77.News of Interest Rate Drop
Tune in today as Adrian, Rob, and Lance talk about news of a recent interest rate drop in an article from CNBC “Mortgage demand jumps nearly 28% in one week, as interest rates drop to lowest point in months” Published Wed, Jan 18 2023 7:00am. We’ll share our thoughts on this article and then take a deep dive on the best strategies for buying and refinancing in this changing market. Links & Resources Mentioned: Referenced Article: https://bit.ly/interest-rates-drop ROI Disclosures: https://tinyurl.com/msywepvw Adrian Schermer @ Directors Mortgage: https://www.directorsmortgage.com/loan-officer/adrian-schermer Rob Delavan @ Delavan Realty: https://delavan-realty.com Lance Johnson @ ROI Financial: https://roi-fa.com Events: https://roi-fa.com/events Transcript: Adrian Schermer: Hello future millionaires and welcome back to the get rich slow podcast. We're your hosts, Adrian Shermer, Rob Delavan and Lance Johnson. Robert Delavan: Good morning, fellas. Lance Johnson: Good morning everybody. Robert Delavan: Nice to see you, bright and early. Adrian Schermer: Good morning guys. Adrian Schermer: Today we are going to be digging into a fresh topic. You can reach us online at Apple podcasts, Spotify, Audible, Amazon, and along with a number of other streaming platforms. We're also on YouTube if you'd like to see our smiling faces. If you'd like to get links to all of this, including our own personal sites, you can go to getrichslowpodcast.com for more information. And today's episode is about mortgage demand. We've seen a jump in mortgage demand as interest rates are dropping. This is going to reference a CNBC article. The link is in the show notes, as well as a quick short link that you can get to through Bitly. And it's pretty interesting. Robert Delavan: Yeah, and this is the end of January, right? So 2023. It's, it applies to right now but what's really interesting is when it's really the concepts that matter here, because rates are gonna go up and down. Adrian Schermer: Yeah, this is real fresh bleeding edge data. I'm usually more interested in seeing how the ninth month, I'm sorry, 90 day rolling averages end up looking. But it's an indicator as we enter a new season, you know, as we break past the holiday, this is as much data as we have so far and we're seeing some indicators. So what are those indicators? Well, there's an increase in mortgage demand by 28% in just one week. As interest rates drop, it's the lowest point it's been in months. Applications to purchase a home increased by 25% week to week, and while that can be a bit anecdotal, again, we want to look at larger totals when we talk about data like this, or I like to. It's still an indicator of where things are trending at least. We'll see how it shapes out. But let's take an aside real quick. Rob, you had a success story to share with us? Robert Delavan: Oh yeah, so my mom actually took a fall three, four weeks ago, Lance, Adrian, you both were very aware of it. Thank you guys for the well wishes there. And just, and initially we thought she really hurt her knee. It really ended up just being kind of a bruise. She's in her seventies, you know, and had some health issues, and this morning was the first time in about three and a half weeks that she came over and... helped me get the kids ready and I took off and had business meetings and all that sort of thing. And she's driving and she's mobile. And she said she she walked around Fred Myers yesterday. And she wasn't sore today. So just a big personal milestone, you know, you guys both know her well and... Adrian Schermer: Such a sweet lady. Robert Delavan: you know, just wishing good things for Marsha and so forth. So Adrian Schermer: Yes. Robert Delavan: that's all, big success story, and my kids were very happy to see her this morning. Adrian Schermer: Oh, I bet. Lance Johnson: Well, mobility is half the battle in retirement, right? So you start to lose mobility and depression sets in and people get heavier and all sorts of medical stuff. So mobility is one of the biggest things that we see with clients. So, Adrian Schermer: Yeah, even if it's a shuffle, if you can keep your legs under you, keep em moving. Robert Delavan: Yep. Hey, just, just yeah exactly. Keep moving. Love it. All right. Keep us, keep us moving fellas. Lance Johnson: So, well, let's start off with the first question to Adrian. With interest rates rates dropping, what does that mean for somebody who recently got a loan? Adrian Schermer: Oh man, you missed out man. Terrible time. You shouldn't have done it. No, I'm just kidding. What it means for someone who's getting a loan is that we're seeing a trend in the direction that you probably were hoping for. We had this great saying that I loved kicking around, marry the home, date the rate. So especially for a lot of buyers, they were looking at their payment as, you know, obviously you gotta qualify for it, you