low. With $90 a barrel in oil prices, inflation is back to a five month high. Our federal government is in debt now, $34 trillion growing at $22 billion a day. And we have the least affordable housing market ever. Things are going great, guys.

Mike Mills (Host) | 00:06:53 to 00:07:15

I hate to give only bad news sometimes, but that's kind of how things are going right now. So there's the news you can use for the week. All right, let's talk a little interest rates. So on Thursday, the 30 year fixed rate mortgage crossed the 8% threshold, according to the Mortgage News Daily. Now, to put it in perspective, in March of 2022, a little more than a year ago, the 30 year fixed rate mortgage was averaged at 3.56%.

Mike Mills (Host) | 00:07:15 to 00:07:50

And Doug Duncan, Fannie Mae's senior vice president and chief economist, said that he does not anticipate affordability issues will ease in 2024. He said, we expect the higher mortgage rate environment to continue to dampen housing activity and further complicate housing affordability well into 2024. And Jerome Powell stated last week that additional evidence of a strong economy may merit more rate hikes. Still, you see, they're committed to the 2% inflation target and show zero signs of adjusting policy until they hit that target. Now, in somewhat good interest rate news, high yield savings accounts are averaging a five and a half percent return on your money right now.

Mike Mills (Host) | 00:07:50 to 00:08:21

Six month treasury bill yields are at 5%. I don't know why that's so hard to say, but treasury bill yields seems to be a little bit tongue twisting. Investment property cap rates are at four and a half percent, and the S and P 500 earnings are yielding only 4.2%. Right now, cash and T bills are paying a higher yield than real estate, and the stock market let that sink in for a second. In other words, risky assets are paying less than risk free assets, which is crazy, because something is wrong when taking a risk pays less than just holding onto your cash.

Mike Mills (Host) | 00:08:21 to 00:08:37

It's never been that way in investing, and this is the first time since 2000 that T bills are yielding more than the S and P 500. So I guess if you want to make money right now, hold on to your cash and invest in the US. Government. This economy is insane. Okay, so let's get into the main story of today's update.

Mike Mills (Host) | 00:08:37 to 00:09:19

So last week I did a segment about the current class action lawsuits against the National Association of Realtors and several real estate brokerages alleging that Nar rules violate antitrust laws and inflate fees paid to agents for listing properties in local MLSs. Now, I already shared all my thoughts on why I feel that ultimately the trajectory that the lawsuit is headed will be bad for buyers and buyer's agent in the future due to the lack of representation because of less to no compensation for buyer's agent. And the real estate industry is ablaze with people weighing in on the subject from all angles. But there is another potential antitrust situation developing in real estate that no one's talking about. And the reason you probably haven't heard about it is it doesn't affect homebuyers or agents.

Mike Mills (Host) | 00:09:19 to 00:10:08

It affects renters and investors. So ProPublica, an independent nonprofit news service, reported last October about a Richardson, Texas based company called RealPage, created in 1998 as a technology platform that enables real estate owners and landlords to use data analytics to suggest daily prices for open units within their rental portfolio. And since its inception, property managers across the United States have been gushing about how the company's proprietary algorithm has boost profits to all time highs. The nation's largest property management company, GraySTAR, found that even during a downturn in the market, its rentals outperformed their competitors by 4.8%. And in 2017, RealPage became the nation's most prominent provider of this type of rent setting software after regulators approved a very controversial merger, expanding the company's influence over apartment rental prices.

Mike Mills (Host) | 00:10:08 to 00:10:52

The move made RealPage the goto provider of real estate tech services for almost 32,000 customers across the country. ProPublica found that in one neighborhood in Seattle, Washington, 70% of apartments that were overseen by just ten property managers were all using the Real page software to set rental rates. You see, the software not only uses data from clients, but also information on what nearby competitors charge to determine the going rate for a particular unit in a particular area. The management software also suggests that landlords do not bargain with renters on upcoming renewals and in some cases, even recommends they accept lower occupancy rates in order to raise rents and make more money. They promote the ability to remove human empathy from the computer generated pricing.

Mike Mills (Host) | 00:10:52 to 00:11:41

Now, critics of this rapidly growing management software have suggested that it created a new type of rental cartel that allows the nation's largest landlords to coordinate pricing and violate federal antitrust laws. RealPage has even created work groups where landlords who would typically be rivals meet in private to discuss their business. Now, at the very least, this type of coordinated collaboration of landlords might be indirectly inflating rents and limiting the free market competition that levels pricing based on renters, choosing the home that provides the best balance of price and amenities. ProPublica also reported that RealPage states that its software prevents rents from reaching unaffordable levels because it can detect drops in demand like will typically occur on a seasonal basis and then lower rents accordingly. See, the role that RealPage has played in soaring rents over the last few years is really difficult to parse out.

Mike Mills (Host) | 00:11:41 to 00:12:04

Specifically, lack of new construction in a tight homebuyer market have driven up living costs across the board. But by their own admission, RealPage's algorithm is helping drive rents higher. On its website. They petition potential clients by promising to outperform the market by three to 7% every year. And the number of doors controlled by the country's 50 largest property managers has grown every year since 2010, according to the national multifamily housing Council.

