The Path to 8% Mortgage Rates

0:00Dave:This has been an insane week in the bond market and subsequently in the housing market. We have seen bond yields rise to the highest they have been in over 20 years. And if you listen to this show, you know that has direct implications on mortgage rates and on the housing market. And so today I have Kathy and James here. And although we were supposed to do our traditional headline story, we got to talk about what is going on in the bond market, what it means, should we all be panicking, or is this actually an opportunity? I'm Dave Meyer. This is On The Market. Let's get to it.

0:39Dave:Welcome to On The Market, everyone. Kathy, how's it going? Good to see you. It is going so great. I think I'm over my jet lag and back to normal. Glad to hear it. After a glorious European wedding for your daughter, congrats again. Thank you. James, how are you doing? I'm not as rested as Kathy. I've been kind of in the trenches. It's been a grind the last couple weeks. Yeah. Well, that's kind of what I want to talk about today. We were planning to do our normal headline episode, but I just want to talk to you both about what's going on right now in the housing market and mostly in the large economy.

1:11Dave:Because I'll be honest, yesterday, I had a couple of moments of just sheer panic. I was just getting a little bit worried about what's going on and I can share why. But before I get into the data, are you guys worried? What is your overall vibe, maybe about housing, maybe about the economy, or how are you just feeling these days about business? I mean, right now, whether you're doing a BRRRR or a flip property and you're in the middle of it, it doesn't feel very good. So that's why you're tired. Yeah. And that's because you got to kind of shift things around as things change. But your performance only is good as what you know when you're underwriting that deal, right?

1:46When you're looking at the investment, you're checking all your different data points, whether it's for rent or for resale. But when you get a big shake up on interest rates, it throws the performance out of fit. And so, you know, it's, you got to kind of grind through it and get rid of things. And I will say people are losing some money right now, including myself, and you got to have to push through. Now, what I am excited for is what I'm seeing on the buy side, right? But you got to get through this inventory. And you know, if you got a lot going on, which I always do, You just got to grind through it.

2:20But it doesn't feel good. Last Saturday, I had the same. I was sweating Saturday. I was like, I went in a full tunnel reshape investment mode.

2:28Dave:I think sometimes a little freak out is necessary. I woke up today. I was like, OK, I'm fine. It's OK. But yesterday, I saw something that freaked me out. But Kathy, how are you feeling? Well, there's so many perspectives. So I'm going to give several. There's my personal portfolio. There's my business. There's our syndication business. So I'll start with personal. and really it's doing fantastic. So short-term rentals, oh my gosh, we hit new record highs and these are high end. So I'm just mind blown. That's where you have to be. It's incredible. That's been super good for us and carrying us through some of the things that are more difficult.

3:05Our long-term rentals, you know, they're just long-term rentals. They just are rented. Nothing's changed there. Now our business is selling investment properties to investors, right? So that is shockingly doing great. And I'll tell you why. Concessions. I mean, there's headline news about seller concessions. They are amazing. Not great for James. Not great for our syndication side, right? If you're a seller, it is hard. It is so hard to sell. And again, depending on where you are, I'm sitting here in Park City at our development here. And actually, Park City is doing pretty good right now. prices are going up again.

3:45But we've got our Oregon one that is just sitting. It's crickets. There's nothing happening there.

3:50Dave:Well, the whole Pacific Northwest is rough, right? It's rough. So that's hard. But then the Florida one, ticking away, just still going. Florida's coming back. Florida's coming back, right? Yeah, it is. Yeah. I mean, we have a lot of rentals there and we haven't experienced all the issues people talk about insurance costs going up, but we don't buy in flood zones. We buy newer insurance rates are lower. So we're not even experiencing that. They're just steady rentals and rents going up. You know what the key phrase is? Florida's coming back. So whatever market you're in right now, they're all kind of doing different things.

4:23Yes. They do come back. That's what everyone has to keep on top of their brains because I mean, Florida I know was rough and so was San Francisco 12 months ago. And you know, they all rebound. And so you put the strategy around what you think is going to happen over the next six months.

