A great Q&A with Mark Falcone, Loan Agent at Golden1 and Ayelet Gingold, Owner of Agam Real Estate in the Bay Area. Both share their thoughts about the Housing Market and Recession.
Ayelet: Hi Mark, how are you doing?
Mark: Well, how are you?
Ayelet: Very good! I invited you today to this call, because i get a lot of questions from people that know me or don’t know me, especially when they find out I’m in real estate. They are all very concerned about where the market is going.
Some buyers are saying, “Let’s wait until the market will collapse, so we can take advantage of the process.” They all blame the interest rates and think about what happened in 2006 – 2007, when the when the subprime hit the market.
So, instead of me starting to really give my opinion about it, because I’m not doing full-time loans and I’m not even doing loans part-time. i thought that it would be a better idea to invite you to really answer these questions. Can you share just a little bit about your background?
HISTORICAL PERSPECTIVE of Interest Rates
Mark: Sure. I’ve been doing loans since 1992. In 1992, the rates were still at 12-13%. And a few years prior to that they’re 15%. Previous to that they’re 17 – 18%. The rates, even though they’re up now, are still very good. The main difference about the market today versus 2006 – 2007 is the economy. Even though we have high inflation, it is still much stronger now.
The loans that were done back then, were a lot of the stated income, stated asset loans, where a lot of people were getting loans that shouldn’t have been getting loans or really couldn’t afford getting loans.
They got loans that started off at 1%, and it stayed at 1% for a year and then by year 2, year 3, the rates jumped back up to 4 – 5%. They couldn’t afford the payments, especially when the second-year hit.
A lot of the booms through 2004 2005, with all the easier loans financing that was available in the market, gave a lot of people the ability to get loans that shouldn’t have. Nowadays, we’re qualifying the same old-fashioned way as we were in 1992.
The industry is much more conservative, and the market is nowhere nearly as volatile as it was back in 2005 – 2007. So, even though the FED has been raising its rates – and you know, over 30 years, I’ve seen the FED raise lower, raise lower their cycles based on the economy.
REVIEW OF FED RATES and MORTGAGE RATES
Right now, the FED has raised rates. It is expected to continue. The most recent rate hike was a few weeks back, they raised it three-quarters of a point. Where the federal funds rate and what that means is that around one and a half to one and three-quarters. It’s expected at the next meeting at the end of July, they’ll raise the rates another three quarters of a point and by the end of the year when they meet another three to four times. It’s expected to raise the rates a quarter each time. So, by the end of the year, the federal funds rate is expected to be around three and a quarter.
What does all this mean? The FEDS main job is to control the monetary policy. They make the money easier to borrow or difficult to borrowers. They raise the rates and lower the rates. When banks, all state institutions, they have all their excess money for reserves to lend out.
The FEDS will set the rate that the banks will loan each other overnight. The bad thing for interest rates is when the federal funds rate goes up, we do eventually see mortgage rates go up. They’re not directly tied like credit card debt, homemaker lines of credit, and car loans. Eventually the mortgages do catch up.
Fortunately, as the federal funds rates go up, so do the rate of returns people get on CDs and depository accounts. We see those rates going back up. You know back in the early mid 90s interest rates that you can get on a savings account, were 4 – 5%. Nowadays, everything’s pretty much under 1%.
There is a little balance act, but overall, I’m expecting interest rates to probably go up to a range of maybe 6 – 7% within the next year. Now in the Bay Area, the economy is still strong. It’s a little different market than the rest of the country because of all the high-tech companies and supporting industries. So, when I look at when I’m pre-qualifying my clients and doing the loans, whether the rates are 4 or 7%, they could still afford to buy the home.
They are not like the rest of the country where the earnings are not quite as strong, they are making $15 – $20 an hour. They’ll feel the impact more and those markets will correct. Housing values will dip down a little bit to make it more affordable for people to come in. When the economy comes back again, we see the house values go back up again. When I look at where homes were back in 1992, they boomed up and then at the end of the 90s, they came down.
It went back up in the early 2000s. They came back down a little bit during the financial collapse of 2006 – 2007 and they went back up. When you look over the long-term, that line is just going up and the housing market over the long term, in my opinion, is remaining very, very strong across the country, especially in the Bay Area. It doesn’t really matter so much in the Bay Area market, where the rates that 5, 6, or 7%. It’s still great opportunity to buy a home.
You have a good tax write-off and over the long term, great investment returns, and the rates will get better. Probably who knows when, but my guess within the next two to three years, based on typical cycles and great opportunity to refinance and get that lower rate back in line and lower your monthly payments.
