With the news of The Federal Reserve raising interest rates, there have been many speculations about the direction of the housing market. The 0.75% increase in June was the largest rate hike since 2013.
Changing interest rates affect numerous aspects of real estate.
- Price of your new home
- Availability of capital
- Demand for investment
This capital flows impact the supply and demand for property and, as a result, they affect property prices.
When The Fed increases discount rates it affects short-term borrowing rates. While it doesn’t directly affect mortgage rates, it changes the outlook of what is going to happen in the market. So, the long-term 30-year mortgage market reacts pushing rates up at a very fast pace.
Price of Your New Home
Theoretically, home prices should change when mortgage rates increase as buyers have less borrowing power. For example, in January of 2022, an 800K loan with the rates of about 3% would have had a 3.5K monthly payment. With the rate increase in June 2022, to keep the same 3.5K monthly payment, a borrower would only quality for a 580K loan. Even so, as of late June, home prices have stayed the same. In Southern California, real estate values are greatly influenced by the supply and demand for properties.
Availability of Capital
Although interest rates affect the supply and demand for capital, demand is still high because there is a significant lack of inventory and a housing shortage across the country, especially in Southern California. Many are willing to pay higher monthly mortgage payments for the chance at home ownership.
Demand for Investment
Interest rates also affect the availability of capital and the demand for investment. Demand for investors is determined by investor valuation which in turn should impact real estate prices. Most investors look for cash flow. The valuation starts by forecasting property income and anticipated lease payments. However, low inventory in the housing market has driven rents even higher helping investors with their valuation – keeping demand high and home prices even higher.
Will home prices take a hit with the rising interest rates?
Diving even deeper into interest rates and how they impact the real estate market, we speak to lending expert Artin Babayan with the Babayan Group and PrimeLending.
Silva [00:00:00] Hello. I’m Silva. Welcome to Prospect Group, where we talk about real estate investing and everything that’s happening in the market. And I am so pleased today. Joining us is Artin Babayan with Prime Lending. He is one of our go-to guys when it comes to lending and understanding the climate and what’s happening with interest rates. And everyone I know is running around like their hair is on fire because we just had interest rates go up significantly this week.
Artin [00:00:28] Yeah.
Silva [00:00:29] Talk to me about that.
Artin [00:00:29] That. Well, it’s been wild, these past couple of weeks have been crazy. So the latest thing is the Fed came out and raised the rates by three-quarters of a percent on Wednesday. And even before that, the market on Monday essentially had a panic attack, thinking, oh, the Fed’s going to raise the rates. What’s it going to do? Is it going to keep raising the rates at this velocity? Is it going to keep doing that? So you saw the worst day for interest rates since 2013 on Monday of this week. So before the Fed even spoke.
Silva [00:01:03] Wow. And that was three-quarters of a raise?
Artin [00:01:07] Yeah. And the discount rate.
Silva [00:01:11] When was the last time we saw that? That much of a raise in the rate?
Artin [00:01:16] That much of a raising rate? It’s been a while. As far as I can remember…so I’ve been doing this since 2006. So that’s when I got into lending and started and was working as an intern back even at Countrywide when that was the thing. And back when I started, it was at eight and a quarter, 2006. And since then I saw it just dip, dip, dip all the way down as the market tanked, as all these kinds of things happened. When the recovery was in full effect, we saw the rates start rising up, and then The Pandemic hit and they went back down. And so now we’ve just been now we’re back in a place. But last time they were going up, it was about a quarter of a percent at a time, which is traditionally what it is.
Silva [00:01:56] A quarter of a percent at a time is what we’re used to. Yeah, three-quarters of a percent is.
Artin [00:02:02] It’s a big jump.
Silva [00:02:03] It’s a big jump. So what has been what would have been what have you been hearing? Because this is your world. This is your wheelhouse, your boots on the ground, talking to people. We read a lot of articles and a lot of content and there’s a lot of noise and a lot of conflicting information. Can you set the record straight? What is happening?
Artin [00:02:22] This is my personal belief. So there’s a lot of talk, there’s a lot of different articles and people talking about it. But I think what’s happening is that the Fed is trying to push us into a recession. They saw crazy inflation. They saw things going up so fast. So by pushing up the rates, they edged that off. And now we will see probably things starting to level off and then start coming down. And then they’ll lower rates, the kind of bougie that, and find some kind of equilibrium there. That’s what I think the grand scheme is and that’s what’s going on behind the scenes or that’s what the whole point of all this is. That being said, what it’s doing to people is that it’s changed, it’s increasing the cost of everything from credit cards to mortgages to car loans to any kind of financing. This is the underlying thing. So what the Fed plays with is the discount rate, which affects short-term borrowing rates. So it doesn’t directly change mortgage rates. But what happens is when the Fed changes, when the Fed ups the rate, it changes the outlook of like what’s going to happen with the market. And so then our long-term rates, mortgage, 30-year rates react to that. And so what we’re seeing is that the Fed is raising the rate, pushing mortgage rates up. And now to give you an end and it’s at a very, very fast pace, which to give you an idea, like in January of this year, if you got to 800,000, roughly about $800,000 loan, with the rates being right around 3%, the payment would have been around $3,500. Now it’s $580,000, that’s like with today’s rates.