4:40Dave:Okay. But can I tell you what really freaked me out? Yes, please do. Okay. Two things. There's actually two different things. So the first thing that freaked me out, you guys know Michael Zuber from One Rental at a Time? Yeah. He's got a popular podcast. He put out something and it's from Twitter or X or whatever, but there was someone just an analyst from BlackRock apparently came out and said that within BlackRock, they're testing their financial models for 9%, not mortgage rates, treasury yields. I was like, holy shit, we're all going to die. It was like my reaction to that. Wait, explain it to me.

5:18What are you saying?

5:19Dave:So they're basically saying that within BlackRock, huge private equity firm, one of the biggest in the world, they're basically running models to try and understand what would happen to their position if treasury yields went from five where they are today to nine, which would take mortgage rates to like 11 or 12%. Oh. So I was like, oh my God, this is, it all ends. Like the whole world ends. But you know, we've been there. You weren't, but I survived the 80s and there were double digits. When I started investing, it was double digit interest rates. I mean, we didn't die. But if you look at like in the 80s when mortgage rates were that high, the like income to price ratio was like three to one.

6:00Dave:It's like five and a half to one now. So it's just the affordability is just going to get completely depleted. So I'm not even worried about the housing market. The whole economy would have collapsed if the whole government would collapse if yields went to 9%. Like we cannot afford that. Right. So as a country. So that freaked me out. But it's like, you know, they're just probably doing worst case scenario stress testing. That's not around the corner. But, Kathy, this is the thing I was going to tell you. Logan Motoshami, who I really love, and I know you do too, Kathy. I'm not sure, James, if you know him as much.

6:31Dave:He's a housing wire analyst. And he's pretty much always right about everything. He's very good at this stuff and understands the bond market a lot. And he came out with something that said the case for 8 % rates. And he was basically saying mortgage rates are going to 8%. Oh, boy. I did see that. I did not read it. Yeah. He was just like, block this out of my mind. Yeah. I understand that sentiment right now. But yeah, that could definitely... I mean, they're at 7-4 right now. So it's not like that crazy a stretch, but I just think that's worrisome. We are in an inflationary environment. It's a different game.

7:06Dave:It's scary. I put out a reel yesterday about what I think is going to happen. Basically, mechanically in the housing market, when rates are going to go up, what I think is going to happen is demand is going to drop. We all know that. That's like a pretty measurable thing. We saw mortgage purchase applications. I think they dropped 20 % in one week. We're also going to see new listings go down, in my opinion. So like fewer people are going to choose to sell their home, right? Because this is what everyone in the doomers get wrong is that it also impacts supply and supply will come down as well.

7:36Dave:But I do think inventory is going to go up because the stuff that does go on market is going to sit on the market and that's going to put downward pressure on pricing. And so even if it goes to 8%, maybe instead of 1 % to 2 % declines next year, it goes to 3 % to 4%. But I still don't see the ingredients for a crash because as of the last months of data, there's still very little distress. Maybe, James, you're friends. Maybe flippers are in distress. But the average American homeowner still paying their mortgage on time. Delinquencies were actually going down. You might see some data about foreclosures going up, which is true.

8:11Dave:but you have to think of foreclosures as kind of this long cycle. And after COVID, a lot of people entered the foreclosure process and they're finally actually getting to that end where they're getting foreclosed on. But if you look at the beginning of that process, people going into delinquencies and early stage foreclosure, it's going down, which is wild. It's incredible. I guess I feel like 8 % mortgage rates are different this time than it was two years ago when they were 8%. Do you guys feel that way at least in the local market where we are there's been a lot more economic changes and layoffs and it's like a combination of the two because you know some markets are still doing pretty healthy right now but um i i do feel like it's different the sediments changing because people just they're it's like they've been waiting you know like when you're waiting for something bad to happen and then it's like oh it's coming and then it doesn't come and then it's like every time it comes back your fear gets bigger and so we've now gone through this a couple of different times with the, I mean, we went, when the interest rate shot up, we all had that fear and nothing happened.

