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Economics of Inflation: A Buyer's Guide to Mortgage Strategies | All Roads LTR Podcast | EP. 37
26 Plays6 months ago
Join Matt for an in-depth conversation about the often misunderstood topic of inflation and its implications for the housing market. Is inflation inherently good or bad? What is the ideal inflation rate, and how does it affect mortgage rates? But more importantly, what does all this mean for homebuyers?
We uncover strategies to navigate the shifting landscape of interest rates, including the power of seller contributions and temporary rate buy-downs to learn how to leverage these tools and secure the best deal in today's market and position yourself for future financial success.
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Transcript
Inflation: Is it Good or Bad?
00:00:10
Speaker
You've described what inflation is, but inflation is a good thing or is it a bad thing? In general, do we want inflation to be zero? No, but there's a healthy mark of inflation right now. The fact that inflation is eight, nine percent is not a healthy mark. Around a two percent mark is a good inflationary number. We all know.
00:00:30
Speaker
Like look at your parents, right? You know, your, your parents bought their house probably for 60 to a hundred thousand dollars. That same house right now is not worth 60 to a hundred thousand dollars, right? We, inflation is healthy.
Federal Reserve's Inflation Target
00:00:44
Speaker
Money growing is healthy, but at a rate that is out of control is not healthy.
00:00:49
Speaker
Yeah. And so an economist I heard present described roughly that 2% target rate that the Federal Reserve has is designed to expand our economy. And so having deflation or stagflation where it's not growing or it's going backwards is not a good thing.
00:01:04
Speaker
And so we just want it to be, like you said, in a controlled fashion. So inflation isn't negative necessarily, right? So that's the first thing I wanted to put out there. And so in order to get back to 2%, we're going to have to continue to raise the Fed rate.
Understanding the Federal Reserve Rate
00:01:20
Speaker
And this is another term that I hear all the time, and I wanted to help see if you could expand on what the Federal Reserve rate is.
00:01:27
Speaker
So it's the overnight lending rate that the banks use to borrow money on a basis. Right. So and it's the Fed rate is not going to directly impact like the 75 basis points that they raise is not going to directly impact your credit card right then and there. It's not going to directly impact your car loan right then and there. It just means that the money is more expensive for us to borrow, essentially.
00:01:55
Speaker
You know, so in the question that I always get, I mean, I had five realtors text me, their clients are so nervous, you know, yesterday, feds are going to raise rates, this and that. I always tell people the day that the Fed raises rates, typically interest rates don't change. And the question is, is, well, John, why is that?
00:02:12
Speaker
Well, the Federal Reserve, we anticipate the mortgage-backed securities, right? Every loan is sold and packaged up as a mortgage-backed securities. The bond market, which is the mortgage-backed security market, understand that there's going to be a raise in rates. They've already predicted the 75 basis point increase. And it's intentional, correct? Correct. They signal their moves well in advance intentionally. Correct.
00:02:37
Speaker
So we're not exactly the day of it's not like all of a sudden the interest rate that morning was seven and that evening it's, you know, eight percent. It is we anticipate what the rate move is going to be. We actually anticipate what the next rate move is going to be based on the notes that they share with the general public the day after the day of the
00:02:58
Speaker
meeting.
Impact of Interest Rates on Economy
00:03:00
Speaker
So it's not exact days, but it does have a clear impact on mortgages. I mean, think about when we went to bed December 31st, 2021, interest rates were in the threes.
00:03:14
Speaker
Right now, you're sitting in the mid sevens. So it has a huge impact on the economy and the marketplace. And look, interest rates play a big role in your monthly payment, there's no doubt, which is why 2020 and 2021 was pandemonium because rates were in the twos and the threes in some cases. I'd like to say in the front lines of that hysteria and going 20, 30, 40 offers and just it was nuts. I mean, giving up your first born some people for an offer, not literally. Well,
00:03:44
Speaker
I mean, we've lost some and I was so aggressive on the offer, I couldn't believe it, but I just kept thinking this is not healthy. This is not the way it should be. A healthy interest rate is a 5% interest rate, right? We've been spoiled and trust me, I've enjoyed it, okay? We all, yes. With the twos. We've all enjoyed, yes.
00:04:04
Speaker
But it's not it's not something that could say sustained in a normal place. So, you know, what we are predicting and this is why I'm talking to a lot of buyers.
