Episode 66 Transcript
Rising Interest Rates – What does this mean for home buyers – sellers
Adrian Schermer 00:02
Hello future millionaires. Welcome back to the get rich slow podcast. We are your hosts, Adrian Schermer, Rob Delavan, and Lance Johnson. How you guys doing this morning?
Rob Delavan 00:11
Lance Johnson 00:13
Hey, great there, Adrian, how are you?
Adrian Schermer 00:15
Thank you. I’m doing very well. I’m excited for the show today. You can find us online Apple podcast, Spotify, Audible, Amazon music, multiple other platforms, including YouTube, if you want to see our smiling faces while we tell you all about today’s exciting topic, rising interest rates. What does it mean for home buyers and sellers? Before we dive into that, though, I want to talk a little bit about some wins. Rob, you had a success to share with us.
Rob Delavan 00:44
Yeah, I’ll try to keep it brief. As you guys know, I’m so good at that. We had a project, this is in the Portland metro area market. That was a real mess of a house had to do a ton of things just to get it like slightly average and eventually priced this thing out at I don’t know about 525 was what it was comping for, based on a number of different things that condition, the fact that it backed up to a somewhat busy road and it was a struggle of a property just in general. We actually ended up reducing the price down to 475, after a couple of price reductions aggressively based on the way the market was responding to us and as soon as we finally hit the right price, which was 475, the market told us that we’re at the right price by giving us multiple offers, again, which we haven’t seen for a few months and we were able to work that through to the end ended up with a cash buyer and actually, were able to basically not give any concessions and even though the property still needed a lot of work. So, it was a big win for the client. They were able to move on and had to sell and you never want to be in that position in a declining price market which we’re in. They were in it regardless and had to sell and we made it happen and it was a big win, especially on the negotiation side, it could have been another $30,000, $40,000 Less based on factors and conditions of the house. So, it ended up at 475 on the dot and with no concessions and previous buyers, we actually had had a failed sale before that. They were trying to get us to like do $60,000 or $70,000 in concessions based on condition things. So, we just worked all that upfront and you know, they were happy buyers and happy sellers, and on to the next one. So, it was a fun story.
Lance Johnson 02:48
Nice shot. All right, so we got some upcoming events that are coming. We have our Santa event that’s happening Saturday, November 12. It’s at the ROI Delevan office off of lower Boone’s ferry, and it’s between one and four and really, this is kind of exciting. You know, everybody has a routine during Christmas going to the mall and stuff and you know, things are getting expensive. So, we’re providing opportunity for our clients and our clients to bring friends and potential clients for us and just kind of have a nice event. You know, we like those social events and bring the kids or the grandkids and, you know, have Santa there and take some pictures. This is the first one we’re doing and so we’re excited about it, and we’ll build on it and have an alternate lower cost means for clients and friends to do that Santa thing.
Rob Delavan 03:44
Hey, there we go. It’ll be fun.
Adrian Schermer 03:46
Yeah, a little more relaxing environment at the mall, too. I mean, if that’s your thing, that’s your thing. People in Portland love standing in lines.
Rob Delavan 03:54
Yeah, there we go.
Adrian Schermer 03:55
I say this is more my vibe. So, let’s jump back into it. In today’s podcast episode we’re going to be talking about really unpacking an article from costar economy that is titled the housing market faces a painful correction. If you don’t know who costar is, they are the largest commercial real estate information and analytics provider. So, they’re a great source of information. I like the articles that they publish, because I feel like they’re very data driven and so that’s more fun for us to talk about because we can kind of fill the gaps with our ideas, but use real numbers to you know, base our opinions off…
Lance Johnson 04:44
Alright, so based on this article, this graph here, what trends are you seeing in the market now the interest rates have peaked, maybe not peaked quite yet. They discuss in depth impact on monthly payments for homebuyers. How are you advising your clients, Adrian?
