← The David Greene Show
The David Greene Show
Mortgage Monday I Which Markets Will Stay Affordable if Rates Creep Upwards? I Episode 123
00:27:13
Loading summary
Transcript71 lines
- [00:00]
A
Welcome to Real Talk Real Estate, the show where we cover how to build wealth in real estate with no fluff, no BS and no sales pitches. I'm David Green and I've been doing this for over 10 years. I've seen the ups, the downs and everything in between. This is the show where we pull back the curtain and show it to you too. So if you want to build wealth through real estate or you just love learning about it, you found your home. What's going on? Real Talkers. Welcome to Real Talk Real Estate. I am your host David Green and I'm joined by my co host Christian Bashelder here to bring you the skinny on the mortgage industry. Christian, how are you doing today?
- [00:33]
B
Doing good, absolutely. Another Monday in the books. We're recording this on a Sunday. Fun fact. Yes.
- [00:39]
A
But it will be coming out tomorrow. So you guys will be hearing the information right off the bat. Let me ask you this actually before we get into it, what are you seeing as far as like the number of loans that are coming your way, the market overall? Are you seeing things heating up? Are you seeing things slowing down?
- [00:56]
B
Yeah, we got we're kind of in this rate, yo, yo right now, right, where when rates drop, we had quite a large number of refinance applications and increase. We always kind of have some pretty steady purchase business of people who just buy no matter, you know, we had people buying at 8, 9% interest rates right at a point about a year ago with a little bit of the tick up the last call it two, three weeks in interest rates since the war in Iran started a little bit of a down, you know, a decrease from where we were at the prior to that. But still healthy amount of business obviously could always be more. That's why we do this stuff for you guys. So you can, you know, get good financial guidance and reach out to us to use our services, right?
- [01:36]
A
That's right. You can do so@theonebrokerage.com or you can head over to davidgreen24.com use the chat option. Let me know what I can help you with with real estate and I'll get into it. Today we are going to be discussing how much rates would need to drop before housing became affordable again. And this is an article out of Yahoo. Finance. They say that a Zillow study showed that mortgage rates in many major US cities would have to drop to 4.43 to make housing affordable. That is a massive drop. I mean, for where we are now, is that about like what, two and an eighth or two and a half. What do you think?
- [02:10]
B
Close. Two percent drop? Yeah, we're right between six and a quarter and 6.5 today. So about a two point drop. Yeah.
- [02:17]
A
Not even a zero percent mortgage rate would make housing affordable in New York, Los Angeles, Miami, San Francisco, San Diego and San Jose given housing costs there. And someone may say, well, how is that possible? And the answer is you aren't somebody who needs affordable housing if you are buying in those cities. That is the answer. You have so much money that you don't care what interest rates are. Some housing markets are so expensive that they would still be unaffordable even if rates plummeted in other areas. A small decline in rates would be enough to make homeownership possible for many buyers. A 2025 Zillow report found that mortgage rates nationwide would need to fall to 4.43% to make the typical home affordable for median income family. The average mortgage rate for 30 year fixed is 6%. That's a lie. It's higher than that. The study assumed a 20% down payment and defined affordability as a monthly mortgage payment of no more than 3, 30% of median household income. So that's what they're referring to when they say affordable to get to 30% of your income. Zillow expects home values to tick down about 2% in 2026. Okay, Christian, I'm about to lose my mind here. I don't think I can handle another one of these people writing these articles that are giving logic that prices will drop to meet affordability. I never ever, ever, ever see real estate agents talk to home sellers and say, well, based on a debt to income ratio and a 30% of your median going to the home and the average rate of 6.43%, you would have to list your house at this price for it to be affordable. Doesn't happen. No one does that. You're going to about to see Spicy Verde right now. If I keep going, can you just break in here and save me from myself and explain why you think articles always say that prices are like going to follow logic and then all the people listening go, yeah, prices have to come down because rates went up and they are always wrong every single time. But they keep saying it.
- [04:13]
B
Yeah, I mean by that logic, during COVID nobody should have been buying houses because yes, right after Covid, when rates went from 2 and a half to 8%, there should have been nobody buying homes.
- [04:24]
A
And what did everyone say the home prices were going to do?
