Texas Mortgage Trends: Rising Rates, Insurance Costs, and More

(0:08) Well, happy summertime to all you remarkable real estate professionals out there. School (0:12) is out and peak home buying season is officially upon us. This is the Texas Real Estate and (0:16) Finance Podcast and I'm your host, Mike Mills, a North Texas mortgage banker with Geneva (0:21) Financial.

I'm here each week helping you sift through all the news impacting your business (0:25) and hopefully bringing you some helpful insight along the way. But when I'm not pontificating (0:30) on this podcast, I help your clients buy and refinance their homes. My team and I specialize (0:34) in those not so easy situations.

We have loans for all kinds of unique circumstances and (0:39) are great at solving problems to help your clients get into the home of their dreams (0:43) when others can't. So if you're having issues finding someone to help solve that out of the (0:47) box situation, give us a call. We'd be happy to help in any way we can.

Okay, enough about (0:52) me. What relevant real estate information is coming your way over the next 20 to 30 (0:56) minutes? Well, in the leadoff spot, as always, mortgage interest rates. After a couple of (1:01) strong weeks pushing rates to yearly lows, we're back over 7% again and creeping up (1:06) the last few days.

I'll tell you why and what to watch out for over the summer. I have some (1:10) updated housing inventory data for the nation and right here in DFW. Inventory is increasing (1:14) as we head into the summer buying season.

So your buyer might have a little more selection (1:18) than they've had in recent years. I've got some information on why home and auto insurance (1:21) is so expensive these days and why having your client get their insurance quote during (1:27) the option period or even before they execute the contract altogether might be a pretty (1:31) good idea. That insurance premium could affect your client's ability to qualify for their (1:35) home loan.

I've got an update from the VA regarding the commission change rules that (1:39) are coming in August. And finally, with Americans having more home equity than they've ever (1:43) had before, but also historically high credit card debt at record-breaking interest rates, (1:48) I'm going to arm you with all the ways that your clients could access their equity and (1:52) even show you how sharing that information with them could lead to a past client selling (1:55) their home with you and possibly even buying another one. So stick around to the end for (1:59) that.

But before we start, please help a mortgage lender moonlighting as a podcaster out and (2:03) share this episode with a friend. If you know someone like yourself that might get some (2:06) benefit from my weekly ramblings, please let them know. I love new listeners and you guys (2:11) are the key to making my podcast dreams come true.

So like, subscribe, comment, and share. (2:15) I'd greatly appreciate it. Okay.

So what happened with rates last week? Well, (2:19) after several bad days in the bond market because of some positive economic day, according to (2:23) mortgage news daily, as of May 27, the average 30 year fixed conventional mortgage is about (2:28) 7.125%. And the average 30 year FHA is about 6.75%. The average 15 year conventional rate (2:34) is about 6.75%. And the average jumbo rate is somewhere around seven and a half percent. (2:39) Again, according to mortgage news daily, we're going to get quarter one GDP data on Thursday (2:44) and April PCE inflation data on Friday, and both should have an impact on rates depending (2:49) on the story they tell about our economy. You see, if GDP comes in below market expectations, (2:53) you would expect the bond market to improve lowering interest rates.

But if the GDP comes (2:58) in higher than expected, then we could see rates jump up a little bit. And if April's (3:01) PCE inflation, which is the price that we pay for goods and services comes in higher (3:06) than expectations, then you'll definitely see rates snap higher. But if inflation comes (3:10) in flat or even below expectations, then that would be some positive news for mortgage rates (3:15) overall.

You see, most people paying attention to all this economic data, at least as it (3:18) pertains to mortgage rates, don't expect inflation to be the trigger that ultimately causes the (3:23) Fed to start lowering the Fed funds rate. But instead, the deteriorating labor market (3:28) is what, if anything, is expected to trigger the Fed to begin cutting rates. Remember, (3:33) the Fed's dual mandate covers price stabilization, but also full employment.

And right now it's (3:38) much more likely that we see the unemployment rate continue to increase before we see a (3:42) significant drop in inflation. Because as it stands, unemployment is at 3.9% right now. (3:47) And with the layoffs increasing every month here in 2024, especially in tech, manufacturing (3:52) and the finance sectors of the economy, it's very likely that we'll see the unemployment (3:55) rate increase over the next several months.

And if we hit 4.2%, that's the level where (4:00) you could expect to start seeing discussions from the Fed regarding rate cuts. Because (4:03) right now inflation is being impacted heavily with the rising cost of insurance, energy, (4:09) food, and housing, none of which raising or lowering interest rates is going to impact. (4:13) CoreLogic report that single-family rentals are up 3.5% from this time last year.