Adrian Schermer 05:01
Yeah, absolutely awesome question and I love this chart. If you’re listening, please check the resources on this article because the data, again is what I think is fascinating and what drives you know, where our mind goes on these, you can see the direct relationship between the orange line on this chart that runs from 2000 up to today, on housing affordability, that index that we’ve talked about in previous episodes, try to get a reference in the show here. A very are fantastic producer if you can help us add that in there. Affordability is a calculation, you know of basically a monthly payment average as a portion of averages in income in our country and obviously, when you see interest rates drop, that affordability index without any other factors, changing that affordability index is naturally going to go up, you can afford more house for your dollar with a lower rate than a higher one sounds obvious. But the impact of getting so close to not zero, really but you know, the lower that number goes, the greater the multiple is when we see a rise again. So, we’ve got a situation where there’s two ways to look at it. You can look back at the peak, and you can go oh, man, I really wish I got that two and a half that I heard you know, my brothers, cousins, best friend’s dog got or…
Rob Delavan 06:22
Yeah, I got a couple of those, Adrian.
Adrian Schermer 06:24
[Cross talk]. But we’re seeing I guess a return is what I see when we look farther back in the trendline and we look especially all the way out historically, housing is still affordable, but we’re going to start to lose, gosh, I had so many buyers who skipped the first home, the starter home, they went straight to four-bedroom, three bath giant homes with really low-down payment. I had so many conversations I remember especially last two, three years that people going oh my gosh, I can afford that much. I’m approved for that much and now the correction is it’s gonna hurt a little bit, right, because it sucks to know that that was an option. You know, I’ve got a chart that I’d love to include in our data as well, that I built in a just an Excel spreadsheet that takes rates and loan amounts and compares payments, you know, the difference between a three and a half percent rate and a six and a half percent rate, you know, is nearly $1,000 in payment on half million dollars’ worth of borrowed money. So, an almost 50%.
Rob Delavan 07:43
In this article, Adrian is specifically talks about, like a national market and remember, we’re in the Portland metro market, but regardless, it’s looking at national trends and it was saying that roughly that 3% rate, which we’ve experienced pretty easily in the last couple of years, and you can see on this graph here, on a $400,000 house to get the same payment. That same home at, you know, six plus percent where we’re at now, that same house would have to be $300,000, which, you know, 25% reduction, which is nuts. Man, that’s a tough thing and we haven’t seen that drop yet and in the further conversations here, we’ll talk a little bit more about that. But it gets harder to afford the same home is really what it comes down to.
Lance Johnson 08:38
Yeah, it’s kind of interesting, because in 2013, is when I bought my house, current house and I remember looking at it took me four years to buy my house. I looked at 200 homes made 50 lowball offers between 09 and 13 and, you know, got into contracts with some and then you know, backed out or they backed out or whatever it didn’t and then finally negotiated that into a contract with the house and then call this was my first house and then called, but like at 13 It was like it was the best affordability because it’s coming down, but nobody was buying, you know, the one and a half to $2 million homes, right? And builders were all these expensive homes that these builders had, you know, they’re foreclosing on them, it’s just really interesting and now that flips gonna happen, like, you know, the properties are high, the interest rates now are high properties are coming down, but like, can’t afford it, right? And so there’s gonna be less buyers. This is very interesting time that we’re going to be going forward something like our grandparents face back in 1950 and then went into savings and loans where they, you know, bought a house and stayed there for 30 years, you know, because interest rates are rising. They can never make the next move.
Rob Delavan 09:58
When I interrupted you there Adrian, as far as the advice of the clients and you alluded to it, but buying that smaller starter home, that townhouse, that sort of thing.