shouldn't grab something that's above budget, but, you may have a lower payment in the future. This may be a temporary thing, you know, based on market indicators and what experts are saying. We were kind of at a high point. So where rates are right now, it's probably not big enough, we'll chew into this more in a second, to justify doing a refinance. But things are moving in the right direction and you should probably be checking out, hey, where's the market at at least every couple of months to try to figure out where that sweet spot is for refi. Robert Delavan: Is there a general rule, and this is actually really Lance and Adrian, like, you know, do you kind of like, is it 1%? is it 2%? You know, and obviously like APR and those conversations go into this, but let's assume everything is equal apples to apples when you start thinking about that, or at least the antennae go up. Adrian Schermer: Yeah, I've heard the 2% rule. What have you heard, Lance? What's the... Lance Johnson: Usually the numbers are 1% when you're doing rate term to rate term versus Adrian Schermer: Mm-hmm. Lance Johnson: somebody does a remodel, they got credit card debts on that remodel, you know, and they have a line of credit and that interest rate is higher versus the current rate, but then the fixed rates have dropped whereas, you know, then that's a little different because now you're consolidating. And then, you know, sometimes like we looked at today, you know. Sometimes 15 year rates and 30 year rates are really far apart. Adrian Schermer: Yeah. Lance Johnson: And so, you know, you could go to that 15 year and really save some money on the backend and it's not going to crush your front end monthly payment. And then sometimes those are interest rates or 25 basis points where, you know, you're better off doing a 30 year and then making payments like that. So it really depends on the spread between those 30 and 15 year and, you know, getting 1% or more so that the fixed closing costs don't really eat away at your refinancing benefits. Robert Delavan: So I'll sum up the concept that you really need to be talking to your financial advisor, your lender, you have to have a plan in place. Adrian Schermer: Yeah, yeah, your mileage may vary right? This is like our phrase of the month but you’ve got to do the math Lance Johnson: We try to figure out the break even we got to figure out, you know, how long is it you're going to break even on the two mortgages? You know, you could be four years out and who knows, you might not even be in this house. So you then have to figure out the upfront cost versus cost over time scenario. So yeah, I think just having sorts of conversations in refinance after you just did a loan and then usually you have to wait, what, six months to 12 months before you can do that again. Adrian Schermer: Yeah, Robert Delavan: Would you mind, one of you, mind kind of playing out the Reader's Digest 45 second payback period, number of months, interest rate variance, that sort of thing, with actual numbers? Just kind of play with this concept of if you're saving $100. Anyway, I don't want to do it for you guys, but you know the drill. Adrian Schermer: Yeah, and so I'm going to have to play only with hypotheticals here because Robert Delavan: Yes. Adrian Schermer: it's it's there's going to be so much variance, and if you watch some of our episodes about what closing costs consist of, then you'll know this could be thousands, tens of thousands of dollars in range, depending on how you decide to do it, if you decide to buy a lower rate, etc but usually the math is honestly pretty simple. Closing costs divided by savings is one way that we calculate break even point. Generally, if it's less than a couple of years, it can be good, but Lance, I think you might speak with more wisdom to this is the idea that, you know, we saw this as well after 2009 and entering that when rates were lower, we had people where they would come and hop and they would do like three refinances in a row because rates would drop again and then they would do it, and again, and again, and there's a certain point where you do it, and then you do the next one so soon that you, you burn up the money that you saved in the refi, because you got to pay closing costs all over again. Lance Johnson: Yeah, I mean, it is a simple calculation of cost minus the savings per month. You know how many months before you break even and you know, and you have to kind of weigh, do I take a slightly higher rate if they've come down significantly to not do an upfront cost? And it really depends on are you in this house for the next 15 years or, you know, you're in it for the next five years and you're moving on. And that might sway what rate you take versus what upfront cost you take. Adrian Schermer: And I got to say, Lance, you raised a huge point earlier. The 15-year, I cannot stress enough, if you got used to that 30-year payment, if