- [04:27]
B
They said it was going to drop and Nobody was going to be buying, so sellers would have to drop. It's not what happened in most metropolitan markets. We had a little bit at the very tail end, but it didn't really happen. Right. Prices did not drop by 40, 50% like should have happened. If logically. Right.
- [04:42]
A
If the world followed the algorithm that these people say that it's supposed to, that's what would have happened. Right?
- [04:47]
B
Exactly right. And that's, that's the thing. If rates impact buyers. Yes, somewhat. But there's a whole lot of. You can't quantify emotion. Right. That family of four who has a dual income household who can qualify easily for that mortgage, just walked through a house on an open house on Sunday morning and they fell in love, envisioning raising their kids in the backyard. Do you think that people, that person cares if they're 30% or 35% of their debt to income and whether or
- [05:13]
A
not the bank will give them a loan? And we have a great person here to ask, what numbers do banks want to see to be able to give you a loan?
- [05:23]
B
I mean, looking at 30%, 50% on most conventional loans, 55 to even 57 on FHA. So like it's not even close. It's almost double what they're saying. Yeah. So that.
- [05:33]
A
Thank you for saying that. What about the people who sold their house? They have $400,000 of equity to go into their $900,000 house. So for them to buy a $900,000 house, they're only borrowing 500,000 versus someone else that's borrowing 850. We're not bringing any of them into this thing. And the reason this matters is there's not a bazillion houses for sale. There's like a reasonable number right now. So you don't have a huge need for tons of buyers to be soaking them all up. I don't know why this just drives me nuts. I think it's because the people listening to us are also reading this. And so they get it in their mind from reading article after article that describes this logic, which does make sense if you don't really know the psychology of how people buy houses like we do. And you go, oh, I'm going to wait. Because prices are coming down 2% in 2026. And then they don't. They go up percent and I face palm. That's where all my hair went. Dude, My face palm slipped right over my forehead and wore the hair off of my head. Okay, getting back into this. Boston and Seattle are also pricey and borrowing Costs would have to fall below 1% to achieve affordability. Across the Midwest and inland South, a cluster of metros would remain, would remain affordable even if rates climbed above 6.7%. The list includes Pittsburgh, Birmingham, Detroit, Buffalo, Indianapolis, St. Louis, Memphis, Chicago, Cleveland, Louisville. Not Louisville. Learn that one. And okc, Oklahoma City Christian. You're doing a lot of loans. Are you seeing a good proportion of them coming from these cities that we just mentioned? Are those MSAs?
- [07:06]
B
Yeah, yeah. We do a good bit of business in all those above.
- [07:09]
A
So it sounds like affordability is the new sexy, doesn't it?
- [07:15]
B
Some could say. Obviously those are also very investor heavy markets. Right. You hear the Pittsburgh's, the Detroit's, the Oklahoma cities. That's typically, you know, Cleveland's. That's typically where people look at and say, ooh, cash flow. Right. So obviously, yes, those, those markets have a, have a lot of allure to a lot of investors that are maybe not, not looking for huge appreciation, but looking for fairly consistent, stable, dependable cash flow. That's. Those are probably five of the top 10 markets that I see people landing in, for sure.
- [07:44]
A
Is it safe to say in the housing industry where people are choosing to move, that the Pradas have now become the salvation armies? That that's the new cool thing. Where is gas prices low? Where can I get cheap food? Where is rent and energy costs low?
- [08:00]
B
That.
- [08:00]
A
That's the cool trendy thing to do. What. Remember that Macklemore song, the, the thrift shop one where he made it cool to shop at thrift stores. Is that what we're seeing in real estate?
- [08:09]
B
That's a funny, that's a funny analogy, actually. Potentially to some degree, I think for investors, obviously, which is a huge portion of our business. Yeah, to some degree. I think people like, you know, the places that have a consistent tenant base. I'll tell you guys this. The markets where a lot of investors invest is typically not going to line traditionally on the best markets to own homes. And I think that's kind of important to understand because investors don't want their tenants buying homes, they want them renting. So the markets that are very rent heavy are typically the markets that will normally show not a huge increasing trend in people buying homes. That's why these markets, you know, there's not a whole lot of primary residence buyers like flooding the Indianapolis market. Right. There's some, of course, of course people are buying and owning there, but they're primarily investor driven cities and investors are always, you know, running their numbers and there's only a Certain purchase price that the number would make sense of. So when people say these markets aren't appreciation markets, it's because if investors are driving it, that means the purchase is less based on emotion, more based on math. And unless those rents go up, that purchase price isn't really going to go up to support it Now. Yeah, San Francisco, the first list that you mentioned, San Diego, Santa Barbara, Los Angeles, Miami.