Mike Mills (Host) | 00:12:05 to 00:12:44

Now, in any antitrust case, prosecutors need to show that competitors agreed among themselves to tamper with pricing. And if competitors agree to use the same algorithm and share information with each other with the purpose of stabilizing pricing, that could easily be seen as violating antitrust laws. This trend is going to continue to go under the radar, but as a Realtor, you need to make your clients aware of the forces working against them when they choose to rent instead of buying. Yes, we are in the most unaffordable housing market in the history of our country. But when you don't own your home, you leave the cost of your living in the hands of data driven software and large companies whose only goal is to maximize profit and drive up the share price for their investors.

Mike Mills (Host) | 00:12:44 to 00:13:07

And it's just another drain on Americans already shrinking bank accounts. So the best time to buy was still yesterday. All right, let's get into your mortgage tip for this week. You ever wondered why the two one rate buydown is hyped up like the superhero of the mortgage world? See, if you're like me, you've probably lost count of how many times you open your Instagram or Facebook feed or talk to a local lender, and they pitch the idea that this is the ultimate mortgage innovation.

Mike Mills (Host) | 00:13:07 to 00:13:25

But if it's so fantastic, why isn't everyone using it on every single mortgage deal? You see, that's the million dollar question. So let's dive into the world of rate buydowns and find out why. First, let's establish what is a rate buydown? A buydown is a financial strategy used in the mortgage industry to reduce the interest rate on a home and therefore reduce the monthly payment.

Mike Mills (Host) | 00:13:25 to 00:13:54

And there are two main types of rate buydowns permanent buy downs and temporary buy downs. Now, a temporary buydown reduces your interest rate for a set period of time, typically like one or two years. It can lower your interest rate by one to two full percentage points, like going from 8% down to 7% or 6%. The cost is relatively cheap compared to permanent buy downs because it's a temporary adjustment and not for the lifespan of the loan. But you see, the upfront cost is just prepaid interest for the first two years of the loan.

Mike Mills (Host) | 00:13:54 to 00:14:24

And while it will reduce your payment, there aren't any real savings when you consider the upfront expense. But where the benefit comes into play for a buyer is when someone else, like the seller or a builder, is covering the cost. Builders, especially these days, are offering this as an incentive to get buyers through the door. And sellers offering closing costs to attract interest in their listing can also take advantage of this buy down marketing strategy. But it doesn't make sense for a buyer to pay this on their own, as there are no real savings gained without someone else paying for it.

Mike Mills (Host) | 00:14:24 to 00:14:45

Now, permanent buydowns lower your interest rate for the entire duration of the loan. The rate reduction amount, though, is typically smaller compared to a temporary buy down. You see, you might go from 8% to 7.75 or seven and a half percent. You don't typically see people buy down the rate a full point, and cost is usually the reason why. Now, the actual costs will vary on the size of the loan and the market rate offerings and pricing at the time.

Mike Mills (Host) | 00:14:45 to 00:15:11

But just to give you an idea, if you had a $300,000 loan and you wanted to buy the rate down, let's say, a quarter of a point, it could cost you, let's say, one percentage point in price to get that lower rate. So $3,000 or 1% of the loan amount would be the cost. Now, that's not the actual cost. This is just an example because the market's going to vary depending on what the pricing will be for the rate. And that quarter of a percent buy down would lower your monthly payment on a $300,000 loan, about $52 a month.

Mike Mills (Host) | 00:15:11 to 00:15:42

And if you wanted to buy the rate down a full percentage point, the cost might be close to like $12,000 total up front in the same instance, depending on the market. So the real question is, does it make sense to buy down the rate either yourself or using the seller paid closing costs to do it? Well, more often not, it just comes down to the math. First, you need to calculate how much your monthly payment will decrease if you lower the rate. Then you determine the upfront cost of buying down the rate $3,000 in our previous example, to buy it down a quarter of a point and then divide that cost by the monthly savings to find the breakeven point.

Mike Mills (Host) | 00:15:42 to 00:15:59

As a general rule of thumb, if you can break even on the cost in less than three years, it could be a good idea. But if it takes more than five years to break even in, then you might want to hold off because you never know where life's going to take you in five years. You could have to move. You could change jobs. There's a ton of things that could occur in your life that may have you get out of that mortgage.

Mike Mills (Host) | 00:15:59 to 00:16:41

So that's why we say anything that's going to benefit you beyond five years is typically not worth the expense because it's too unpredictable. And if rates come down in the next couple of years, it might make sense for you to refinance before you can reach that breakeven mark as well. Now, if you want my own personal approach to it, as a guy who's bought and sold sold many properties over the years and understands the positives and negatives of buying down the rate, because I originate loans every single day, I personally never buy down the rate or even use seller paid closing costs to do. You see, $10,000 in seller paid closing costs is going to serve me much better today by having to bring that much less cash to closing than buying down a rate that I could very well refinance or change anytime in the near future. Look, rates move up and down, but today cash is always king.

