Today’s Housing Market

All right. Good morning. Welcome to the Bogart Effect. I’ve got Daniel Evans with me today. And we’re going to talk about the housing market. You know, thanks for the time, Daniel. You know what I want to do is kind of spend a little bit of time at the forefront talking about where we’re at, what’s gotten us to where we are with the housing market. Then I want to spend a little bit of time talking about interest rates. Obviously, that’s had an impact on where we currently are. And then we’ll get into talking about a little bit of a future outlook and predictions of what we’re anticipating. So why don’t you kick us off, Daniel.

Yeah. Excellent. Thank you, James. You know when you hit the nail on the head there, when we look at it, today’s housing market is very important and imperative to understand, you know, what the events that have taken place to where we’ve ended up today. And then, like you said, we’ll touch on it as, okay, this is where we’re at today. What do we see coming down the future? You know, it’s kind of hard to, you know, believe it. But we’re still talking about the pandemic and the impact of the pandemic. And once it’s had, you know, all around us today, specifically the housing market, we saw a shift, within the employment workforce, we saw a shift within population and movement and migration to other parts of the country. And then the big one, you know, we had, interest rate cuts and the drive and the speed at which we drove those interest rates down has greatly impacted the housing market and environment that we see today.

Well, and truthfully, I’d also even say the buyer pool has changed. You know, and historically, homeownership was only for the affluent. Right. And the younger generations, just from a generalization perspective, were more mobile, more transient. They were typically renters. And you’re absolutely right. The pandemic changed a lot of those, those themes. So now, for example, the millennial buyer became a very, very active buyer in the housing market and almost overnight created a massive, massive shortage in housing. And that’s, that’s nationwide, right? That’s not even just in certain segments of the economy.

And then, as you pointed out, I think the work from home narrative is still very much alive and well. It very quickly changed a lot of the trends in terms of where people wanted to live, because you were no longer forced to live in cities, or even in the suburbs of cities. You could now live more where you wanted to live and, maybe occasionally commute to work. But not necessarily where the office buildings are.

You know, and so when we talk about this now, I think it’s really important to emphasize the fact that these trends don’t change immediately and they don’t change overnight. And there’s a lot of, let’s just say, stickiness associated with how to get there. And really what I mean by that is when, when someone starts to get into the mindset of, I want to buy a house, it isn’t always, you know, all right, that weekend you go and you buy a house, right? Like it can take months of planning. And ultimately that momentum continues to build, where then you start to get emotionally invested in it. And all of a sudden, it’s like, well, I might have spent 500. Now I’m willing to spend 600 or 700. And so that also creates some price pressure that’s also happening as well.

The low interest rate environment certainly brought down the attractiveness, actually brought down the, the, the cost associated with it, which made it a lot more attractive. But it did not change the generalized trend or momentum there. So, you know, when we talk about millennials and specifically their impact, I mean we’re talking about 85 million Americans now that are looking to buy homes. Now, of course, some of them have already bought. But that trend has absolutely been what has been the most dynamic shift in the current housing market. Not saying that, Gen Xers, baby boomers weren’t, weren’t a big part of that. They still absolutely are. But if you go from all of a sudden having a group, again, we’re talking more of a generalized, reference point. But if you go from having a generation that’s not an active participant in the housing market to then all of a sudden very active, well, of course you’re going to have a massive housing shortage.

I think the other thing that’s important to talk about with regards to trends is inflationary pressures. You can’t ignore it. The cost of building has doubled to tripled in the last four years. And depending upon that there is some regionalization. Associate with that. But that’s more than just land values. The actual cost of construction has risen so fast, so materially, that you can’t ignore inflation. Inflation here. And so that of course, has had an impact on people’s ability to afford homes and ability to afford what they want. And so of course, that’s caused a migration or shift some again, some of that work from home narrative that we’re having, they’re kind of, entangled with that discussion where people can now live, where they want to live, they can move to lower cost living areas and ultimately then have a home and be able to set routes there.