- [09:28]
A
Yeah.
- [09:29]
B
There's not really a whole lot of investors in those markets, so they're not analyzing based on numbers. They're buying based on emotions.
- [09:36]
A
Which means you have a ton of money. Like, what's the word? It's evading me right now. But you have more than what you need.
- [09:41]
B
Abundance.
- [09:42]
A
Yeah. An abundance of money. Or like something dispensable. I don't know why I can't.
- [09:47]
B
Disposable.
- [09:47]
A
Disposable income. Thank you. Yeah, so you don't care what rates are because you got a buttload of cash. And that's why you're going to live in a super expensive market. Now, at the same time, we don't see a lot of inventory moving in those cities. Miami was the hottest market in the country. Very slow right now. San Diego is amazing, but they don't have a ton of houses flying off the shelves. We do see it here. So I don't know. I'm gonna pop some tags. For instance, home prices in Pittsburgh, which I think is going to be one of the next hot markets to take off. You guys heard it here first. I've somehow been right, like every single time I've called a city taken off. I think Pittsburgh, Pennsylvania is going to be like one of the next darlings of the real estate industry. Average is a more manageable 228, $571, well below the 357,000 average home value in the U.S. buying a house there obtainable for most people. Even if rates jumps as high as 9%. Home values in Birmingham average 131,000, which means that the average buyer can still afford a home even if rates hit about 7.6%. Birmingham's had a run. It was even less than that before. And in Detroit, lovely Detroit, the average home value of $75,000 means a home buyer can afford a mortgage rate of about 7%. Buffalo, Indianapolis and St. Louis are also cities with home values low enough to remain affordable if rates went above 7%. This is a very interesting article. I like how they kind of broke down. These are the state, the cities that you could buy in, depending where rates go. Do you Think that we are going to see people moving like literally into different areas if rates keep going up and down.
- [11:26]
B
Yeah, I mean, I think we've seen that to a degree. Right. Kind of. Everybody talks about the mass California exodus. It's funny because our real estate prices haven't really come down because of that.
- [11:34]
A
It.
- [11:36]
B
But you know, you see some of these high cost of living, you know, maybe primarily democratic states that have taxes and regulations, you know, they're losing. They're losing tendency. I'll say. Right. So yes, to some degree. But I also think, you know, I've talked to a lot of people, believe it or not, who moved out of California and like wish they could afford to come back. So sometimes you get that buyer's remorse, right. Of like, oh my gosh, I. Bro,
- [12:00]
A
do you think that. Sorry to cut you off. That you are California to your ex girlfriends?
- [12:10]
B
I have no idea. You'd have to ask them if they can't afford.
- [12:12]
A
Oh, I think we both know, dude, they want back and they just can't afford you anymore.
- [12:16]
B
That's hilarious.
- [12:17]
A
They're not at your level.
- [12:19]
B
There you go. But. But yeah, I mean, I definitely have seen that to a degree. Now, not everybody who leaves unhappy. Of course, a lot of people are happy where they're at. But I think, you know, obviously rates have a non negligible impact. It's easy to just talk about, you know, if people got money and everything else. But rates do drive a percentage of the buyer's market. And if purchasing just becomes impossible with financing in California, you'll probably see more people leave. Yeah, but I also don't think we're gonna have like 15 interest rates anytime soon. Right. So we'll see.
- [12:53]
A
Actually, we probably are likely to see them come back down. We don't know what rates are going to do, but we do follow the things that influence the rates and so we can predict more often than not where they're going to go. And Jerome Powell was kind of, in my opinion, the stubborn piece that was keeping him high. He is on the way out. It's been, I think, do you know who it was it was named that was supposed to take his place. I don't remember the guy's name about him.
- [13:19]
B
This morning I forgot his name.
- [13:20]
A
Okay, so it's not a memorable name, but tell us what you read and I'll make sure it lines up with the same stuff I was thinking.