9:11I mean, that, in my opinion, should have broke the market a lot worse than what's going on now. Two, three years ago. I mean, it was, I mean, that was a huge increase in cost of capital. And we didn't, we saw like a moment of time dip, but then it rebounded right up and people were still buying. And that's what I try to keep in the back of my mind is the market was rebounding when the rates were in the sevenths.

9:31Dave:That's right. You know, we saw a lot, big, big dip. And so, you know, it's very, very irrational. And that's where as an investor, you got to be like, you can't let fear make your decisions. And you got to go, okay, what can I do? If I'm in a deal now, how do I mitigate this loss? And how can I try to make this better? I mean, I know this is what I spent all day last Saturday doing, going through every deal, looking at my comps again, going, this is my exit. Where's the velocity behind that exit? And if there's no velocity, I'm switching the plan. You know, Dave, that house, remember that gem of a house that me you walked through in Columbia City?

10:04Dave:Yeah, the one that had all that different options, like you could have developed it, you could have flipped it, you could turn it into a duplex and rebuild it. Yeah, my original strategy was to actually sell novelty and sell this big yard. But that's at the top of the price point now. Like I'm like, no, that's not what I'm swinging for anymore. And so I just literally pulled the trigger on this this week to where now we are doing a dadu in the back, because now I can drop the price on the front house from a one four value down to a million 50, right? Because that's where the velocity is. And so you want to go, where are people buying?

10:37Because people are still buying. They just got to be able to afford it. Yeah. Put the plan together that is affordable.

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13:22Dave:Welcome back to On The Market. I'm here with Kathy and James. We're talking about what's going on in the bond yield, whether or not you should be worried, and what you should do with your portfolio. Maybe it's just me, but I feel like there's just a psychological difference now. I think a lot of people, in my mind, wrongfully, I don't like this, but a lot of people were just banking on refis. Like they were buying in 2023 and 2024, assuming maybe on bad advice or maybe it was their own decision that like you're going to be able to refinance and you should just date the rate, marry the house kind of thing.

13:56Dave:There was a survey of people who bought in the last two years. So just the last two years. And apparently 50 % of them say they cannot afford their mortgage without a refi. So that's scary in itself. But I think for the other people who have been sort of tire kicking now, there's no longer a narrative that's like, oh, you could just refi, which is good, right? Like, I think they should only buy when they can afford it. But now people maybe aren't stretching as much. So I think demand is just going to be harder to come back without like a real sustained path forward, like down for rates. And the only two things that can happen are the war in Iran ends and the Strait of Hormuz opens and oil prices drop 30 percent.

14:40Dave:Or there's a serious recession, which has its own problems. Right. And like I am not a geopolitical expert, but I've been reading a lot about this stuff and like the war in Iran is not going to end. Like there's no good out at this point. It doesn't seem to be. What do you do? Like right now we're just in a stalemate and oil prices are up. No one's even talking about the fact that Russia and Ukraine are just blowing up each other's diesel depots. And now diesel in Seattle is almost$8 right now. I'm laughing, but it's not funny. It's insane. It's crazy. Anyway, I feel like people are recognizing that there's no quick fix.

15:17Dave:And so you have to be careful. Everyone, us too. You just kind of have to assume this is going to get worse. not that it's a disaster but like i don't think we're in the about to take some upswing i feel like it's going to get a little worse before it gets better and like i don't see the pain yet with the sellers which is going to come it's going to be a cold winter like this is going to be a dead dead winter on velocity sales now i do have a little bit of hope for the spring coming in because uh you know the spring always helps you get a little bit of a jolt in there even in a bad market but it's a cold winter for sellers, but a great winter for buyers.

