Weekly Market Update: Mortgage Rates, NAR Lawsuit, Variable Income & Atomic Habits

Mike Mills (Host) | 00:00:09 to 00:00:31

Hello, everybody. This is the Texas Real Estate and Finance Podcast, and I am your host, Mike Mills. I am a mortgage banker here in the Dallas Fort Worth Metroplex, and I've been publishing the podcast right now for about a year now. Usually, I bring on guests from all walks of the real estate life marketers, successful realtors investors, other lenders, et cetera. My goal of this is to help real estate professionals keep up to date with what's happening in our industry.

Mike Mills (Host) | 00:00:31 to 00:01:02

But often I don't get to go over some of the big news that happens each week, because my guests and I are focused on one particular topic of conversation. So I decided to do an additional weekly episode about 20 to 30 minutes long, just to keep you in the loop as to what big news stories are happening in real estate and maybe give you a few little extra bits of information to help you along your real estate journey. So I hope you find this helpful and informative. And as always, if you find value in the content, please hit the subscribe button or share it with a friend. Every listener goes a long way in allowing me to put out more and more episodes each and every week.

Mike Mills (Host) | 00:01:02 to 00:01:20

So I very much appreciate you tuning in, and I hope you stick around. So today we're going to go over a couple of topics. First, market updates and news stories that are impacting real estate this week. Spoiler alert, it ain't good news, but I promise I will not be a Debbie Downer. I just want to be sure you're informed, and when the news isn't great, I still got to tell you about it.

Mike Mills (Host) | 00:01:20 to 00:01:58

And speaking of it ain't great, I'll be discussing where mortgage rates are right now and why they've gotten so high, just so you can better explain to your clients and help them understand what buying in this market looks like. I have a mortgage tip for self employed borrowers that you can add to your real estate book of knowledge, and I'm going to go over what's happening with the big lawsuit filed against Nar Remax and Keller Williams and how it could impact your commissions as a realtor. And this is something that every agent needs to be aware of. I'll let you know if there's anything you need to watch out for next week and try to end on a more positive note with a book recommendation that I have to help take your real estate business to the next level. So I hope you get a lot out of this episode, and I hope it doesn't suck too much so I can do it again next week.

Mike Mills (Host) | 00:01:58 to 00:02:09

All right, let's start with the news. I wish it was good news, but unfortunately it isn't. These are just the facts, folks. So here we go. So mortgage rates crossed 7.8% for the first time since the year 2000.

Mike Mills (Host) | 00:02:09 to 00:02:29

And with higher mortgage rates come higher payments. The average house payment just hit a record $2,900 a month this week. And that's just the principal and interest. But to all my realtors out there looking to find buyers, the average rent payment is now also a record nineteen hundred dollars a month. And that doesn't come with any appreciation upside on a property that you own just one $900 living expense.

Mike Mills (Host) | 00:02:30 to 00:02:48

Existing home sales are at their lowest level since 2010. And even new home sales that had been doing pretty decent are starting to decline. They're at their lowest level since March of this year. The ten year treasury yield hit 4.7%. This is because the demand for these bonds is declining due to the amount of bonds being issued to pay US.

Mike Mills (Host) | 00:02:48 to 00:03:01

Debt. Because interest rates are so high, this is bad for mortgage rates, but we'll get into more of that in a minute. Now for some good news. Job openings were apparently higher this week. Although when you really dig into the jobs data, there's a lot of conflicting numbers regarding part time employment.

Mike Mills (Host) | 00:03:01 to 00:03:12

People having more than one job in multiple listings in different states for the same job. But that's another topic. For another day. Government shutdown was avoided, but the speaker of the House, Kevin McCarthy, was voted out for the first time in U. S.

Mike Mills (Host) | 00:03:12 to 00:03:27

History. That thing's a complete mess. Delinquencies on mortgages are a historic lows, but delinquencies on credit card debt is rising very, very quickly. Mortgage demand, however, is at its lowest level since 1995 and even below the average demand in 2008. Hear that, buyers?