Current Real Estate Market Dynamics
00:04:17
Speaker
Right. And they're like, John, I can't afford at seven and a half percent. I just don't like it. I don't want to do it. I can't do it. I mean, how many times have you heard that conversation?
00:04:24
Speaker
I hear it every day. That's the reason I wanted to get on here and help describe this and bringing someone like yourself on that originates a ton of loans in Maryland. You're listening in on a conversation that if you haven't had this yet with a local lender, you're listening to the conversation you would be having with someone like John.
00:04:43
Speaker
And the conversation goes pretty simply, right? You have an advantage now that you didn't have then, and you have the ability to negotiate on price, terms, and seller contribution. Your payment is going to be higher, but what I'm telling people is, look, you will have a higher interest rate, right? Nobody has a magic button that they could go back to two and a half percent.
00:05:04
Speaker
You are going to have a higher interest rate, but the mortgage banker association, which is pretty darn accurate, is expecting interest rates. Let's say they fall to five and a half percent. You're dropping a total of two percent on your interest rate. You are going to save a ton of money. So what we're doing is putting people into mortgages right at seven and a half percent, which we have some tools, which I'm going to talk to you in about a second.
Mortgage Strategies: Refinancing and Buy-downs
00:05:26
Speaker
But we're putting people into this mortgage and saying, look, you are going to refinance the average person refinances
00:05:33
Speaker
a 30-year mortgage, right? A lot of people are like, I'm gonna get in a 30 mortgage, I'm gonna stay in it for 30 years. No, you're not, right? The average person will refinance that mortgage about two times in a 10-year period. Is it because they wanna pull out cash? Is it because they wanna do renovations to their house, pay off student loans, pay for colleges? We don't know, right? Everybody's got a why. Well, I'll tell you, I heard this, I'm in the business, and when I bought my home, which we anticipate being our forever home here in Lutherville,
00:06:02
Speaker
I love the place. I was trying to be convinced this exact situation not to go even for a 30 year fix, but to do an arm because the rate, it was significantly better and I was in the jumbo category and it just made sense. And I'm in the business. I've heard that statistic thrown at me a million times and it's challenging because that's risk and it makes you nervous.
00:06:23
Speaker
And one of the things I want to highlight is that I've heard this approach. The likelihood of you not refinancing in the next couple of years is zero. Correct. It's what I've heard. But you talk to a buyer, they say, Matt, that's speculation. I'm not going to buy a home that I can only, quote unquote, afford or want to afford based on what you're saying there. Because what if it goes up to nine percent?
00:06:44
Speaker
And I don't blame them, right? Which is why we're typically putting people into a 30 year fix at seven and a half percent or whatever the range is. So if it goes up to nine percent, you're in a 30 year fixed and it's never going to change, right? So, you know, we completely do a 180. We have no idea what's going on. Next thing you rates are 15 percent. Well, you still have a half a percent or half of what the market's selling right now and you're fixed in for a 30 year fixed.
00:07:09
Speaker
Arms also don't always have the best rates right now because of an inverted yield curve, right? We're not going to go ahead and see the best interest rate on an arm in some cases. But again, the 30-year fix gives them the cushion. But what I was just talking to you about before getting over here is we have the options for these buy-downs. And these buy-downs, again, I've been at it for 17 years. These buy-downs were popular years ago.
00:07:33
Speaker
they come back. So the buy downs give us, if you as the real estate agent can negotiate seller contribution, we could use a portion or all of the seller contribution to temporarily buy down the interest rate for the consumer. So let's pretend the interest rate is seven and a half percent. We have many different buy down options. The one I like the best is a one percent buy down over a two year period. And I'll explain to that why. But
00:08:02
Speaker
Instead of having a 7.5% interest rate, you will have a 6.5% interest rate for a two-year period, okay? And we're using the seller proceeds to offset that monthly payment and get it at 6.5%. And after that period, for the next 28 years, in the event that you don't refinance, your interest rate is going to be a fixed 7.5%, right?
00:08:25
Speaker
So it's a standard 30 year mortgage, but it's a buy down, temporarily buy down for 24 months. And the benefit is, let's say in 12 months, the rates are five and a half percent. You'd be refinancing anyway, locking in the lower rate. Absolutely. And you want to know the best part about that is you're going to temporarily be at six and a half percent for that 24 month period.