Adrian Schermer 10:10
Yeah, return to more traditional, you know, the step-based purchase, or, you know, I love this phrase, I’m never going to I’m going to be sad when it’s gone, Mary the house date the rate, you know, get into a property except the cyclical nature of the economy. Except that this is, and we can dive more, I think when we talk, Lance, we got a question for you and forward in the episode about this. But, you know, these are adjustments that are made by the federal government. There’s a reason that we’re seeing higher rates, and it’s not something that should sustain, we shouldn’t be seeing these rates forever. But waiting out that time by getting into a house building equity, and then having the opportunity to refinance and have a lower payment, will, you still have that home. You’ve also got a lot of people who bought I mean, the advice would be just buy two years ago. But those people who have that equity and who already have a low loan, they’re not going to refinance to grab their equity. But you know, in the recent home equity loans aren’t like a brand-new product, but they have become more popular in use. I think we’ll also see people tapping the equity, if they want to use it, you know, they’re gonna borrow at a higher rate, but they’re gonna borrow only that little extra chunk there. You might have bought a house two years ago, you could have, I got lots of clients who got six figure equity by buying right before some of that wave died off and people may be leveraging that along with their savings from COVID, from the pandemic, it’ll be an interesting time.
Rob Delavan 11:47
Which was actually the perfect segue into.
Lance Johnson 11:49
Well, and one brief moment, it’ll be interested in see, like, you know, there’s the tiny house movement that’s going on, right? And I wonder if that, you know, it’d be interesting to see if that accelerates that, you know, they’re tiny houses that are mobile, you know, and you might see people taking that really small start, get into the tiny home, and then get into multiple land deals, and then move up and then eventually build their house and stuff when they’re ready. It’s just, it’s gonna be a very interesting time to watch.
Adrian Schermer 12:23
Rob Delavan 12:27
Okay, so, this is actually a great segue into this. So, the question to this one’s for Lance. So, this graph here is titled real wages are declining. And, as you can see, it stated the average weekly earnings grew by 4.6%, from August 2021 to August 22. Yet so has the cost of living, which, you know, the whole inflation conversation and so forth. Well, you know, tons of households were able to accumulate, I mean, savings rates, and so forth, during the distribution of pandemic relief, you know, and that whole thing, which we’re coming out of now, in the fall of 2022, solid and persistent consumer spending is living less available for those big down payments. So, obviously, we need to pick your brain here on the thoughts, Rise of inflation cost of living. And, you know, we’ve already talked about, you know, potentially starter homes versus, you know, and so forth. But this is a huge issue. So, what are your thoughts on inflation cost of living as it relates to the declining real wages here, you know, and where that takes us?
Lance Johnson 13:41
Well, yeah, I mean, it’s a great conversation, there’s just so many parts to it. So, let me just break it up into a couple different parts. You know, the biggest thing I can teach somebody how to do as a financial advisor, is if I can teach them to save 20-25% of the gross income, no matter what their income is, you know, and we realize that a family of five, in the Portland metro area, if your combined income is 60,000, that’s not going to go very far, right? In to try to save 20-25%. It’s gonna be really difficult. But let’s, you know, one of the things I pride is I get my clients within that two-to-five-year period of time trying to strive for at least 20, if not 25%, depending on how many kids they have, and whether going into education, how much they’re going to pay for that. Well, with rising inflation, you know, there’s a couple factors with that inflation, will your income go up. You know, so you’re seeing clients getting 11% raises 12% 15%, too, because during the pandemic, they didn’t have raises, right? And so, if those raises are occurring and inflation has happened, you probably still going to be able to save that money. But if you didn’t get that raise, and you’re saving, and all sudden now groceries are 20%, higher, travel is higher, there’s going to be some tough discussions about how to reduce expenses and or you might have to change the amount you save, right? It’s not rocket science, you make X and you know, there’s four levels of spending, savings, committed, discretionary and taxes. So, you know, the next stage is, you know, we have a 2025 sunset on our recent tax situation, which is the lowest tax rates we’ve had in America. Well, if that should go up, and inflation should go up and the income doesn’t, and buying a house is getting greater, there’s going to be some pinch points on your ability to save and get ahead in the market. So, there’s going to be some real conversations about what your ability to save and how you’re going to spend your money because we’ve had interest rates come down, and you can refinance and solve all the problems. But now with interest rates going up, you’re not going to have that ability to refinance, you’re out of your problems and so there’s going to be some real gut checks if people don’t live within their means and those old ways of getting out of those things are going to go away and you know, and so there’s, I think people need more so than ever, are going to want to annually look at cashflow, look at where they’re going and if they’re not nipping that bud meaning that there’s just not as much money to go around, something’s going to give, if not, your consumer debt is gonna go up and so forth and then, you know, you might be forced to sell versus refinance out of your problems and stuff and so there can be a set of problems that we won’t be able to solve based on refinancing because your housing was going up, and your interest rates are going down, well, we could have the opposite effect, your housing might be going down or flat, but your interest rates are going up, your expenses are going up, your savings is getting less and you can see people getting in the future into some real problems that they can’t, like, refinance out of and so we’re gonna have to be careful with our clients and advising them to stay out of debt and that’s gonna be hard.
