In this Video, Ryan Dorman and I discuss the current interest rate environment for mortgages and discuss some ways that buyers and sellers can take advantage of the current rate environment.
Well, happy holidays, Merry Christmas. Whatever you celebrate, hopefully you're getting out spending time with family and friends.
We're going to talk about mortgages, and we have the mortgage man himself, Ryan Dorman of Evergreen Home Loans, the Dorman team. One of the top lenders in the state.
All right, well I didn't want to wait until the end to give the juicy details. So do you just want to start with where rates are now, maybe what we've seen over the last handful of weeks, and what the current environment looks like for mortgages?
So as many of you know, about two years ago, rates kind of just bumped right up, almost doubled in a short period of time. And recently they've been in the 8's for some, depending on loan programs. And it's been tough. It's been really tough
for consumers out there specifically first time home buyers, people who've never owned a home before. That's a heavy weight when rates are clear up in the 8's. If you're trying to do down payment assistance, it's really tough.
As of recent, we've seen rates slowly coming down, which is good. And, the Feds met this week, or Jerome Powell announced on Wednesday that, we're going to probably see 3 rate drops in 2024. It's very likely.
But then, we're hearing some conflicting comments from Fed presidents of different locations. So, the jury's out. We don't really know where rates are going to go for sure. There's no guarantee.
But we're hoping to see rates improve this next year. I mean, one of the stats that's been thrown around out there is that, you see a 1% drop in interest rates equals about a 5% bump in value. And that's something important for sellers to think about. It's really important for home buyers to consider too.
If rates do drop, 2%, 3%, from what they are today, that's a pretty huge increase in purchase price that they're going to be looking at. If someone's looking to buy, this is actually a really good time to consider that. You lock in the price point, and you can always refinance later.
So the Fed, they have come out with their new dot plot, which is something I actually look at for fun, suggests something like 75 basis points of cuts next year. That does have an impact on mortgages, because it has an impact on banks. But if you look historically at the federal funds rate as it relates to mortgages, you'll see times where that federal funds rate moves a fair amount. But mortgage rates stay pretty flat across that time. So they do move somewhat independently.
You'll find them following closer the 10 year treasury rate. So that 10 year treasury, over the last several months we've seen it go from something like 4.5 to down into the 3.9s now today. So that's good news.
Historically that spread above that for mortgages is somewhere around a 1.5% - 2%, depending on the environment. Right now it's north of 2%, but hopefully that spread would come back to more of a long-term average and those 10 year rates hold. So there's other factors there too. The Fed cutting rates helps for sure, but that 10 year also, which is more market driven, is an important component when we're looking at mortgage rates in general.
I'll give a quick example to kind of texturalize this a little bit. About three weeks ago, we had a client that wanted to do a refinance, a cash-out refinance. Their rate that we quoted them at the time was about 8.25. And it was pretty high and it was a tough rate. We talked about some things that were happening in the market, you're never always right on this, but some of the tea leaves indicated that rates may come down in the next couple weeks. So fast forward to this week, and that that came true. Their rate went from the 8.25, we were able to lock it in at a 7.25.
So given the environment, what can people do? It's nice that rates are expected to be lower in a year, but today what can we do?
Well, there's some options I touched on earlier in regards to home buyers. There's options to kind of lock in that price right now. You can do some temp rate buy downs. The sellers can pay for that. You have a lot more latitude right now. Or flexibility with the sellers where they are willing to do some concessions to help out with closing costs, which could help with a permanent rate buydown or temp rate buy downs like the 3-2-1, 2-2-1, 1-1 buy downs. Those are good options.
But as soon as these rates start to drop, you're going to have that bump in value. Why is that happening? Supply and demand. You're going to have more people
that can qualify for homes that couldn't at the higher rates. So now you got all these people coming in the market trying to buy these properties. That's tough. Now you start seeing multiple offer situations, you start seeing people paying over appraised value. That makes it tough for those that don't have the capital to get into the game.
You know, we try not to think of someone's primary residence as an investment. And the reason is just you can't spend the money in your house. It's nice that you have a place to live and when it's paid off, no one can take that away from you really. So that is a nice benefit. But sometimes, especially here locally, we've seen home values kind of skyrocketing over the last decade or so, and a lot of people's net worth is tied up in their house. Where cash flow is getting harder because of inflation and just things getting more expensive. And also, life surprises you at times. So what are you finding in terms of ways to sort of unlock that net worth that's tied up into people's homes?
Right, I think that would be something that especially if is appropriate for our senior citizens. 62 and older, a lot of them have that equity tied up in their home. They're on fixed income, they don't want to pull their assets from investments that are making them money. Or sometimes those investments are down and they don't want to pull on that money. They don't want to go, maybe they don't want to go get a job right now, because it's not paying much. And it goes against maybe some of their insurance, affects their qualifying ability for insurance. But people can certainly leverage the reverse mortgage as an option. I know it sounds scary, and it has had a bad wrap over the years.
Aren't those expensive?
They can be, depends on how you put it, how you structure it. They can be a very expensive option, but they can be also a financial lifesaver for some. And we meet with a lot of clients on the reverse mortgage space, and try to figure out how could we have them not do a reverse mortgage? What are options we can do, maybe they could sell their home and take the equity, and build a mother-in-law suite on their son or daughter's property? And when they pass the heirs get a duplex.
That's huge in Tacoma right now, there are property use guidelines that are changing. Puyallup should be next is what they're planning. But you know, Seattle, Tacoma, University Place, just had one of these laws passed last week where you can now build Mother-in-Law suites in your backyard. So consolidation of households, that's one way we're doing that people are doing this. Or freeing up the capital, and just making it more economical for their families.
But that reverse mortgage space is one a leaf worth considering. And turn over that leaf, see what's there, meet with Andy. He can talk to you further about how that would impact your game plan moving forward. You know, us or any other lender that does reverse mortgages could run those scenarios for you too, and give you that perspective.
Yeah, it's one of those things where, a lot of financial solutions are only for a certain group of people. So this is one that just depends on your personal situation. That might be the way that you're able to, sustain your current spending level throughout the rest of your life. As a young person, you try to plan around that so you don't have to. Sometimes you just get in a situation where you need to unlock that value that's in that home that you purchased a long time ago, and it's grown to a high valuation and a large part of your net worth is tied up. So I really appreciate that.