Silva [00:03:56] It’s what?
Artin [00:03:56] $580,000. If you borrowed $580,000 today, that payment would be roughly about $3,500.
Silva [00:04:04] So what you’re saying is, if I could earlier in January, I could if I could afford to pay $3,500 a month, I would have been able to afford an $800,000 house loan or loan. Right. And today, based on where we are, I could only afford a $580,000 home.
Artin [00:04:22] Yeah.
Silva [00:04:23] Wow. That is a huge difference considering the market and home prices here in Southern California.
Artin [00:04:31] So it’s a huge difference. And what’s shocking is at least now and so everything is so quickly right now. But as of right now, the prices, I mean, we are starting to see price reductions right now like as we speak, but it hasn’t really dropped that much. It’s not like the market has dropped to adjust for that. There’s still, I think, a lot of demand and I think what’s keeping the market prices up so high is like a lack of inventory. But what I think is happening, what’s going to happen is that somewhere there needs to be an adjustment. It’s the rates can’t keep going up like this and the prices still stay the same. Something’s got to give one way or another.
Silva [00:05:08] I think that’s where the confusion is and conflicting information, because people are looking at graphs and information and you’re like, yeah, so the rates are going up. Theoretically, it should slow things down and impact the housing market and home prices, but in reality, it hasn’t really moved that much. There’s been a little bit of turbulence, but there hasn’t been a big dip at all. So I think the inventory element of Southern California housing might have something to do with that, as you just said. But. So you said they raise rates to push us into recession, to level things off. And at some point, they’re going to find that equilibrium.
Artin [00:05:47] They’re going to lower rates to find that equilibrium.
Silva [00:05:48] And they’re going to. Right. Do we have an idea or anticipation of how long that gap is between when things go up and up and up and into recession to when we balance out?
Artin [00:06:03] Well, I think that’s the million-dollar question because we see that we’ve seen versions of this play out over U.S. history. I think in the seventies, there was this called stagflation where interest rates are going up. But the economy was stagnant. They were trying to basically. But what typically happens and I think this that history doesn’t repeat, but it rhymes. So we’re seeing a different version of things playing out where they’re taking it, lessons from the past, and trying to apply it to today’s date to combat inflation. And so the question is like, this is what’s going to happen. This is how this works. But the timing really comes down to some of the different factors that it’s almost like you won’t know until that day shows up. Whereas as the narrative changes, because we’re not there yet, we don’t know it’s we’re not in a place where we’re even talking about going back down now we’re talking about recession is coming. So now we’ve got to get the recession. Then we’ve got to see what’s going to happen there before we make that next job.
Silva [00:06:59] How does that impact your industry?
Artin [00:07:02] Well, the interest rates going up just kind of like last year between last year and now, the mortgage applications have plummeted. I don’t know. I want to say it’s more than 50%, but refinances are pretty much gone. There are not that many people refinancing. So, generally, speaking to me as a residential mortgage lender, I do refinances, and purchases, and those are primarily the kind of loans I do. The purpose of the loan, is you’re taking money out or refinancing the loan or buy a property so people refinancing their property just to lower the rate that doesn’t exist anymore. There’s no reason to do that because everyone who has gotten a loan has a lower rate than what it’s been now, people pulling money out of the property. I’m spending a lot of time talking them out of refinancing a loan and helping them get second mortgages because it’s a cheaper way to take money out than changing out the whole first loan. So you saw pretty much half or like a half of the ways in which applications that are received just go away. So now purchase loans are still there and so people are still buying. I’m still busy with purchasing loans and it’s almost when I was looking at last year to this year, it’s very similar. It hasn’t really dropped off. Maybe it’s even increased a little bit in terms of like how many purchase mortgages I’m doing. But overall, like you’re seeing a lot of mortgage lenders fold. You saw Loan Depot lost a billion or 100 million. It was a large amount of money. Large lenders are trying to fold and lay off large amounts of people. Mortgage lenders are going through what their cycle is, which happens when rates go up, as they just start shutting down and cutting out people.
Silva [00:08:38] In anticipation of what’s to come.