- [13:26]
B
Yeah. So it's funny because, you know, Trump was basically gonna. He was saying at least and he was expected to basically elect Somebody completely different from Jerome Powell, somebody who's much more bearish for the market, much more rate cut, aggressive, you know, much less worried and, and focused on inflation and more focused on job growth. And the guy that he selected, at least historically with his voting preferences, is not that. The guy he selected is very, very, very similar to Jerome Powell, which was really interesting. If you guys, this was a couple months back now, but when he, when he announced that that's who Trump had, you know, put up for election, appointed, whatever. I forget what the term is now, I'm having the, the word loss here. But, but when he did it, we actually saw the markets downgrade a little bit because the markets were like, oh, my gosh, we were thinking somebody who was going to be cut, cut, cut, cut, cut, come in. So I think that's interesting. Now, maybe they worked out a deal or something and Trump knows what he's going to expect from him going forward. I have no idea. Obviously, I'm not in those, those back room channels. Right. But I do think the pick was very interesting because it's not from a measurable perspective what we were expecting or who we were expecting Trump to appoint. But we'll see what happens. Maybe the guy has changed his ways and seen that what, Jerome Powell didn't work very well. Right. And maybe he wants to do something different. We'll see.
- [14:49]
A
Well, it's hard to imagine him being as, I don't know, conservative. I don't know if that's the right word, is pal. PAL was just like, bro. I don't know. I'm, I seriously think there's a good chance that in the future we look back and they find pal's policies triggered a depression like that. Raising of rates so fast, so sudden and so severely destroyed the commercial market and then it destroyed the labor market and then everybody stopped spending money, but inflation was still there. You didn't make prices go down, you just stopped them from going up. But you killed the ability for any boss to offer a raise to any of their employees because it stopped the revenue from coming into the companies. I'm amazed that I'm not an economist and I feel like I could see that as a predictable consequence. And this guy who's the biggest nerd ever, somehow missed that tinkering with rates and just pushing them up, rather than any kind of job policy or encouragement for people to spend money. Or talking to the president like, look, man, if I can keep rates here, we can stop this problem, but I need you to cut taxes over here so that we can keep the money flowing and the two of us can, like, work in conjunction as a team. It was just my way or the highway. And I hope to God I'm wrong and we don't go into a big depression. But there is a good chance that this just grinded the whole thing to a halt and it's going to have to collapse before you see investment money jump back in and plants being made and manufacturing coming back and new jobs forming and housing getting back up. And I think there's a chance. Historians look at that Kiba Ralph and they go, that guy is responsible for what happened. Really hope that we don't have it go down that way. As far as your advice for real estate investors in today's market, are we at a point where it's like, don't buy anything at all, Just wait. Homes are going to drop? Do you think that if we do have some foreclosures, they'll be regional? Do you think that the hedge funds might buy them all? And so waiting isn't even going to help you because if they do hit the market, they're going to be bought by any, like, people that have more money and cheaper capital than you. What's your thoughts on how people should play their cards right now?
- [16:58]
B
Yeah, I mean, I'll answer those in order. I mean, first question was, do I think investors should still be investing right now? And it's funny, I feel like if I wasn't in the industry and seeing what people are still finding on the market and watching them have success, whether it's cash flow or appreciation plays or whatever, I'd probably lean into what the media says too. And I'd probably say don't buy. Right now I'm seeing people get such good deals. Right now, I'm seeing people who even last year got a deal at eight and a half percent. We're now refinancing them to six and a quarter and their deal looks like they were a genius. You know, if the rates keep going lower, we're refinancing down to five and a half and they'll look like a super genius.
- [17:34]
A
Oh, man, that's a great point.
- [17:35]
B
It's just hard because I think anything that I say is, obviously, I'm a mortgage broker. I'm, I'm, I benefit from people buying properties. However, I also benefit long term from giving good advice because people trust me and they come back. And if I honestly wasn't seeing what I see by being, you know, somebody providing a service in this industry, I would probably believe What I see out there that rates are too high. No real estate works. You know, people all over the country, you know, are saying you can't find cash flow right now. We're doing a DSCR loan right now with a 3.8 ratio. That means the rents are 3.8%. What the. Or 3.8 times what their monthly payment is. I think their monthly payment's like 1500 bucks. And they're renting for like five grand. Something crazy. I'm like, it's a multif family in one of those markets that we discussed, you know, So, I mean, I see stuff like that happening and I'm like, why, why wouldn't you invest? But of course you have to do what you're comfortable with. But to say there's no good deals and it's. It's irresponsible to invest financially right now. Absolutely not.