And attached (4:18) or multi-family properties are actually down 0.6% for the first time in 16 years. Which (4:25) is good, but not enough to move the needle compared to the single-family rents. And oh (4:28) by the way, that's mostly due to the overbuilding of apartments, condos, and townhomes over (4:32) the last five years.

But that construction is all but stopped since rates turned upward. (4:36) So you can expect those rents to climb over the next several years as that excess supply (4:41) gets utilized. (4:42) There is some good news on inflation though.

Target says that it's dropping the prices (4:45) of over 5,000 common items, joining a growing list of stores trying to draw inflation-weary (4:51) shoppers. Target's list of price cuts posted on Monday includes milk, meat, bread, soda, (4:57) fresh fruit and vegetables, snacks, yogurt, peanut butter, coffee, diapers, paper towels, (5:01) pet food, and more. The company said that it's already lowered prices on about 1,500 (5:05) items and will continue to do so throughout the summer.

So cracks are starting to show (5:10) in some of the middle-to-higher end retailers. Amazon and Walmart are still doing great, (5:14) but that's because consumers will continue to buy necessities but will just trade down (5:18) to cheaper retailers as their discretionary income continues to be impacted. (5:23) So if you want lower rates, we need lower inflation and or higher unemployment.

And (5:27) until that happens, we're going to be living in this 7% range for the foreseeable future. (5:32) Okay, now let's look at last week's housing trends to see where the overall market is (5:35) headed right now. (5:36) So this past week, we actually saw inventory grow by 16,500 overall available listings.

(5:42) This is great news for home affordability and sales because we did not see this hardly (5:46) at all last year. The weekly inventory change rose from 578,000 listings to over 594,000 (5:53) listings. And this same week last year, inventory rose from 424,000 listings to 433,000 listings.

(6:00) Only about a 9,000 listing change. And this week is the inventory peak for 2024 at 594,000 (6:07) listings. We're trading at about 37% more listings on the market compared to this same (6:11) time last year.

Now we still are not at pre-pandemic levels, which saw close to 890,000 listings (6:17) on the market in 2019 at this exact same time. But another good sign for home prices and (6:22) affordability is the percentage of homes taking price cuts in 2022. (6:26) At this time, 23% of homes were taking price cuts in 2023.

At this time, 30% of homes were (6:32) taking price cuts, but already in 2024, that numbers jumped to 35% of the homes on the market (6:38) right now are taking price cuts. So that's good for overall affordability. Now purchase (6:42) applications are a whole other story.

There does tend to be a decline as we get out of (6:46) may and into the summer, which is normal seasonality. And last week further prove that point purchase (6:51) apps fell 1% week over week, and they're down 11% from this same time last year. (6:57) And this is a continual trend so far in 2024, because so far this year, we've only had six (7:01) weeks of positive application data compared to last year, where we've had 11 negative (7:05) weeks of application data compared to last year.

Also, another reason we might start (7:09) to see inventory improve at least some over the next decade or so, unless builders pull (7:13) back on production, of course, is the U S census Bureau keeps downgrading the expectations (7:18) for the U S population over the next several years. So some great reporting from Lance (7:22) Lambert of resi club, who I often use to find great data for this, check them out on (7:26) Twitter. According to a recent article from Lance, the U S census Bureau has downgraded (7:30) the expected population numbers for the U S by 2050.

Again, you see in 2008, it was (7:36) forecasted that by 2050, the U S population would reach about 439 million. Then in 2012, (7:42) it revised its forecast down to 400 million by 2050. And in 2023, it was revised down (7:48) again to 361 million people.

That's over 78 million people less in the U S than was (7:55) expected in 2008. And by 2038, the U S census Bureau expects us deaths to start exceeding (8:02) us native births. And in 2081, they expect the total population to actually begin declining.

(8:09) And really this is mostly due to people just not having children. Now, does this impact (8:14) housing today? No, but over the course of the next 15 or 20 years, it's going to have (8:19) a significant impact on housing inventory and affordability, hopefully for the positive (8:23) because there's less people for the same amount of homes. But if construction stays stagnant, (8:28) that it may not impact it at all.

But this lowered population is also going to have impacts (8:32) all throughout the economy. And as Lance correctly points out in his article, this might be one (8:36) of the biggest long-term stories in America right now. And it's also affecting everyone (8:40) all over the world.