00:08:45
Speaker
Let's pretend that cost you or the seller $10,000. So essentially what we're doing is putting $10,000 in an escrow account and we're paying the difference between seven and a half percent interest rate and six and a half and we're giving that credit. We're taking it out of that money that the seller gave you. Let's pretend you only are in that home for four months because all of a sudden now interest rates are five and a half percent. You don't lose that $10,000 in there.
00:09:10
Speaker
If there's money left over in the escrow account, the buy-down account, that money goes down to your principal curtailment. So instead of you owing $200,000 on a mortgage and you had $10,000 in that escrow account, you used up $2,000 of it. You now have an $8,000 credit against your principal when you refinance. So you're never losing that money because a lot of people are going to say, hey, John,
00:09:35
Speaker
I'm going to just use that $10,000 seller contribution to buy the interest rate down. So instead of 7.5%, I just want to use that $10,000 to get a rate of 7%. I counter them and say, look, if rates are at 5.5%, you use that $10,000 that you're never going to get back. At least now for a 24-month period, we could give you a lower monthly payment.
00:09:58
Speaker
And then that money is never disappearing. You're going to be able to use it as a principal curtailment, which just simply means instead of owing $200,000, now you owe $192,000 on your mortgage payoff when you do a refinance. So it's a huge opportunity. It's a huge win for people. There's a 2-1 buy down. So instead of having a 7.5%, you'll have a 5.5% and then a 6.5%.
00:10:21
Speaker
I like the 1% buy down over two years. But you still have to be qualified. If I'm a buyer, I have to be qualified for the 7.5% payment. Great point. Yep. You have to be qualified for that. And one of the things I just wanted to clarify, if you're watching this and you have no idea what a seller contribution is, you know, the seller contribution to clarify there, that's when a seller, during the negotiating process, when you write a contract, they are willing to give you, if you will, a credit to
Navigating Uncertain Markets
00:10:46
Speaker
the buyer. It's the same as cash.
00:10:48
Speaker
In the best way to do it, you risk being salesy when you tell people this because it's almost like you get your cake and you eat it too. Because the market shifted, anytime there's uncertainty, there's opportunity. The fact that I have to do a podcast to describe what these things are and to calm people down to get them through this initial purchase,
00:11:07
Speaker
I say if you were looking to make a move in the last year and you missed it, or two years, three years, and now you're here, there's always a benefit to everything that there's, whether it's a potential negative, right? So yes, there's higher rates, but we have negotiating power now. There's only a few markets in all of Maryland where it's really competitive. Most markets, days on market have crept up.
00:11:29
Speaker
Things have slowed down. The good homes still sell like crazy, but you're not gonna be nearly as... It's not gonna be a line around the block for an open house on a Sunday like there used to be. Correct. And if there is, it's rare. And so you can basically get a better position to get a better deal on your home and then improve your rate down the road.
00:11:53
Speaker
And so I think it's an advantageous thing for a buyer to understand, to know their options. And I'll probably say it a few times, you don't have to remember anything we just said, right? Because if this is new to you, you don't need to know all of this and spend the next 10 hours of your life Googling. You just can call one of us. And that's the purpose of having a professional is to look at their scenario. And I do my darnedest to get people to speak to someone like John first before we tour homes.
00:12:22
Speaker
And it's because it's all in the game plan. And I want to know I call it the buffet of options. I want to know what all the options are before we see the first house, because that will dramatically impact potentially where we look, how we go about it, what price range we look in, everything. Yeah.
00:12:38
Speaker
Yeah. I mean, and here's the advantage of buying now too, is you have the seller contribution in some cases, most cases I would say you have the ability to either negotiate on price or seller contribution or terms. Okay. I've seen offers that are contingent upon them selling the buyer, selling their other house. And years ago, I've never seen that. Like, you know, the past two years I had not seen that. I'm seeing that more often.
00:13:01
Speaker
But what's going to happen is all those people, so if you could afford the payment right now, it is a great time to buy because what's going to happen is when the rates drop, because they will drop, those people that can't afford, say, a seven and a half percent interest rate now can afford at a five and a half percent interest rate.
00:13:22
Speaker
We're going to see a lot more people come out of the woodworks. There's not that many people. There's not that many buyer shopping for shopping for homes right now. So you're going to see a lot more people when the rates are lower and there's going to be a lot more competition.