Ayelet: Many of my clients are from Israel because that’s where I’m from. In Israel, the mechanism is completely different, and there is a reason why many people don’t choose the 30-year fixed. Mainly because people are refinancing and – and so you know the way that I explain to people is yes, you know there is some softening in the market today, because some buyers are out of the market from different reasons, and that’s exactly why the people that can afford should get in a house. Here’s why. They can get a house without so much competition. In a few years they can refinance and bring their monthly payments to a lower, more reasonable level.
What is Going on with INVESTMENT PROPERTIES?
We were talking also about investments, looking for some investment opportunities in areas that are more volatile, because it’s areas where typically people are investing money, including second homes and investment income properties. This is more important for people looking for investment opportunities.
Investors approach this topic differently. For them they might want to wait a little bit to see some more decline in the housing market and get better opportunities to buy. But at the same time, they must remember the market will go down because buyers will go out of the market, which means that most likely they will go out because of two reasons. The main reason is their buying power is going to decline because interest rates will go up. Yes, you’re waiting to get the property for less, but on your monthly at least for now.
You’re going to pay a little bit more because the interest rates will go up, so timing is key.
What is Going on with PROPERT MANAGEMENT?
The right timing is very personal. At the end of the day, if you can afford it, plus taking you back to the Bay Area, people have to live somewhere. With my experience in property management, I can tell you that my phone can’t stop ringing now, because i have a few properties on the market for new renters.
It’s crazy. The rental market is crazy. So, if people are postponing buying, they’re going to pay more in rent anyway. You know a decision everybody should make for themselves. To summarize what you said, you also don’t believe that this is anywhere close to what happened in the last declining market in 2006 – 2007, because the reason is different. Plus, back then, from what i heard it was super hard.
After the bank collapsed, it was super hard to even be able to get the loan, so even for those that could buy, they had to pay cash because it was impossible to get the loan, and now the banks are doing well. If somebody can qualify, they can get a loan. So, it’s a very different market right now.
Do You Want to Get a Home in a PARTICULAR SCHOOL DISTRICT?
Mark: One thing I stress with my clients is when they’re looking for their primary residence, they have their favorite neighborhoods they want to be in. Sometimes these neighborhoods have very low turnovers. If something does come up in the neighborhood they really love, I recommend getting it now, while the opportunity is there. The rates could come down in a year or two. It might be two to three years before a home in those neighborhoods comes up. If one does come up that you like, it must have the proper bedroom bath count and more. It does become more difficult when you’re looking for a specific neighborhood and it’s specific size.
In my opinion, the rate is not important when compared to securing the areas you want for school districts and more. There is opportunity to refinance in the short-term, but the main point is you’re in the game. You got the property, instead of paying high rents and waiting a year or two for when the market to get stronger and the economy does get stronger. Otherwise, the buyers out there will be facing a lot of competition with other buyers.
Building EQUITY is Important Now
Then we start seeing like last year. The prior years, 15 to 20 offers with values going up dramatically. I prefer my clients to get in the property now and build the equity over the next two to three years. Instead of wasting money on rent and then refinance, but then when the market does get better, inflation gets back down to 4 – 5% percent and will in time you’re going to see the rates coming back down and just to get the neighborhood, the school district and what you are looking for NOW.
What you’re, seeing now is keen in overall strategies for maximizing the housing benefits for your family.
BAY AREA Housing is Different
Ayelet: One of the other reasons the Bay Area is so solid in terms of the housing market is the fact everywhere else in the country, you see a dramatic increase in inventory. You don’t see an excess inventory in the Bay Area.
You see improvement of inventory, but it’s not even close to satisfy the level of demand. When inventory stays low, it keeps the market from falling. And that’s what I see here in the Bay Area.
Mark: They are not building your single-family residences in your core Santa Clara County or Silicon Valley. There’s only so much inventory available, if you need that single family residence with the yard.
Ayelet: Absolutely and with all the new developments, most of them are just building no-lot properties. This even includes the single-family homes with zero lot lines.
I think that even the more they will build your property with the little land around it is going to be worth more because it will become kind of a rare find.
With that Mark. I really want to thank you for this call and we’re going to record more tips about the market and more updates in the future. Maybe sometimes the end of the summer, we will even put together a live seminar here in the Bay Area. It will be for those of you who want to mingle with other people and hear the real truth about what’s going on, without all the interpretation from your friend’s ideas and opinions. It’s always recommended to seek advice from people that you know that’s what they do for a living. Mark is one of the best loan agents that i know so.
Mark: Thank you!