Good morning … or afternoon … or evening , depending on when you’re reading this. The quiet hurricane season has suddenly gotten loud, but — so far — it looks like the latest round of storms aren’t heading our way.
Fed Chair Jerome Powell clarified on Wednesday to expect interest rates to continue to increase at least through next year.
Why it matters: With rates rising, we could see a resurgence of a couple of old real estate tricks: the wrap-around mortgage and the agreement for deed. These can work to get buyers into homes when qualifying for a new mortgage is out of the question.
The two documents work similarly in that they both convey the property to a buyer who then agrees to pay the seller monthly payments, and the seller uses the buyer’s payments to pay the current mortgage on the property.
- The seller-held wrap-around mortgage or agreement for deed often is higher than the rate that the seller is paying their current lender. But the rate is lower than market rates that the buyer would pay if they went to a conventional lender.
- This allows the buyer to purchase the property without qualifying for a higher-interest conventional mortgage which in turn lets them afford more house.
The big picture:
- A deeper buyer pool for the seller who may sell the property for a higher price, and also — over the life of the wrap — make more money in interest on the loan to the buyer. The buyer gets the tax benefits and creditor protections of a homestead while building credit.
- The seller’s credit report still shows their mortgage. The seller remains “married” to the buyer until the wrap is paid off.
- Foreclosures, due-on-sale clauses, and dishonest sellers.
Our thought bubble: We’re expecting to see more of these as interest rates increase. Having lawyers involved early on for advice and drafting will help ensure the good, manage the bad, and prevent the ugly.
The Fed raised the Central Bank’s interest rate by another 75 basis points on Wednesday afternoon, seeking to cool inflation back down to its mandated target of 2%.
Why it matters: Mortgage rates track with the Fed’s lending rate. As the Fed’s rates rise, so do mortgage interest rates. Higher mortgage interest rates increase monthly mortgage payments, making it harder for buyers to afford to buy homes they could purchase a few months ago with lower interest rates.
- As the number of potential homebuyers dries up, demand for home purchases, closings, mortgages, new furniture, new cars, and many other consumer activities also fall, slowing down the economy.
- With less demand for such goods and services, companies that cannot borrow money at higher rates and cannot sell their goods and services will lay off employees, shutter operations, and stop producing those goods and services.
The Fed has two mandates: Keep inflation at 2% or less and maintain full employment. The US has been close to full employment for the past 10 months.
- However, inflation has steadily risen during the same time.
- Some economists, including some in the Fed itself, attribute the inflation of prices to supply chain shocks after the pandemic waned. Goods, services, and labor were in short supply, so the price charged for them rose.
- This includes housing, where building supplies prices increased, labor prices skyrocketed, and there was not enough supply for those who needed it.
It begs the question, if supply was stressed and that was inflating prices, then how is choking off supply going to bring prices down?
What we’re seeing: Housing prices are decreasing very slowly, and rents are increasing but more slowly than they had been before rates started rising. The effects of the rising rates may not be realized for months.
- Central banks worldwide are following the US Fed’s lead, raising rates in their home countries in an effort to tame inflation. Their hope is that a little pain now will avoid prolonged massive pain. But will the cure be worse than the illness? New York Times
- If the housing market is about to get hammered, here’s what buyers and sellers need to know. Realtor dot com
- Miami is the #4 metro where people stay the longest, but they leave Colorado Springs faster than anywhere else. Realtor dot com
- Empty downtown office highrises wasting space? Turn them into housing. Realtor dot com
- Realtor.com joined Zillow, Compass, and Redfin in preparing for a further housing downturn as it laid off an undisclosed number of employees and contract workers after leads from the site dropped 39%. SFGate
- We need at least 40% income growth to get houses back to normal affordability. CNBC
- Fannie Mae says the housing market meltdown has only just begun. Housing Wire
|We closed the office on Tuesday afternoon so we could go bowling during a long late lunch. It was a great way to blow off steam while joking and laughing.
Congratulations to Lisa Lutz who received her title agent license (again) this week, so you’ll start seeing her signature on title commitments and policies.
The bottom line: This week’s news and activities reminds me that we’ve only just begun.
|We hope you found this helpful — any feedback is appreciated and can be shared by hitting reply or using the feedback feature below.
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