Rob Delavan 17:34
Yeah, tell us some good news there, Lance.
Lance Johnson 17:39
I mean, the good news is, people are making more money than they ever have in the past, but that might go down. I mean, corporations, your housing values, you know, there is real equity that you had since 2013, when I bought I mean, you know, there’s well over my house is appreciated well over a million and a half dollars, that’s real money, if I wanted to take that, you know, even if it was dropped 3% from the height, come still 3% of a really large number and so there’s just, you know, we’re just, we’re gonna have to be as consumers, we’re gonna have to be smarter, because we had some economic things that allowed us a simple way out of our problems. In future, we’re just gonna have to be smarter.
Rob Delavan 18:26
Adrian Schermer 18:27
Yeah. I’ve done it a number of those the debt consolidation, home loans, I mean, they were, they were awesome, because you’d be lowering someone’s rate on their primary at the same time. So, a lot of times, we tuck 3060, you know, $120,000 worth of credit cards on into this mortgage, and the payment would still go down. So, it was just a reset button for these people, you know, because they needed to refinance. Anyway, when I started a decade ago, we had the harp loans, you know, people were even upside down in their houses, they were allowed to refinance. So, this government program, harp MH, making homes affordable and there were a couple of names out there for it. But you know, same thing it was it gave people a lot more breathing room, and yeah, I totally agree with you, you know, maybe equity, never like a home equity line, but then they’re just kicking the can down the road, right?
Lance Johnson 19:14
Right. Well, the problem is, the real issue is that person that accumulated the 120 still has a bad problem and that problem is they live beyond their means. So, you’re able to fix that problem, but you never, well, you were able to mass that problem. Yeah, put a band aid on it. You didn’t really solve or…
Adrian Schermer 19:34
Fix the symptom, but they still…
Lance Johnson 19:36
Right. So, now when that symptom still happens, you’re not going to have this and so it’s going to be a lot more devastating to people and so my scenario with clients is let’s address the cashflow issue and let’s make some hard decisions about and before you get too far before you get $60,000 or $120,000 in debt because now you’re not going to have those same opportunities to refinance out of your problems, right? So, yeah, we’re just gonna have to be better.
Adrian Schermer 20:16
All right, Rob, I want to pick your brain now. Based on the graph that we’re looking at here, we’re showing home prices may have fallen since May is the title at the top. This is one running from January 2018, through September 22 and let’s talk about these trend lines that you see here. It stated that the median home price has declined 3.6%. Since its peak in May 2022. What kind of advice are you giving your clients to prepare them for the shift in the market?