- [18:33]
A
Well, don't say the name of the person, but can you break down a little bit of the details of that deal so people can get an idea of what's out there and what to look for?
- [18:39]
B
Yeah, it was a property that they bought. They renovated. It's a four unit. I want to say it's in Cleveland, might be in Cincinnati. It's in Ohio. It's in one of the metropolitans in Ohio. It's a four unit. They're renting it out. I think it's F15. No, 1600 A unit. So we can do this math here if you want. I think it's 1650 a unit. You're hitting me on the spot here. I have to remember it. 1654. No, it's a little less than that. 1500 times four is 6000. 6000, yeah. So he's renting each side for 1500 bucks. He bought it really cheap. He bought it, it needed a lot of work. I think he bought it for like 150k. We just re. We just am rate term refiing him now, and he's at like, I think a 300k ARV after his renovations, and it's almost hitting the 2. I mean, that's the 2% rule. 6,000 on 300,000 value. So, like, people are saying that doesn't exist. I can't even find the 1% rule anymore. I see people find it every. And this was an on market listing. It wasn't.
- [19:33]
A
What city was this in?
- [19:34]
B
It was in Ohio. I think it was. I'm pretty sure it was Cleveland. I can look it up.
- [19:37]
A
Okay, but maybe the MSA of Cleveland, if not Cleveland.
- [19:40]
B
Correct.
- [19:40]
A
Somewhere in that area.
- [19:41]
B
It was in Ohio. 100.
- [19:43]
A
Well what did we just say? Midwest is the new sexy. That is where so the person moving There is paying 1500amonth in rent for a one unit which seems dumb but what if you were paying 2500 somewhere else and their energy costs are lower and their food costs are lower.
- [19:57]
B
Yeah, they're pretty big. I think they're two and three unit apart. Like it's. It's a big fourplex. It's pretty good. It's pretty well sized. He just got such a good deal on it because it was torn to crap. Right.
- [20:06]
A
And I'll say this, those multis used to be the hardest thing to get. It was like Pearl Jam tickets. You're not getting one of those things. But now that everyone's kind of gun shy, like everybody's sort of pulled back and they're waiting to see what's the market going to do. There is a opening in that hole. You're a football player was at the a gap. Right. Like they're not paying attention. You can get right in there if you're looking where I used to tell people for it. Yeah. If you find one amazing, don't hold your breath. Like it's almost not worth looking for them because everybody's looking for them. And I don't like to follow what everyone else does. But now I think that there's like this little gap just like when Covid first came and no one knew it was going to happen and everyone came out of the market. That was a great time to buy. I think it's a great time to buy today. If you're looking at those two, three and four unit properties. Now if somebody wants to buy a five unit, a six unit or a seven unit, something that's a little bit bigger but not like a 30 unit apartment complex. What kind of financing options do we have available to help that person out
- [21:05]
B
For a primary residence or a rental
- [21:09]
A
for will be like a 6, 7, 8 unit apartment complex over an actual complex.
- [21:15]
B
Those are so I can take my DSCR loan up to 10 units now we've recently expanded it and DSER is a 30 year fixed really awesome product. You get a little surcharge to your interest rates once you go above 4 units which is the typical residential cap. Anything above, I'll call it 8 to 10 units is true commercial. And unless if people don't know we do do commercial lending. Here's the one brokerage we can finance. Apartment complexes, hotels, gas stations, warehouses, all that fun stuff. And that includes Larger multi family of over 10 units. That would be a traditional commercial loan which will be underwritten a little more. A little more strict commercial underwriting is a little tough. We may do a future episode on commercial David, that might be a good, a fun episode for the, for the listeners. But it's a little stricter of an underwrite than dscrs. So if at all possible, if you can keep it 10 or under, it gives me access to a wider range of loan products. Whereas when you go over 10, I'm, I'm pretty, you know, pigeonholed into, into one product.
- [22:14]
A
Okay, there we go. What can they expect as far as rates, down payment and balloon period?