Mike Mills (Host) | 00:03:28 to 00:03:41

Sounds like opportunity. Less demand means less competition, which means better deals on homes, right? Just trying to spread a little good news here. But new listings are also trending at their lowest levels in history. No one wants to move with a 3% mortgage.

Mike Mills (Host) | 00:03:41 to 00:03:57

The jobs report will be out tomorrow. I'm recording this on October the fifth. So this is going to be a big indicator on what would be expected for the Fed for their next meeting in November. If the job market is weakening, then the Fed rate hikes might be done. But if jobs and unemployment stay at good levels, then they may hike one more time in November.

Mike Mills (Host) | 00:03:57 to 00:04:15

So there's your real estate news for the week. Now let's talk about what everybody in our industry really cares about interest rates. This could be an hour long discussion and I made an episode about this a few weeks back when I did my first solo podcast. But I want to touch on a few high points again. So so everyone kind of understands it basically comes down to this money was very cheap for a long period of time.

Mike Mills (Host) | 00:04:15 to 00:04:50

This made the cost and risk of borrowing money very low. This, in turn, pumped more cash into the economy, which caused demand for goods to increase, which caused inflation, which caused the Fed to raise rates to slow the economy down. And shrink the money supply, which caused the US government debt to skyrocket because of these high interest rates, which caused them to issue more treasury bonds, which caused the price of bonds to decline due to oversupply in the market, which caused bond yields to go up, which caused mortgage rates to go up as well. So that's the quick short version of why we're here. But the real victim in all this so far is just the housing market.

Mike Mills (Host) | 00:04:50 to 00:05:21

And in my opinion, the Fed and the US government caused this problem and is currently doing nothing to try to fix it as it especially relates to housing. So if you follow my logic here, and if you agree with me, let me know. So I did a little research on this and from about 2008 to 2020, interest rates were about three to 5%, which is still very low historically, and at that time great for housing as it provided a lot of buying and selling. Home prices were appreciating in value at that time, but started increasing more dramatically after 2011. Well, if you look at the numbers, I think it's because builders stopped building homes.

Mike Mills (Host) | 00:05:21 to 00:05:44

You see the months of supply was about nine months in 2010, which means if not, another home was listed and sales volume stayed at the current pace, the market would run out of homes in about nine months. But by 2013 that number had dropped to four months and it hasn't gone beyond that since. So inventory has been tight since 2013. There have been a couple of months recently where it technically went above four months. But that's only in new home inventory.

Mike Mills (Host) | 00:05:44 to 00:06:12

And with new home inventory it counts homes that aren't complete and may not be complete for eight to twelve months, so that home can't be moved in or purchased in immediately. And if someone was going to sell their house to buy that new home, their house wouldn't be available until they could move in to the new house. So new home inventory can be a little deceiving. So low inventory and relatively low rates caused prices to increase at a steady clip for about seven years. Prices were going up, but still manageable for most Americans at the time.

Mike Mills (Host) | 00:06:12 to 00:06:38

But then COVID happened. The world shut down and slammed the brakes on our economy, but also the global economy as a whole. Now, by the way, this isn't a discussion about all the other stuff around COVID, but just on what it did to the economy. People were trapped in their homes for a long period of time and global commerce came to a grinding halt. So when everything started to open back up again, the Fed and the US government felt they needed to pump money into the economy to keep businesses from failing and get things moving again.

Mike Mills (Host) | 00:06:38 to 00:07:06

So the Fed lowered rates next to zero and there was a massive amount of market stimulation like we've never seen. Stimulus checks were issued three times, ranging from $600 to one $400 per qualifying citizen. And child tax credits were passed, sending $300 checks to everyone with a qualifying child. So about $1.8 trillion was issued to individuals and families. But often overlooked in the water cooler discussions are the 1.7 trillion given to businesses in the form of PPP loans.