Rob Delavan 20:44
Well, there’s a lot here. The fun part about this particular graph, for those of you that are viewing this is the spread between the median price, the number of overall sales, and so forth. The simple advice for clients is preparing them for this shift as as it’s happening, is looking at okay, so and these are national numbers. 3.6%, down since May of 2022, when we peaked, and this is through August, and we’re always looking backwards a couple of months. We’re recording this in October and what I’m looking at is the trend and saying and this is just comes from experience, this isn’t data driven up past August, because we just don’t have the data is the feel, though is I’m saying, hey, we’re probably losing 1% a month, and is what I’m feeling going forward based on experience. So, for every if you have to sell a house, man, you look pretty good on this trendline median price seasonally adjusted, since you know, this goes all the way back to 2018, we were going up a little bit and then you know, in the last couple years, we’ve gone up, you know, 20 plus percent. So, at some point, the farther out you go here with this correction is the farther you’re going to lock in that or have a harder time locking in those gains. So, if you have to sell, let’s look at other options. Maybe you should talk to a financial advisor, say, you know, see what else you can do. But if you do have to sell, let’s do it quickly, is what we’re basically saying because we are dropping. This fall this winter, and probably for the next couple years, as long as interest rates are continuing to be a driver of higher monthly payments where we expect a correction and the correction is is happening or at least we feel that that’s happening and the statistics seem to bear that out as of right now. I don’t think there’s anybody out there nationally from an economic standpoint, that saying oh, hey, maybe actually the housing market is magically going to go turn around tomorrow and go up another 30%. Like, I don’t know that anyone saying that and the data from this article, which we’re pulling from, you know, is certainly not showing that. So, you know if with that said, if you’re looking to buy, okay, let’s look at what your dollar can get you. Let’s explore that conversation of date the rate, marry the house, looking at what it would cost to purchase the house now with closing costs and so forth, you’re going to refi, so there’s probably going to be there is going to be another set of closing costs potential in the future. You probably want to bake that in when you’re doing your projections for financial advising. When you’re also looking at, okay, what can I afford right now, if I have the luxury in life of timing the market, they tend to bottom in the winter and then year over year, they tend to come back up a bit in the spring, the overall trend is probably going to be an adjustment because of again back to interest rates which are driven by inflation to a certain degree. You know, you start looking at when would I want to buy and you start having that conversation and frankly, it goes back to if you’re having that conversation with just your real estate broker without your lender without your financial adviser, without your tax professional CPA, what have you, then you’re probably missing the boat. So, I’m having the advice of number one, let’s look at the trends. Number two, let’s look at the why of what you want to do whether you’re buying or selling and then number three, which really should probably be number one. Let’s sit down make sure you have a plan and talk to your team and again, that’s the financial advisor the tax person, the land under, and let’s see how we can game this out in such a way that you’re going to do the best you can given the current market conditions.
Adrian Schermer 25:09
Yeah, no decisions without data, right? I’m all for moving on instinct on your gut, but your gut should be an informed gut, right? Like, you gotta have numbers in front of you, you got to understand what you’re getting into.
Rob Delavan 25:22
Right and that’s the fun part, you know, with working with both of you. You know, Lance, your clients they save, you know, that’s, that’s the core tenet of everything that you do is they’re savers. Well, savers, generally are really good clients from a lending standpoint because they’re strong borrowers. So, you know, if I can give any advice for those clients, it’s, you know, start setting yourself up, if you’re playing poker, you got a 52-card deck and aces are high, how do we get more aces in that deck instead of you know, only four? Let’s put 40 of them in there. So, the way you do it is long term. So, you know, plan and being strategic. So, that’s my, I don’t know, short, long answer, what do you guys think?
Lance Johnson 26:16
Well, I mean, you’re looking at different clients. So, you got clients already have existing houses and they grow out of their new house. You know, one thing we really haven’t this is kind of a tangent. But like, one thing that I’m not a fan of in Portland is this high densification. So, back in the 1950s, people had, you know, acre lots and so what they did when rising interest rates occur, they just, you know, they built on a 400 square foot addition or a new garage, right, that of redoing the whole shooting match the whole house, you know, in this densification, can’t really do that. So, you know, one of the things I tell clients is, you know, hey, you know, you’re probably going to get some good deals on some bigger lot older houses now and you know, you might be better off getting a deal on that and remodeling, because you’re going to be able to grow into it, you know, or if you’ve already done it, they’re going to be sitting really nice. Going forward, right, whereas the 4000, square foot postage lot, there’s really no room and you have a 3000 square foot house, two stories, there’s based on the lot lines, you’re not gonna be able to do things. So, it’s just gonna be an interesting market, you know, real estate is very big and you know, I’m a proponent of real estate, and there’s going to be a backlash in time where, you know, there’s going to be some negative effects to it, right? And then when it gets down to that low point, there’s going to be a buying opportunity, it’s just going from, when are we at that peak to when we’re going to be at that bottom again, and going from point A to point B, that was an answer for reconsolidation with lower interest rates, that options, maybe not going to be there anymore and so there’s gonna be some basic financial stuff that we’re gonna have to get better at, in looking at different options, I guess so and people might sell like, even though you’re selling off the high 3%, off the high, it still went up 20 something percent last year, way above the average, or the last two years, it might be a combined 30%, 40% gain and I’ll take 3% off a 40% gain and pocket the money and pay off all my debts and you know, there might be some interesting scenarios there.