Some really crazy times we live in. Now, those are some national housing (8:44) numbers, but what about right here in good old Dallas Fort Worth? Well, the Dallas morning (8:49) news reported last week that DFW ranked second in the nation for home sold and active home (8:54) listings just last month, trailing only New York. We had nearly 8,500 transactions that (8:59) were closed in April up from the 7,800 the previous year, there were more than 13,000 (9:04) active listings and almost 31% year over year jump.

According to data from REMAX, the report (9:10) also found that active housing inventory is up by 49% year over year, but home prices (9:16) are still up one and a half percent annually. And right now the median home price in DFW (9:20) is about $405,000. DFW had 3.2 months of housing inventory in April, at least according to (9:26) Metro Tech's data, and that's near pre COVID levels, but a six month housing supply is (9:31) something that we consider to be balanced.

So inventory is up, but still not close to (9:35) what we had just 10 years ago, which is why with even higher inventory, home prices are (9:39) still going up. And also some of that 3.2 months of inventory includes new construction (9:44) that isn't completed yet, meaning it's not ready to move in, keeping future home buyers (9:48) from listing a possible house that they would sell, keeping inventory down as well, but (9:53) it's still improving nonetheless, which is good for buyers looking to get better deals (9:57) on homes that are currently available right now. It just depends on where you're looking.

(10:00) There's some areas in Dallas, Fort Worth that have a glut of inventory, and there's some (10:04) that still barely have enough to have any choices because as we all know, real estate (10:08) is different state to state, city to city, neighborhood to neighborhood, but more inventory (10:13) is always good for affordability. And as long as rates stay elevated, we should expect to (10:17) see this trend continue. All right, let's talk about a very exciting topic, which is (10:21) homeowner's insurance.

Now, if you own your home or heck, even if you own a car at this (10:25) point, you know that insurance rates have gone through the roof, no pun intended, at least (10:30) over the last couple of years, all across the country. Now, I did an entire episode (10:34) about this back in January of this year. I had a good friend of mine, Brad Bingham with (10:37) Allstate on the podcast, and we discussed many of the reasons for these big jumps in premiums.

(10:43) So check that episode out if you want to go a little deeper into this subject, but here (10:46) are the top five states with the highest home insurance rates for a $300,000 residence according (10:51) to bank rate. Florida's number one with 5770 per year on average. Louisiana is number two (10:56) with 5710.

Obviously lots of flooding and weather in those states. Mississippi is about (11:01) $4,300 a year. Again, on the coast, lots of weather.

Texas right now is sitting at about (11:07) $4,000 a year and Alabama comes in fifth at $2,900. So right here in the Lone Star State, (11:13) we're sitting at number four and highest insurance premiums across the country. And just to (11:17) give you a little context, according to a 2019 report by the National Association of (11:21) Insurance Commissioners, the average annual premium for homeowner's insurance in Texas (11:25) was just under $2,000.

So that's over a hundred percent increase just under five years. So why (11:31) is this? Well, the primary reason for inflating insurance prices is the increasing number of (11:35) claims in recent years. The payouts connected to these claims mean that insurance companies are (11:39) increasing prices to offset their costs.

Government data shows that 2023 was a record-breaking year (11:45) for damaging weather and climate events. In fact, in 2023, there were 28 such weather events that (11:51) were recorded, each totaling at least 1 billion of damages, which substantially exceeds the (11:56) previous high of 22 events set in the year of 2020 and double that of 2019, which only had (12:03) 14 of these set events. Now, some of this is due to there being more weather events recently, but (12:08) also that these weather events cost so much more to pay for repairs because of the cost of goods (12:14) and inflation.

And aside from this affecting your pocketbook personally, you need to make your (12:18) clients aware of this, especially first-time homebuyers. I personally know of insurance (12:23) companies denying people over low credit scores, claims that they've made on their properties in (12:27) the past, and even claims made on the property that they're trying to purchase, which is unheard (12:32) of, at least in my experience. So getting a quote on insurance needs to be something that they (12:37) either do right away during the option period, once the contract is executed, or even before (12:42) they execute the contract.

As a lender, I've personally changed how I estimate insurance (12:46) premiums for buyers over the last couple of years. But even when I raise my expected premium (12:51) from $200 a month to $250 or $275 on say a $300,000 home, there have been circumstances where they're (12:57) coming back at $350 or $400 a month, depending on the buyer. And if someone's debt to income (13:02) ratio is tight, then this extra premium could cause them not to qualify for the loan, or at least (13:07) make that payment so much more expensive that they don't feel comfortable with it anymore.