you locked in above 7% when you bought your house, and then a 15-year is potentially in, let's say, the fives, or if we see that slide into the fours .Yes you're going to pay more per month because of the 15-year pay term, right? Like a 15-year, if it was apples to apples, but when you factor in. a difference in rate that is potentially 2% or more, you may find that it is; that delta is much, much smaller, and you might go; I think that's advice that I'm definitely going to be giving my clients when they call for that refi is: Hey, let me just pass you the numbers for a 15 and consider the concept, especially if you're dropping mortgage insurance in the process, let's say, you bought that house with less than 20% down back when rates were, you know, well above 7%, and maybe you didn't do a buy down because you you had this belief with the rest of the market that hey, rates are going to make their way back down. Comparing to a 15 year, I think it's gonna be a super, super smart decision for some people to make, hey, I'm used to this bigger payment. Why don't I turn this into time off my loan instead of a lower payment at this point? Robert Delavan: Yeah, and I've heard Lance give that advice quite a bit over the years is, eh, you want to look at this. What's your cashflow situation? And then of course it comes into like, you know, um, what's your income? Do you have tolerance for that within your budget? Adrian Schermer: Yeah. Robert Delavan: You know, there's a whole domino effect and that's the, I guess that's the piece. And Lance, I think I jumped it on a little bit here on question two for you, but Adrian Schermer: That's good, we rolled through it. Robert Delavan: kind of talking about Adrian Schermer: Lance has taught me to love the 15 year again. I love it. Robert Delavan: kind of penciling out here, so of what works. So. Lance Johnson: Yes, that's been two episodes in a row that you've gone into question two. You… Adrian Schermer: We're just so organic guys. Lance Johnson: yes, yes. Robert Delavan: I get so excited. Lance Johnson: I think we, I think we did answer question two. What sort of savings are we talking about? It does it pencil out if you add closing costs and other fees and you know, you gotta, you gotta look at my big thing is numbers don't lie. Just people lie about numbers. Adrian Schermer: Hahaha Lance Johnson: …and so I think you just let the numbers speak for themselves. Robert Delavan: Right. Lance Johnson: I think a good advisor will point out what is a 30, what is a 15, what is a 5, what is a 7/1 ARM, 10/1 ARM, and those numbers are always changing. So like a month and a half ago, the 5 and 7/1 ARMs were very attractive over the 15 and 30 years, and so 15 and 30 were similar, 5/1 ARMs, 7/1 ARMs were very attractive. Now here we are a month and a half later, and the 15 year’s really attractive. and the 7 and 5/1 ARM is really not much different than the 30. And so those change on a week to week basis… Adrian Schermer: Yeah. Lance Johnson: …depending on, you know, the companies are looking what their revenue streams and what they're looking for for portfolio. You know, they package these things Robert Delavan: Mm-hmm. Adrian Schermer: That's a great point, yeah. Lance Johnson: And so, you know, you just got to kind of look at all four and let the numbers speak for themselves, and you know, if you're going to spend cost on on closing costs, you know, try to wrap in as much of the debt, if you have consumer debt, or other things to free up cashflow. And then there's a whole planning sequence that goes along with consolidated debt and stuff. Robert Delavan: Mm-hmm. Yeah, absolutely. Adrian Schermer: Yeah, that's why I've liked working with you, Lance, too, because it's there's a core concept that I want to throw out there. I as a lender, I can't tell you what to do. I could present you a 30 year, 15 year, maybe a couple rate options for both, and you and I, we've worked with clients before who I have felt have chosen the, air quotes, wrong answer. And it just was because it didn't pencil out. Maybe it's buying too much rate, you know, spending too much on an interest rate, in my opinion based on the turn time they have for a property. Having someone like Lance, who is is more obligated towards giving you the advice for your end financials who has the fiduciary responsibility to tell you which path seems the right based on your goals, and just have a second sounding board because at the end of the day, if a client pushes for one product or another, whether I think it's a good idea or not is not my… I can give my opinion and nothing else, at the end of the day, I take the order, and that's part of the way that I'm regulated. I'm not supposed to push people. I'm not supposed to say no, you know, if they want to make a decision like that. Lance Johnson: Yeah, Adrian Schermer: And Lance, I know you've helped a lot of people. Lance Johnson: and