Rob Delavan 28:53
Yeah, and what’s fun about this graph, as you mentioned it right there Lance is there’s going to be an opportunity as this the orange line, which is the median price seasonally adjusted, is going to cross over like, you know, from the number of actual sales. It’s going to cross over again, like it did back in it looks like here is roughly between May and September of 2018 and when it crosses over, there’s going to be buying opportunity. There’s going to be more homes for sale, and more volume in the market and…
Lance Johnson 29:27
Get back to be a buyers’ market instead of a seller’s market.
Rob Delavan 29:30
Exactly. So, it’s cyclical, and these things crossover and when you’re crossing over, that’s when there’s opportunities one side or the other.
Lance Johnson 29:38
You want to have your lines of credit in place. You want to have, you know, you’re gonna see more of that. You keep your main base rate and then you’re probably going to do more lines of credit to be able to fix some things and then you’re going to focus on paying those off. But what you really don’t want to do is get yourself where your underwater, cashflow wise, you know your cost of living, you can’t do savings in the future, which then can’t reduce the taxes and expenses are going greater, and then now your house becomes too much too expensive for you and that’s why you’re working and then what happens is your backup plan, what are you going to do? You know, what’s kind of follow is eventually things are gonna get to a point where there have to be layoffs and stuff like that, you know, and so we’ve just got to make sure clients are prepared and if they see a trend, where it’s not, maybe they do sell right now, and take advantage of it, and maybe it’s the time to rent now, you know, is just lots of different things. Maybe it’s time to not be in, you know, densified rural area with where the urban growth boundary props up the price, right? And maybe you live outside those growth boundaries. All right. So, final thoughts, how do you take advantage of a drop in the market, that people that have a game plan are excited about the opportunities that are in front of us? Everyone else is holding pattern, wondering what to do. We help our clients create a plan, we’re taking advantage of the opportunity that’s here now and we can talk about that and if you’re ready to take control of your money and your time, come see us. Let’s see what the possibilities and I think one of the things here on this is, you know, when I meet with clients is we analyze the good and bad of your rentals, the good and the bad of your current home, what equity, what are the things to prepare you for? You know, we’ve had a great run in the market, real estate and stock market. So, the law of averages says we have 12 great years, there’s probably going to be a couple of years, that’s going to be tough and are we prepared for that and if we are prepared for that, when we get to where the market is really attractive for real estate and other and rentals and vacation rentals, you know, we want to get those clients prepared and we want to make sure that if there is a layoff, they got backup plan on backup plan on backup plan. So, you want to know what would happen if that happens and yes, real estate is going to do what it’s going to do the stock markets and one of the things we know is, in any given time, it’s going to be one person’s menace and the stock market or real estate and another person’s benefit, right? And so we’re just hoping that we could teach our clients had a, unfortunately take advantage of an opportunity and get yourself prepared for that. So, we’re excited about it.
Rob Delavan 32:51
Let’s play chess instead of checkers.
Lance Johnson 32:54
There you go.
Rob Delavan 32:56
Adrian Schermer 33:00
All right, up on screen, for those watching on video we do have links to our websites. If you want to get in touch with us, Getrichslowpodcast.com is a portal to access all of our collective information, as well as a catalogue of financial tools and links to the articles and charts referenced in this episode.
Rob Delavan 33:22
Awesome. Thank you so much for listening. Appreciate you guys.
Lance Johnson 33:25
I appreciate you guys. Nice job, guys. I want to get the team back from a summer layoff.
Adrian Schermer 33:33
We’ll see you next time.
Rob Delavan 33:34
We’ll see you next time.