- [22:21]
B
For a true commercial you're typically not a 30 year fixed. Typically you're either amortized over 20 or 25 years. So that's how long your payment is calculated over. And then it's typically structured with between a 5 and a 10 year initial fixed period. So if you guys have ever heard like a 5:1 arm, that's an arm means adjustable rate mortgage. The 5 means it's fixed for five years so it does not adjust. And then the 1 in 5:1 arm stands for it adjust every year thereafter. So if you get a 5:1 arm, you have the same interest rate for five years. In year six it changes to a different one and that's it can go up or down based on the market where it's at. The next year, year seven it would be a different one, so on and so forth. And typically those loans will mature which means they're doing full anywhere within that five to ten year period. Which may be confusing. I know I said the payment structure over 25 years but, but it cuts off before you get to 25 years and you either have to sell or refinance. And most people refinance obviously.
- [23:20]
A
Do you think there's opportunity in that little niche there, the like the 5 to 10 unit small apartment complexes?
- [23:28]
B
Yeah, we do them all the time. That's actually a pretty heavy business type for us where we see yeah, the five to 10 units, we do a lot of DSCR loans on them that are 30 year fixed and you don't have to get into the commercial style financing. But I think there's a lot of opportunity. For sure they're bigger down payments. I just want to make sure everybody understands you're not getting a multifamily with 5% down. You're not going to go buy a 20 unit apartment complex with 10% down. You're typically start 25 to 30 down. So yeah, a lot of people take what they learn in residential and think it just copy and paste to commercial. No.
- [23:56]
A
Well, here's the problem though. You do kind of want to move your equity from residential to commercial to come up with that 25 to 30%. So it makes sense that you would think, well, I'm also going to move my knowledge. But the exchange rate on the knowledge of residential commercial is much different than how easily your equity goes there. Right. So what advice do you have for someone who says, hey, I've done good in single family but I want to get into something bigger. Maybe they're more numbers oriented.
- [24:24]
B
I'd say talk to a financier first. So like talk to somebody like me first. Because if you're setting your expectations at a down payment, that's not right. If you're setting expectations at an interest rate or an amortization period, that's not right. You're just going to whiff your underwriting. Right. Just I mean really, I'd say that even with residential talk to a lender first before you go waste the realtors time. Right? I mean David, I'm sure you could know there's probably not a worse feeling for a realtor than going and showing 45 houses to a borrower that never spoke to a mortgage broker, doing all the work, getting them in contract just to learn that they don't have any money to put down or they're not pre approved, like oh my God, I just spent all this time. Now most good realtors will know not to do that and not waste their time, but it's possible something like that could happen. So talk to somebody who's knowledgeable about the financing of the asset that you're buying first before you go waste anybody
- [25:11]
A
else's time because they can help you also with some of the underwriting that you should be doing. Maybe connect you with some resources there
- [25:17]
B
100 that's exactly right.
- [25:19]
A
All right, well thanks for joining us. If people do want to contact you about a commercial loan, a residential loan, or if they just feel alone and they need some company, where can they go to contact you?
- [25:29]
B
Absolutely. You can always find more about myself on Instagram @the1 broker is my handle. You can shoot me a DM. We can talk talk financing all you want. If you want to find out more about our company, you can navigate to onethe1brokerage.com there a little contact us now tab at the top right where you can get in touch with the team and we can help you out with your next need. For financing.
- [25:49]
A
There you go. You can also follow them at the One Broker on Instagram. You can find me at David Green 24 on the Old Gram or you can visit davidgreen24.com use the chat option and get a hold of me and I'll put you in touch with somebody from the one brokerage that specializes and whatever your needs are. Also, if you're looking for someone to manage a short term rental, if you're looking for a real estate agent to be connected with in a different market, just connected somebody Mario actually. So Mario, if you're listening to this shout out to you with a real estate agent in Dallas and he is getting pre approved with the one brokerage and he's moving out there and now that I'm in Tulsa, Oklahoma will kind of be within driving distance. So maybe we'll have Mario on the podcast and he'll get to tell us about his experience. Thank you guys everybody for following us, for subscribing to the channel, for liking and sharing this video, and for commenting what you thought about today's show, what you wish we would talk about. If you have any ideas for a show that you think that we should do, or if you just want to give us some encouragement, we could use it. So let us know in the comments below what you thought about today's show and make sure you tune in next Monday for Mortgage Monday.