Mike Mills (Host) | 00:07:06 to 00:07:32

You don't even want to know where all that PPP money went. Let's just say very wealthy people got a lot of money with very little oversight. So if you add stimulus, cash, cheap borrowing, plus pent up demand, plus the severely crippled supply chain, and multiply that by significant corporate price gouging because they could, and boom, you have 8% inflation. In 2020, the inflation rate was 1.23%. In 2021, it jumped to 4.7%.

Mike Mills (Host) | 00:07:32 to 00:07:56

And by 2022, 8%. And eggs were worth more than an ounce of gold. So the Fed has to fix this problem and put the genie back in the bottle. Oh, and during all this, the Fed was also buying billions of mortgage backed securities each month, artificially keeping mortgage rates historically low. So now the Fed has to start raising rates to shrink the amount of money flowing through the economy and stop buying mortgage backed securities to move mortgage rates back up.

Mike Mills (Host) | 00:07:56 to 00:08:30

But now that we have high Fed rates, the cost for the government to borrow money skyrockets also, which causes them to have to issue more bonds, which devalues the bonds, which in turn drives mortgage rates up even more. So our housing market was doing just fine. Not too much appreciation and plenty of activity. But when COVID hit, the overcorrection and flood of cash caused everything to spike up and home values to go to levels we've never seen, and rates to their highest levels in almost 30 years. So now we have high prices, no homes for sale, and high interest rates.

Mike Mills (Host) | 00:08:30 to 00:08:47

It's the recipe for the most unaffordable housing market in history. Now, the good news. When will rates come back down? Well, like I said in my previous podcast, a recession is the most likely place for mortgage rates to start coming back down to more manageable level. We won't get to 2% like we did when the Fed was buying up all the mortgage backed securities.

Mike Mills (Host) | 00:08:48 to 00:09:20

But they will come down because as we've seen, when the Fed wants to stimulate the economy, they lower the Fed funds rate, which lowers the amount of interest on the debt the US. Government has to pay, which causes bond prices to go higher due to a lack of supply, which in turn causes yields to go down and rates to go down as well. Add to that a declining stock market in a recession and you'll see even more money flood to the safer and more stable bond market. So I'm not saying I'm rooting for a recession, but if you want mortgage rates to come down and housing to become more affordable, well, you kind of are all right. Well, that was a lot of fun.

Mike Mills (Host) | 00:09:21 to 00:09:40

I hate to reopen old wounds, but the more you understand about how we got here, maybe the better we'll be at preventing getting here again. But just like anything else, this is a market cycle and it too, shall pass. You just got to hold on a little bit longer. Now, mortgage tip of the day. Do you work with borrowers who are self employed, have income based on commissions, heavy overtime or bonuses?

Mike Mills (Host) | 00:09:40 to 00:10:05

Well, this is what we call in the mortgage world variable income. Now, as a general rule of thumb, you have to have two years of variable income in order to use that income to qualify for a mortgage. Now, with FHA, VA and USDA loans, this is a must. But with conventional loans insured through Freddie Mac, there are some instances where you may only need one year. So be sure to talk to your local mortgage professional, like myself, to see if your borrower can qualify for one year of this type of income.

Mike Mills (Host) | 00:10:05 to 00:10:21

But twelve months is a must. So if your client just started a new company or just got a job as a Realtor last year and is only using commissions, probably going to have to have two years before they'll be eligible to buy a home. Next up, do you like your commissions as a realtor, especially as a buyer's agent? Well, that might be changing. Not for the good.

Mike Mills (Host) | 00:10:22 to 00:11:03

So right now there are two class action lawsuits going through the court system that take aim at the Nar Participation Rule involving Remax Keller Williams and the National Association of Realtors. The plaintiffs in these cases allege that commission sharing inflates the cost for consumers and is in violation of the Sherman Antitrust Act. This is the agreement a listing agent makes as a blanket offer of compensation to the buyer's agent in order to list a property on the local MLS. Basically, they're saying that the buyer's agent commission should not have to be paid by the seller, and making this a part of the negotiation will lower the commission structure and save consumers money. Now, the other side of this Nar makes the argument that the current commission structure helps consumers.