Artin [00:08:41] Yeah, it’s for how long. They don’t know how long this process will go. And at the same time too, it’s like right now they’re not paying, making a profit. So right now it’s like they have a huge payroll. They had we saw rates being the lowest they’ve ever been. So they hired and staffed up and brought in a ton of people. They saw rates just go up so quickly that it was almost like a light switch. So now all the revenue is gone or a lot of the revenue is gone, so or.
Silva [00:09:04] It’s eating into the profits.
Artin [00:09:04] Profits, it’s eating its profits. But a lot of mortgage companies, probably won’t be making a lot of money this year. This is just kind of like the way the cycle of owning a mortgage company is, is that you’ll have a like you’ll have some years where you make a ton of money and some years where you don’t make much money. You’re just trying to keep the lights on. And so what they’re trying to do after they have to layoff, they have to slim down, they have to get rid of all the fat because they need to be in a place where they can at least hope to break even during this period of time so that when it does, time does come time to make money. They’re ready to go.
Silva [00:09:36] We have access to you who’s an expert in this space. What are the absolute things we must know as we prepare for this length of uncertainty that’s coming our way?
Artin [00:09:47] So I was speaking to realtors or to buyers?
Silva [00:09:50] Think we should talk to both.
Artin [00:09:59] Realtors need to be able to communicate to the buyers and sellers that this is the environment we’re in. From the seller’s side, you have to be able to say, like, what are the risks of waiting to sell? And like, we’re starting to see that where the prices are starting to drop. I think it’s communicating that communicating like the difference in what the payment is like, even though three months ago this property sold multiple offers that like way above the listed price. The climate has changed and so we just have to educate and make sure that in front of that rather than trying to chase that market, because that will just like delay and make them lose more money. I think when it comes to buyers, I think a real turn has to be able to guide them and show them where they have to feel like they’re not overpaying because overpaying in this market would be a sin. It’s just like you have to be able they should be able to make sure that the client is buying something solid and be able to like have strong data to support it and also be able to communicate to the buyers that, like the interest rate being this high is a temporary thing. This is not a permanent thing. Somebody had somebody very smart — I can’t remember who — they said, you know, I’d rather buy a lower-priced property with a higher price rate versus a property with a higher price and a lower interest rate. The difference is, I can always change the loan I have on a property, but I can never change the price I pay for a property.
Silva [00:11:29] That’s very smart. The reality is, for a good chunk of the beginning of your loan, you’re only paying interest anyway. Yeah. So, you know, you have, what, about ten years or so to refi this loan, the 30-year loan that you’re taking. So that actually makes perfect sense.
Artin [00:11:53] Especially in the beginning. And then also like with refinance one thing I always look at too is like if you can afford to keep making the same payments, hopefully, you bought the place even though you’re thinking interest rates will come down, but you bought it with the ability to make that payment consistently. If you continue to make that payment and you refinance at the lower rate, you’re not starting again for 30 years, which is, I think, the hard part about refinancing. You’re actually you’ll pay off your loan faster than you originally were planning to. Right. So there’s a way to make it always work for you as long as you play it. There are fiscally responsible ways to refinance at any time, even if you’re 15 years into it and you do this and you keep that, keep the same payment, you’ll just pay off your loan faster. But yeah, in a practical sense for sure. In the beginning, the first couple of years, hopefully, this doesn’t take that long to cycle through. Maybe it could, but I think at any point you just kind of plan for the worst, but hope for the best and just adjust accordingly.
Silva [00:12:49] Anything else you want everybody to know about? About the current circumstances in the climate, we’re in?
Artin [00:12:55] I think the main thing is like to be informed and not to act on the fear. I think if you’re if you’re not buying because you’re scared, but like rather than looking at all the data or not selling because you think, oh, maybe it’ll come back, I’ll go up. I think you just have to really look at the information and make decisions based on information rather than fear. And I feel like that’s driven, that drives the marketplace. I saw it happen in 2008 when people let their properties go away, which if they held them now, they would have been totally fine and then even made money. So far, let them run that way. We saw it in 2006. The fear of missing out pushed the prices up too. So you seeing like all this kind of stuff. So you just don’t want to let fear and the general consensus push you in a way that doesn’t make sense. Look at the data, take a breath, and then make a decision.
Silva [00:13:49] That’s great advice. Thank you so much.
Silva [00:13:51] Thank you. We appreciate you being here. We’re going to pick your brain some more. All right. So this has been an episode with Artin Babayan with PrimeLending. I think the great advice you just gave is to keep your emotions in check no matter what happens. The most important thing and to look at the data. All right. Do us a favor. Make sure you subscribe. Comment. Ask a question and make a suggestion on the topic. We love hearing from you. And for now, this has been another episode at Prospect Group where we talk about real estate and how to help you make more money. We’ll see you next time.