I also know in talking with a lot of mortgage brokers, not necessarily you, you're not going to push things, but you're not going to disclose all things. I think you do a better job, but a lot of mortgage broker, here's the two options you have. Well, they have more than two options. It just takes a lot more work to present all options, and so sometimes I like to give more than two options because if you're not pushing something, but you're only given two options and they have 10 options. You're not really disclosing all the options they have. Adrian Schermer: Mm-hmm. Lance Johnson: You're really kind of focusing, narrowing them down to a direction you want to go in. I'm not saying you do this, I've seen this with other mortgage people. And so I often like to throw in ones I know they're not going to do just so they can see what the market is bearing, and so then it's easier to make a decision that this is the better option when you see all options or as many as you can. I mean, sometimes I think you get into paralysis by analysis and some clients get that, and so too many options really debilitates them. Nut too little doesn't give them all the options, so I try to flush those out a little bit. Alright, so Rob, let me give you a question. If I'm a buyer who's on the fence, would now be a good time to purchase? Yes or no? Robert Delavan: Well, it depends, your mileage may vary, right? Yes, if you're in a good spot, good employment, looking for, hey, I just couldn't pay as much or didn't want to pay as much for a home 12 months ago when the market was very different and a seller's market. And now it's a buyer's market or at least the trends are going that way, nationally, and the, we're getting deals. You know, we're able to get closing cost concessions, we're able to get, you know, prices where we're not competing against 30 different; 30 different offers or you know hundred thousand over to get the property and that sort of thing. The flip side of that, the counter argument is, well rates are higher, so the monthly payments more. So, you know and we've and we've covered that, now rates have dropped and we address that a bit in this episode, and then the concept of dating the rate versus buying the house and having a plan in place. So you know the question is, is, I hate to say this, yes and no, or maybe. With that said, what really pushes things over the edge is; where are they at in a life cycle, in addition to their financials and their finances and that sort of thing. Regardless of the, you actually used the term Lance, which I've used before on the market the last six months, it was kind of as rates like really spiked from the threes to the sevens over the last 12 months there was almost analysis paralysis by the entire market in real estate, just like, you know, what the hell do we do? Adrian Schermer: Yeah. Robert Delavan: And payments are so much higher and prices haven't come down that much, and, you know, everybody's just kind of was sitting and waiting and volume in the market just, you know, went through the floor. And now with this, the data that we have, which we quoted and so forth, in this article that we were discussing, things are jumping back up, and in theory, when more people enter into the buying market, that's going to affect demand. So in theory, that would then improve prices or at least stabilize things and kind of pop them up for the spring, which is normal. During that six months or so where the market was, eh you know, kind of sitting, hanging, paralyzed market if you will. People were still, you know, having kids. People were being born, people were dying, people were changing jobs, getting jobs, losing jobs. You know, getting married, all of the things that drive the housing market to do transactions, those were still happening, even though we were seeing a lot less volume. So people were sitting and waiting. Well, at some point, and I think we saw a little bit of it with a little bit of interest rate pressure, there's this, you know, pent up demand a little bit. So we'll see where that goes. It's gonna be fun. I wanna do multiple, well frankly, we'll do multiple kind of state of the market updates and have these types of discussions and podcasts throughout the year of, hey, what's happening in the short term versus the 90 day, six months, 12 months, that sort of thing. But right now I see people jumping in, especially with the data that's been presented here, and my brokerage is seeing an uptick in volume. Buyers are jumping back in. Sellers are saying, ‘well, maybe this spring will be a little better’. We're looking at all of those data points. But the life events aren't changing. Or I guess I should say the life events are still happening. And Lance, you see that every day, I mean… Adrian Schermer: Yeah. Lance Johnson: Yeah, well, I mean, Ithink I tell clients that, you know, we're not probably going to get the deals like we did in 