(13:11) And this is becoming more and more of an issue. And with higher rates and higher home prices, (13:15) this is just one extra piece that's making these mortgage payments more and more unaffordable with (13:20) all these factors. So my advice to you is to start making this part of the expectation (13:24) setting with your buyers, because this is becoming more and more of an issue.

And if (13:28) your lender or the lender that the buyer is using doesn't address this upfront, it could (13:33) be a deal killer. So watch out. Now, something is an industry that we knew was going to need to (13:37) happen is finally working its way through the system right now.

As many of you may or may not (13:42) know, the VA as of right now does not allow for the veteran to pay a realtor commission. It's one (13:47) of the unallowable. So when August 17th hits, if a VA buyer finds a property where the seller is (13:53) unwilling to pay the agent commission, then as it stands right now, that agent on the buy side (13:59) cannot get compensated because the VA buyer cannot pay.

So that puts VA buyers at a significant (14:05) disadvantage in finding a home or even just offering on homes with a reputable agent once (14:10) these changes take place. But we got some good news on this front. Last week, the officials (14:14) announced that a temporary fix would be issued before June 12th of 2024 and that a formal policy (14:21) change was expected to follow.

One possibility is that real estate commissions could become an (14:26) allowable fee for VA buyers, giving them the same flexibility as other buyers. They did this (14:31) recently with pest inspections. Pest inspections used to be a non allowable, but now the VA buyer (14:36) can pay their pest inspection in order to keep their offer competitive with conventional and FHA (14:42) buyers.

Although they still have not said specifically what exactly they are going to (14:47) do for sure, they are hinting at the changes. And at least at this point, they're saying that (14:51) something is coming, giving veterans a sense of relief to know that there is at least a plan. (14:56) Look, we all knew this was going to be an issue and really it was just a matter of time before (14:59) the VA decided to fix it.

And now it looks like they are, but stay tuned for updates on this as (15:03) we get them. Finally, here's something as a realtor, it may seem like wouldn't be as important (15:07) to your business at first, but having knowledge about this could be a secret hack to help you get (15:13) more clients. And that secret hack is something we call equity loans.

So right now, according to the (15:18) February 2024 ICE mortgage monitor report, the average homeowner currently has about 299,000 (15:25) in home equity, of which about 193,000 is what we call tappable home equity. Also at the same time, (15:32) the US credit card debt is sitting at close to $1.1 trillion. This is at all time highs.

And the (15:39) average rate on this credit card debt is also at an all time high of about 28% interest, at least (15:45) according to Forbes. This is such a problem that Freddie Mac recently announced last month that (15:50) they have plans to get into equity loans themselves, which they never have before. (15:54) The FHFA announced a request for comment on a proposal to allow the government sponsored (15:59) enterprise to purchase single family closed in second mortgages when it owns the risk of the (16:05) corresponding first lien mortgage subject to a combined loan to value ratio of 80%.

If the home (16:10) equity product is approved as proposed, it would have terms of up to 20 years be manually underwritten (16:16) and remain in Freddie's portfolio for six to nine months until the creation of a second mortgage, (16:23) non-TBA guaranteed security. During that time, however, borrowers would be unable to refinance (16:28) their first mortgage until the product is paid off unless it's prohibited by law. This just means (16:32) that Freddie Mac is trying to give a second mortgage as long as they are the insurer of (16:37) the first mortgage and the combined loans do not exceed 80%.

And a closed in mortgage just means (16:42) you can only access it one time. Until there's a secondary market created for these mortgages, (16:47) your buyer would not be able to refinance their first mortgage until that second one was paid (16:51) off. But often you can combine the two of them together into one mortgage later on.

(16:55) So how does this information help you? Well, this is a reason to reach out to your database of past (17:00) clients because many of the people that you've worked with in the past are going through these (17:05) debt issues, right? And as their forever real estate expert, your job is to offer solutions (17:09) to them as it relates to real estate. And this is one solution that could help a ton of people. (17:13) So what type of equity loans are available? Well, you have a home equity second lien.

This is the (17:18) same type of loan that Freddie Mac is trying to start insuring, but it already exists. However, (17:22) you can only get it with small independent banks. So a home equity loan, also known as a second (17:27) mortgage, lets you tap into your home's equity with a lump sum loan.

These loans are secured by (17:32) your home as collateral and typically come with fixed interest rates and minimum payments that (17:36) you'll make over the term of the loan. And thanks to the fixed rate nature of these equity loans, (17:40) they can be a smart choice if you know how much money you need and want consistent monthly (17:45) payments. And if you don't want to touch your current low rate on the primary mortgage.