Mike Mills (Host) | 00:16:41 to 00:17:04

I want to put money to work for me in many more ways than just saving a little bit of money every month on my mortgage payment. Buying down your interest rate can be a really smart move if the math works in your favor and your specific circumstances support it. However, always consider your long term plans and market conditions before committing to a rate buydown, as the benefits may vary depending on these factors. So talk to your friendly neighborhood mortgage banker to find out if it makes sense for you. All right, you ready to learn how to get more listings?

Mike Mills (Host) | 00:17:04 to 00:17:30

So, as a real estate agent, you're a key player in helping sellers navigate challenging markets. And there's never been a more challenging market than we have today. As interest rates rise, homes across the country are spending more and more time on the market. So how can you provide valuable insights and recommendations to your clients in a world where homes spend more time on the market every single month? Well, let's look at the top five home improvement projects you can recommend to sellers to help you win more listings.

Mike Mills (Host) | 00:17:30 to 00:18:02

Sell homes faster and give the highest rate of return on the investment for your clients. Sellers are often resorting to concession and price drops to lure potential buyers these days and to win listings. In this tight and competitive market, it's clear that the traditional listing presentation and tired marketing tactics just aren't going to cut it anymore. Sellers, now more than ever, expect us to come to the table with a plan that'll fetch them the top dollar for their homes. And in order to build credibility, sell homes faster and secure more listings, we need to provide data driven home improvement recommendations.

Mike Mills (Host) | 00:18:02 to 00:18:27

So here are the top five home improvement projects that offer the highest return on investment and should be part of your recommendations to selling clients. Kitchen Refresh this is a 377% return on investment. The kitchen is often the heart of the home and the focal point of buyers and updating. The kitchen can increase buyer interest and deliver a higher ROI. Today's, buyers prefer move in ready homes, and a dated kitchen can certainly deter them.

Mike Mills (Host) | 00:18:27 to 00:18:47

A refreshed kitchen includes painting cabinets, installing new appliances, updating countertops and many more. These are cosmetic updates that don't require permits and are cost effective compared to full remodels. Refinishing not replacing. Hardwood Floors this is a 348% return on investment. You see, hardwood floors have a modern luxury appeal that elevates a home's feel.

Mike Mills (Host) | 00:18:47 to 00:19:03

They're in high demand and can easily raise the sale price, especially in competitive markets. So recommend refinishing hardwood floors whenever possible to give them that fresh, updated shine. Number three. Just basic listing prep. This is a 297% return on investment.

Mike Mills (Host) | 00:19:03 to 00:19:36

You should suggest tackling basic prelisting home improvements like painting flooring installation or refinishing lighting updates and hardware swaps. You see, simple things like faucets, cabinet and doorknobs, ceiling fans, and even light switches and outlet covers can be cheap and easy improvements that can make significant difference in preparing your home for sale. Number four roof replacement. This is a 288% return on investment. Now, while roof replacements can seem expensive, they are essential if a roof is leaking or in poor condition, and in some cases, just a little too old.

Mike Mills (Host) | 00:19:36 to 00:20:01

Small repairs may suffice for newer or well maintained roofs. But addressing roofing issues ahead of time can help avoid red flags during buyer inspections. And if the roof is new and mentioned in your listing description, it can attract buyers with significantly lower insurance premiums. You see, the vast majority of your homeowners insurance premium is determined by the age of your roof. And with high interest rates and high home prices, every little reduction in that mortgage payment each month helps attract more buyers to your listing.

Mike Mills (Host) | 00:20:01 to 00:20:26

And number five flooring replacement. This is a 280% return on your investment. Outdated carpets can really deter buyers, so recommend updating carpets, especially in areas like the bathroom or kitchen you see these days. There are more modern options, such as new carpet, luxury vinyl tile or LVT hardwood or just regular tile. Luxury vinyl tile is a really cool option for older homes at lower price points because they look great and are cost effective and waterproof.

Mike Mills (Host) | 00:20:26 to 00:20:56

Today's buyers are looking for updated features and move in ready homes. Just go search the active listings in your area and filter for homes that have been on the market for more than 30 days. I promise you, most of those homes are outdated, and they're going to give buyers the feeling that they're going to have to spend more money to move into an already overpriced home. But by suggesting these strategic home improvements, you can increase the home's value and attract more buyers, which is vital in today's competitive market. So have your sellers roll up their sleeves and bust out some old Bob Vila episodes, because those improvements are going to be critical to get their house sold quickly.

Mike Mills (Host) | 00:20:56 to 00:21:24

Well, my wonderful humans, that's all for this week. I hope you found a few little nuggets in today's episodes to add to your real estate repertoire, and I cannot thank you enough for your time and valuable attention. Look, Google makes billions of dollars a year on selling businesses access to your eyes and ears. I'm so grateful that you chose to spend 20 minutes of your day with me. Now my eyes and ears are going to be locked into tonight's ALCS Game Seven as my Texas Rangers take down the trash can drummers to advance to the World Series for the first time since 2011.

Mike Mills (Host) | 00:21:24 to 00:21:31

That's my prediction. Mark it down. I hope you have a great week and continue to be the best humans you can be. And I'll see you right back here next week. Take care.