08, 09. Robert Delavan: Right. Lance Johnson: There was, you know, some people might claim that there was felt like there was some fraudulent activity around the, you know, different institutions and stuff. Robert Delavan: Sure. Lance Johnson: and so, you know, fair disclosure and transparency wasn't quite there. Adrian Schermer: Yeah. Robert Delavan: Right. Lance Johnson: And so you had six, six and a half million people lose their homes, which was unprecedented in America. So we're not going to have something like that. But what you are going to have is are they going to be layoffs? Yes, they're already happening. Robert Delavan: Yes, right. Lance Johnson: Are people going to be moving? Yes. Robert Delavan: Yes. Lance Johnson: You know, are they going to have to give up a old interest rate of 2.625 because they got moved from Portland to Nashville or whatever. You know. Robert Delavan: Mm-hmm. Lance Johnson: There's all sorts of stuff. What I’m telling clients is you know selling a weeks with… Robert Delavan: Right. Lance Johnson: …you know 25 offers more planning involved Robert Delavan: Mm-hmm. Lance Johnson: and if it's a rental and you have laws protecting and you have to give disclosures of when they move out and timing of everything’s gunna take place and so I tell people get looking, find out where you want to be, do a little bit ahead of time. I just think the cycle's longer right now. Adrian Schermer: Mm-hmm. Robert Delavan: Yep. Yep. Lance Johnson: But when you find that place, you're still gonna have to be ready to act because those diamond and roughs are gonna be there. Robert Delavan: Mm-hmm. Lance Johnson: Good deal, somebody willing, somebody that has to move and they're looking for that first buyer and you're the first or the 15th? Robert Delavan: Yeah, Lance Johnson: …you know, so. Robert Delavan: yeah, and we're getting back to that, and what's probably a good point to tie a bow on that, Lance, is a normal market is balanced. I guess this will probably kind of bring us into the final thoughts here. A normal market is, they say, about six months supply is normal versus we've experienced less than two months, and these crazy hot markets and all of these things, nd at the end of the day, like, ah, we can get better deals, we can negotiate better deals. There are those opportunities out there, and I think that's probably the biggest message is, be ready for that opportunity, you know, and I appreciate you pointing that out. You know, the client has to be ready. Adrian, that client has to be pre-approved. Their finances have to be done you know Adrian Schermer: Yeah, yeah, I would share that opinion with you, and it should vary to, depending on situation. If you're thinking to yourself, I need to, I need to own a house for two years and then I'm out of this town. Maybe this wouldn't be the best time because like you're saying, Lance, you know, we may have a push from unemployment and that may impact values. If you plan to own this house for 5, 7, 15 years, you know, like your kids are going to graduate high school before you move out of this place. Buying represents potentially a lower risk to you because it matters less what happens a year down the road. What matters more is what the value is gonna be at the end of that 15 years. So playing the waiting game and gambling on what the market is going to do, I would probably say if it's the right time for you, don't make that gamble. Instead, just if the right house is there, take advantage like you said Rob of the fact that it is leaning more towards a buyer's advantage market where you can get seller credits, where you can get a little more negotiation, where you don't have to send in an offer without seeing it, that's overestimated value, to enter into a 40 offer feeding frenzy you might be in a more comfortable shopping position, which I personally and I think you guys would agree. I find that more ethical just on the front of, of like it not being a high pressure sales environment necessarily. When you're making a six figure purchase, you can maybe sleep on it and then make an offer and not feel like you're losing position because you didn't slap money on the table the second you walked in the door. Robert Delavan: Yeah, it's awful nice to be able to have a little more even bargaining at the table, so to speak. So final thoughts here, that's a wrap for our episode. I thank everybody for tuning in. We have some exciting stuff moving forward that we're very much preparing for this year, for 2023. As always, our websites are here, we have delavan-realty.com, roi-fa.com, and Adrian at directorsmortgage.com, and then we do have, as always, our disclosures and the specifics of the, if you wanna look up that article, go ahead and jump into that. That'll be in the show notes as well as the PowerPoint. Thank you all for listening, and we'll catch you next time on the Get Rich Slow Podcast. Thank you fellas.