Mortgage Rates Are Up: Unwrapping How Albuquerque’s Mortgage Market Works
(Transcript Snippet): “Tego:
Got that outta the way. Yep. So what I wanna talk about Lee is how do mortgage markets work? Cause a question that’s now coming up is anybody that’s kind of casually following the news. They hear about what’s going on with the fed and the fed is going to raise interest rates. Right. And then they go, well, they haven’t raised them yet, but yet mortgage rates have gone up a percent in the last, you know, just over a month. So, so, so how does that work? Why there, there obviously is not a direct correlation to what the fed does versus what mortgage rates do. So can you try to unwrap that a little bit?
Lee:
Yeah, sure, sure. So you know, and at the heart of it, the mortgage, you know, the mortgage movement is gonna be based on what’s happening in the economy. You know, typically a lot of times when there’s unfortunately when there’s bad things that are happening and the markets are crashing and that kind of thing. And and it’s affecting, you know, the stock market, the 10 year treasury rates tend to, to move down. Okay. Okay. And, and when things are doing well or inflation is up, like it is now, then rates start to move. Right. But the thing is with mortgage rates, it’s a lot of times based on emotion. Okay. things that are going to be happening. Right. a lot of times, like with what’s happening now with inflation and the talks, just the talks alone of, okay. The inflation is, is, you know, through the roof, we’ve had the biggest year over year increase in 40 years. That scares a lot of people because they know what’s coming next and what’s coming next is the fed, raising the overnight rate, the fed pulling back and not buying nearly as many mortgage backed securities and really coming out of that market. Yep. And just the news of that rates are based on emotion and that’s what drives it as emotion.
Tego:
Yeah. And it’s really the, so the mortgage rates, well, let me just ask this, I’m not gonna say it as a statement. I’m gonna ask you a question. Do mortgage rate really? They’re they’re pricing in the future.
Lee:
Exactly. They’ve priced it in. So what we’re hearing now is that the fed is considering a 50 point B increase 50.5% increase to the overnight rate. Now that’s not the mortgage interest rate or like if you’re getting an auto auto loan or, or your interest rate in your credit card, that’s not what that is. Yeah. But what it does do is it affects all of those rates. Okay. Yeah. Now when we hear that, there’s gonna be a, a, a 0.5% increase to the overnight rate people panic. Right. And they price it in. Yeah. When the emotion, they price it into the rate and our rates start to move up and they’ve moved up significantly because of the news of what the fed is gonna start to do here in March. By the time it actually happens, it’s already been priced in, like you said. Yeah. You know, and so we don’t see nearly the same effect. So when it actually does
Tego:
Happen. So, so come March when they, you know, some people are saying a a half a point, some people are saying a quarter point, you know, looks like everybody grease are gonna raise it some somewhat. Right. And, and the reason they’re doing that is they wanna slow down the economy to slow, to, to pull back on inflation,
Lee:
Pull back on inflation, right. With the news yesterday of the CPI. And yesterday was a pretty big increase at 83 BS, which is pretty significant 0.3%. Yeah. To, to some of the pricing not necessarily the rate, but with the use of that. Now there’s a 44% chance that the fed is gonna increase it by half a percent. That,
Tego:
That that’s, that would be big, would be big. And, you know, I know there, you know, if I file all these economists on Twitter, myself, that’s one of, one of my, my things I do. And it’s really interesting that the conversations and debates going on cuz you know, nobody really knows. And, but, but what happened is what happened on Thursday when the inflation numbers came out the market tanked the 10 year treasury went up substantially, it went up over 2%, which was the first time in, I don’t know how long, well, like
Lee:
A chart at least probably two over two years, you know, probably
Tego:
See last time it was at 2% was 2019, you know? And, and so let’s, let’s talk about that actually. So if we look at 30 or fixed straight mortgages, they’re somewhere around 4%. Is that fair to say?
Lee:
Maybe even a little higher
Tego:
Right now, maybe a little higher. Okay. And the thing I thought was interesting about that though, if you look back in history, we’re, we’re basically back to where we were pre, so let’s say, you know, January of 20, 20 pre COVID.
Lee:
Exactly. And that’s, that’s the thing is we do need to change the narrative a little bit here, right. Because yes, rates are definitely higher than they were a month ago. They’re definitely higher than they were in you know, 20, 21 and, and 2020. But they are back to where the direction we were headed, you know, at the beginning of 20, 20 pre COVID and we’re right at that same level again. So we’re right back to where we were at
Tego:
The question I’m getting a lot lately is, are the higher mortgage rates gonna slow down the housing market? And I think the answer is yes. I think the, the, the big question then is how much, right? How much is it gonna do it? How many buyers are gonna be taken outta the market because now their, so, you know, we did some, we did a chart here. If you look at a $250,000 loan, let’s say loan dollars at 3%, it was a, 1,054 and at 4%, or it’s at, you know, let’s say 1200, so it’s about $150 more per month.