(17:49) However, these days, this type of loan is much less available on the market because of banks (17:54) tightening up lending standards. And the rates on these could go as high as anywhere between 11 to (17:59) 15%. It's still better than 28% credit card rates, but with few options out there and the requirements (18:05) being pretty strict to qualify, this isn't a loan that's available to everyone, which is part of (18:10) the reason Freddie Mac is looking to get it into the market.

Now, the next kind of equity loan is (18:14) what we call a HELOC, a home equity line of credit. A HELOC allows you to borrow from your home's (18:18) with a line of credit. Now, this starts with a draw period in which you can borrow against the (18:22) home equity as needed up to your credit limit.

And in most cases, you're only required to make (18:26) interest payments during that draw period, which typically lasts about five years. Now, (18:30) following the draw period, the repayment period begins, which is when you make payments towards (18:35) interest and principal. Now, HELOCs typically come with variable interest rates, which could (18:39) be beneficial right now as experts expect interest rates to start falling later this year and into (18:44) next.

And if rates decline over time, then the rate on your HELOC would likely follow suit, (18:49) meaning you'd pay less in interest on the money that you borrow. HELOCs also give you a lot of (18:52) flexibility on borrowing, which could come in handy if you don't know how much money you need. (18:57) On the other hand, though, if interest rates go up in the long run, your HELOC will likely follow (19:02) suit.

So you could end up paying more interest than you would with a fixed rate home equity loan. (19:06) But again, the requirements on these loans can be pretty high. You're limited to how much equity (19:11) you can tap using these products and less and less lenders are offering them right now.

So it (19:16) might not be the best option for all borrowers. And lastly, you have what's called a full cash (19:20) out refinance. So with this type of loan, you refinance the entire mortgage on your home and (19:24) borrow money from the equity in the process, having one lump sum loan.

So unlike a home equity (19:29) loan or a HELOC, a cash out refinances replaces your current mortgage with a new mortgage loan (19:35) at a new rate and new terms. Now, this could be a tough sell for someone sitting at two to three (19:40) interest on their current loan. But surprisingly, there are still lots of people out there with (19:44) four to five percent interest on their current mortgage.

And seven percent is higher, of course. (19:49) But twenty eight percent credit card debt interest is ridiculous. And also the requirements on these (19:54) loans are a little bit easier to qualify for because they're guaranteed by Fannie Mae and (19:57) Freddie Mac right now.

And you can typically tap more equity than you could with a HELOC or a (20:02) second lease. So it may not be right for everyone right now, but it might be very helpful depending (20:07) on the situation, especially if people have monthly credit card or other debt obligations (20:12) that far exceed what it would cost to consolidate those all into one loan, (20:17) saving money and cash flow on a monthly basis. So the real question is, is how is this going to (20:21) help you sell more homes? Well, number one, this is an excuse for you to contact your database (20:26) and let them know what's going on with their equity and give them an option to a solution (20:32) to possible credit card debt.

You're just letting them know how much their home is worth and how (20:36) much equity they have. It's just another touch point to put you in the role as the expert in (20:40) all things real estate. Not to mention that when they know how much equity they may have sitting (20:44) in their home, it might spark the idea to try and sell it, causing them to pick up the phone (20:48) and call you with more questions.

And if they do decide to sell, then they may also want to buy. (20:53) And you know what? Even if they don't want to do either of those things, it's just another reminder (20:57) that you're the realtor that's always looking out for their best interests and that you have (21:02) solutions to any issues that they may have or that one of their friends or family may have (21:07) because your client has a network too. And if you're their go-to expert, giving them ideas on (21:12) how to solve a problem, they may share those ideas with their friends and family.

And that's (21:17) never a bad thing. We all need future clients as well. So are you helping your clients in all (21:21) things related to real estate or are you just waiting for the phone to ring? Well, that's (21:25) all for today, guys.

Rates are still elevated. Inventory is growing. Insurance is expensive.

(21:31) VAs fixing their commission issue and equity loans could help you find more buyers and sellers. (21:36) I really hope you got some valuable real estate nuggets today and I hope to see you back next (21:40) week. Join me on Thursday as I welcome Jeff Zempfer to the podcast.

Jeff is a digital marketing expert (21:45) in the real estate space and he's coming here to share all his tricks and knowledge with us on (21:50) how to use digital marketing to grow your business in 2024. So tune in for a masterclass in real (21:55) estate marketing. Thanks for hanging out with me, guys.

I hope you all had a safe Memorial Day (21:58) weekend. And until next time, be great humans and keep grinding. Life is what you make it.

(22:04) So make it great. See you later.