15:57Like, and I can say I am, I probably have more capital out than I've had out in 24, 36 months. It's coming back and we're just going to do whatever we can to get that money back because I do think the opportunities coming this winter are going to, it's going to be buy mode. You can't think about the deal you have when investing is the long term. Like, what can you do? How can you change your portfolio? What deals can you get into? Because I am ramped up looking to buy. Even though I don't feel good about it right now, I'm buying, that I can tell you. Because when people are freaked and spooked and you're going in those dark winter months, that is where you can really get in some good buys.

16:43Dave:For sure. No one else wants to buy this winter? I would buy long-term holds, for sure. flips? I don't know. I would be a little worried about flipping. Buying whole deals, they're coming together too. I mean, we just, we're closing on a property and it's just a praise for$2 million higher than our purchase price. I have not had that happen in a long, long time on a bigger multi-deal. Is that a syndication on? Yeah. It's like we bought it right, you know, and that's the thing. You just have to buy right and don't have FOMO. Like just because you want to go buy, just take your time. Like I was talking somebody on Tuesday at this walkthrough thing.

17:16And he's like, yeah, I'm getting in. And he was a full time pharmacist and he had 120 grand. I'm like, hey, there is no rush to get into this market. Yeah, I agree. Most important thing is just take your time, build your teams, get the resources behind you, then go find the deal where people make a mistake is they find the deal and then they backfill the rest. But you need to set the foundation, which is who's going to finance you? How are you going to stabilize that property? Are you going to rent it out? Are you going to use a property manager? Are you going to sell the property? Who's going to sell it for you?

17:47Get that set up because when you have a better foundation, you can make it through tomorrow in a market. If you're just kind of guessing and firing and shooting, that's how you can really get clipped. As far as buying this fall or if interest rates continue to rise, it's kind of more of the same, a lot more of the same where affordability gets worse. People still need a place to live. Sellers will have to do more concessions if they want to sell to make up for that difference to get back to that affordability level. So I think it's going to be an incredible time to buy. Again, if you're flipping, that's different because you're both a buyer and a seller.

18:23If you're buying hold, you just get to be a buyer in what is definitely going to be more of a buyer's market. Again, more concessions. And you see these reports of, what is it,$18 trillion in home equity or something like that? So there's a lot of home equity out there. There's room for sellers to lower prices. They don't want to, but they might have to.

18:44Dave:That's a really good point. Yes. There's room for it. It's not like everybody's underwater. We're not negotiating with a bank in a short sale type thing. You're negotiating potentially with a seller who needs to sell. It's psychology. Yeah. Like they anchor in their head to some price, but it's still all gravy for them. Like that's what eventually they'll have to realize. And that's what people have to understand when rates go up. prices kind of have to go down unless the economy is booming. If wages are going up at the same pace that rates are going up, then it's okay. But if that's not the case, then there has to be some kind of balance there.

19:15It's the same if rates are low, the prices tend to go up because people can, you know, that cost of financing is lower. When the cost of financing is higher, either prices stabilize or come down. So I couldn't agree more, James. It will be an amazing time to be a buyer. It's going to be really tough for renters and people trying to buy their first home.

19:35Dave:Yeah, I think a lot of boomers are about to find out that their homes are not worth what they think. It's what's gonna happen. And that's okay because they have so much equity. Yeah, exactly. Like I listed a house for sale, a rental that I've been wanting to get rid of for a while and I just like eventually got around to it. And it's not selling for the price I want, but I'm like looking at when I bought it 12 years ago, I'm like, it's still a home run. Like, you know, like if you just lower the price by 20 grand, it's OK. Like, you know, it's hard because you don't you want the 20 grand, of course.

20:07Dave:But no one times the market perfectly. You never always sell at the top. Like this is I think, James, your point is like this is just the cost of doing business. There is some volatility in the market. And it's so important, as James said, to like not count that as your money until it's in your pocket. And then it's probably going to go out and go into another investment. So it's just like you can't get anchored to what you think it's worth because the market is constantly shifting right now. All right, we got to take a quick break, but we'll be back with more right after this. You know, when I first started sharing my real estate journeys online, I didn't have a website.