Lee:
Right? Yeah. And so that’s, that’s what ends up happening is that when the rates moved, then people are priced out of their homes or where they were looking. Especially when their debt income ratios are, are pretty tight. Now you’re looking at, okay, one, your payment has gone up, you know or does that mean you can, you know, now you have to buy less house and we talked a little bit about, yeah. You know, that type of an increase, a 1% increase in rate, which that’s what it’s been over the month how much house could you buy now? And you probably lose about $30,000 in buying
Tego:
Power in buying power. Yeah. Or something like that. Yeah. Yeah. And you know, it’s interestingly, I went back and looked at like 2018 when we had the, the price, the mortgage surge. I think we had a surge in 2015. I’m trying to remember exactly where we had, you know, we’ve had periods where mortgage rates went up really fast. Right. Right. And I was curious to see if there was some correlation to home prices and then the number of home sales and the thing that was interesting. I just looked at Albuquerque. There was, there really wasn’t a change. No, it, it really didn’t. At least in those times it did not take people out of the, out of buying. You know, statistically now the, the, the one variable that we have now that we didn’t have then is we’ve had two years of price appreciation, you know, somewhere between 20 to 30%, right. In two years. Wow. That’s that, that’s different. So it’s gonna, it’s gonna be curious to see you, you said something, I, I just want to go back to it. You said debt to income, or, you know what we always say, DTI, what do you mean by that? Cause I think that’s a real, it’s a very simple thing I think, but if you’ve never shopped a mortgage, you, you, you have to understand it. So what is, what is debt to
Lee:
Income debt to ratio is your grow is, is your total of all of your liabilities, your monthly obligations. Okay. based on the credit report, plus the proposed housing expense, the house that you’re looking to purchase. Okay. And you take that and you divide it by your gross monthly qualifying income. Okay. And that gives us a percentage most loan products want you a, you know, out or below 45% that’s you know, more ideal. You can usually push that up to 50% with, you know, factors such as good credit and a, a really strong buyer, but, you know, so typically you wanna stay about 45% debt to income ratio. So again, your, your total of your liabilities in the proposed housing expense divided by your gross monthly income.
Tego:
Got it. Got it. Okay. Got it. So let, let’s just do the anecdotal thing. So, you know, here, Ventura Realty group, we’ve we are here in Albuquerque. There’s still a lot of buyers out there looking for homes. That’s what we’re seeing. We have not seen, seen much change there.
Lee:
Lots, lots of pent up demand,
Tego:
Lots demand. And so in the mortgage world, you guys do, you know, a, pre-qualification a pre-approval process for people that are looking for homes. Have you seen much change there?
Lee:
We haven’t. No. In fact what’s happening now. It feels like we have a lot of people now feeling the rates going up and, and the news definitely can help and hurt you. Right? Yeah. And so with, with all the, of rates moving up as fast as they can, now there’s a rush to say, we need to buy now. Got it. Because there’s no, you know, they, right now, they don’t know when these rates are gonna stop moving. Right. And they can continue. And so there’s, there’s now been a rush of people that just say, like, I need to buy, I wanna buy. And as you know, in this market Albuquerque and we talked about this before that it’s not just a Cury, but rents are, are through the roof.
Tego:
Oh yeah, yeah. Yeah. In fact, rents have gone up faster, you know, that’s, that’s one of the things that, that we, we hear a lot right now when we’re, when we’re talking about inflation and we’re talking about you know, housing costs and, and rental costs and shelter cost is real estate is actually a really good hedge against inflation. Right. Because now, you know, somebody that bought a house a year ago, they’re locked in at that monthly payment forever. Right. Right. It, it doesn’t get affected by inflation. Right. Right.
Lee:
Like, like rent do.
Tego:
Right, right. Like rents do. Right, right. Right. Now of course you could argue. Yes. The, the value of the dollar is less that you’re paying with and all that. Okay. I got that. I understand. But I’m just saying it, you know, you know, a, a, a real asset, like real estate generally is a good hedge, a against inflation.
Lee:
It really is. Yeah. It’s one of the best hedges against inflation because it’s, it is gonna continue to appreciate as inflation is up. So, so, so is that appreciation on the homes? And like you said, you know, we’ve seen double digit, 20 to 30% increase in the Albuquerque area. That’s gonna continue. And so we’ve really been educating our borrowers, our prequels to, you know, stay in the market. You know, it’s still a great time rates, historically, they’re still low. Like we said, you know, of course, you know, they’re still the same level as they were in 2020 before pre pre COVID, you know? And, and appreciation is still there. It’s gonna continue. It’s driven by supply and demand. And as the, as the supply issues that we have, you know, there’s just not a whole lot of homes in the market currently. And we
Tego:
Still, well, isn’t that
Lee:
The truth, right? We don’t, we have a lot of demand. That’s gonna drive prices up and continue to this supply and demand issue that we have, or the supply that we have. Isn’t gonna be over in the next, I don’t feel like probably in the next couple years, cause it’s such a, a, such a big issue right now. Yeah.
Tego:
Yeah.
Lee:
So why not purchase secure that appreciating asset at a time when rates are still historically good? You know, a lot of buyers have, do have short term memory and as good as it was, like I said a month ago. Yeah. But it is still a great time to buy.
Tego:
So if you look at post, let’s say the, the great recession, right. The housing crash, whatever you wanna call it. Right. You know, coming out of 20 10, 20 11, 20 12, you know, we, mortgage rates came down a lot, just same thing, right. The fed did some stuff to stimulate the economy, you all this stuff. Right. So, you know, we’ve been in this 4%, 5% range for many, many years, many years. Yeah. And, and right now we’re still, you know, if you look at it again, historically, we’re at the lower end of that. Well, I’ll call it the middle end of that range. Cuz we have had 3% mortgages for the last two years. So right. Anyway, I think we’ve, we’ve beat up this, this mortgage thing enough, um,