Mike Mills (Host) | 00:11:03 to 00:11:33

Number one, saving cash for a down payment and closing costs is hard enough. And if you add to that having to pay a buyer's agent commission, that would make saving for a home orders of magnitude more difficult. Newer agents and brokerages would have a much harder time breaking into an established market. Shrinking competition of available agents and brokers in any market would, over time, cause the cost to the consumer to go up, not down. There are flat fee brokerages right now that exist to sellers, but they aren't very popular because of the value an agent brings to selling a home.

Mike Mills (Host) | 00:11:33 to 00:12:04

Buyers can purchase a house right now without using an agent, but very few ever do that because the process of buying a home is filled with pitfalls and intense negotiations on price and repairs that very few buyers are equipped to handle. Buyers agent protect the consumer. They don't harm them. And forcing buyers to pay for their representation will cause more and more buyers to choose not to be represented due to the costs, which will put all the control in the sellers and the seller's agent's hands. Plus, everyone who bought their home and are now selling it got the advantage of a seller paid agent, so why shouldn't they have to do it now too?

Mike Mills (Host) | 00:12:04 to 00:12:25

Now, remax settled for 55 million, which is not necessarily a good move in my opinion. They're basically claiming fault and leaving the entire industry open to more and more of these types of lawsuits in the future. But I'll tell you right now that Nar is not going to settle and they're going to continue to fight this all the way to the Supreme Court. Now this is a story that every agent should be aware of because it could upend our entire industry. I know as a lender, I don't want this to happen.

Mike Mills (Host) | 00:12:25 to 00:12:42

Cash is tough enough to come by, especially these days, and a ruling like this would drive the pool of available buyers even lower than it is right now. Okay, let's try to end on a lighter note, if that's possible. And I feel like I really brought the room down today with this one. So sorry about that. Anyway, my favorite book of all time.

Mike Mills (Host) | 00:12:42 to 00:13:27

I've read it three times now and I have copious notes filling my phone and computer about the lessons it teaches is called Atomic Habits by James Clear. Read it or listen to it, whatever you need to do. This book will change how you live your life, if you let it. Atomic Habits is a definitive guide to breaking bad behaviors and adopting good ones in four simple steps showing you how small, incremental everyday routines compound into massive positive change over time. When you read this, you'll understand how small habits compounded over time make big changes in your life, how setting goals isn't nearly as important as the systems and processes you implement into your daily life that help you achieve those goals, and a step by step process to creating good habits, but maybe even better breaking bad habits.

Mike Mills (Host) | 00:13:27 to 00:13:44

I've spent a good amount of time over the last few years programming my brain and my daily routine to get the most out of my day every day. And I've never been more motivated, healthy or efficient with my time at any point in my life. So if you feel like it's time to get your shit together, I would start with Atomic Habits. You can thank me later. Well guys, that's all for now.

Mike Mills (Host) | 00:13:44 to 00:13:58

I really appreciate you sticking around and supporting the show and I hope you found it useful and informative. I'll be back next week with another market update, hopefully get a little bit better at this thing. I might change the publishing date around a little bit. Not just sure yet. But again, thank you for tuning in.

Mike Mills (Host) | 00:13:58 to 00:14:20

And don't forget to check out my most recent episode with Joe Pizzuro, where we discuss real estate, fractionalization and tokenization. Or my most recent episode with Conrad Jackson, where we discuss how to make money in real estate outside of just representing a buyer or a seller, which is something we all kind of need right now. Conrad is a wealth of knowledge, and I think you'll get a ton from that episode. Have a great week and be great humans. I'll see you next time.