And then the other thing that I think is important to note is the inflation that’s happening on wages. You know, it’s we’ve literally seen over the last four years the fastest real wage growth, real wage growth. So relative to inflation that we’ve seen in over 40 years. And because of that, that means that ultimately there is more discretionary income. Now, I might argue that point a little bit simply because when we talk about discretionary income, the real costs across the board have absolutely risen. I’m sure, Daniel, you’ve had, food costs are higher. How are childcare costs higher? Right. We’re in the same boat in that regard. Right. Like, you know, real costs have risen. But at the same time, too, because people have higher income levels, ultimately that means that they have the ability to qualify for bigger mortgages, which means that they have the ability to, buy more, buy, buy a higher priced home.

Right. The way I see it is, there’s three different segments in the housing markets right now. There’s the housing market that’s under 500,000. There’s the 500 to 1.5 million, and then there’s the 1.5 million and above. And all three have had a different segmentation that’s happened. And the reason that I bring it up this way is simply because ultimately, there’s a direct correlation with how much someone is financing versus their, the, the inventory at each of those respective levels.

So, for example, typically a home price that’s under 500. More often than not that’s usually the starter homes. And that’s usually where somebody is going to need to have a very, very large mortgage. And yeah, they’re usually putting ten, 20% down financing the rest, which means that they’re being impacted much, much more by interest rates right now. Whereas the 500 to 1.5, that’s typically where you see more of the larger cash transactions. So, there’s a lot less sensitivity to interest rates. And then the 1.5 and above as well. That’s typically where we’re getting into a discretionary level where interest rate volatility is relatively relative. Right. I’m not trying to minimize money, but relatively, an impactful relative to the purchase price itself.

What I will say is inventory is very hard to come by. And this is across the country, certain regions are better than others. But what we’re finding though is if priced appropriately, when something comes on the market more often than not, they’re getting offers very, very quickly. And in a lot of instances, we’re still seeing bidding wars. We had one of our team members down there in Houston when she was getting ready to buy her first home. I think it was 27 homes that she put offers on before she ultimately got one. I mean, that’s crazy to me. But the environment that we’ve been talking about here.

And by the way, I don’t think that that trend is going to change in the near term. I think that we’re still going to see the ramp up period taking a while to get the inventory back to a place where we’re going to see enough supply to, to equalize out the demand. Right. So, let’s shift gears a little bit and talk about what interest rates have done. Daniel. And let’s specifically talk a little bit about, how those have gotten us to where we are now. And then let’s start transitioning into talking about future outlooks.

Yeah, absolutely. When you look from an interest rate environment, right? I mean, from the cause of the pandemic, I mean, the rate of acceleration to cut rates was, was historic. I mean, we’ve had historical lows. I mean, we look at what interest rates used to be in the 80s and 90s and all of a sudden, we’ve got, you know, sub 3% mortgage rates here. I mean, we’re at historic lows here.

You know, in context, I mean, even if we settle around a five, 5 or 6% interest rate, historically it’s still a relatively low number, but it’s a shock to the current environment that we have with it. So, the cause of that is to stimulate the economy through the pandemic and have that, I mean, it’s really driven the cost of capital has really come down. So, there’s more availability to it.

Well, now that interest rates have gone up and they went up at a very, very fast or moving up, I won’t go up as high as it went down. But we’re moving into this environment where now, it’s proverbially called the locked in phase. Right. So now I’ve got a mortgage and I’m at 3% on it. I mean, I’ve got to sell, absorb a higher rate going into the future, but also with, the price increases in homes, you know, your dollar doesn’t go as far, when you look at it right?

So, you know, supply and demand, you know, affordability in this lock in period, I see is really, you know, driving the dynamic, in there. And I think that when we get into a lower rate environment that we could see, a little more momentum on this on the buyer side and the seller side as, as sellers can become more incentivized. And be more available to buy, you know, homes going forward.

Well, and I want to pull on part of the thread regarding interest rates. I think it’s important to really talk about relative timing. You know, for most baby boomers, their first home mortgages were 11, 12, 13, 14, 15%. So, it’s important to note that, yeah, it doesn’t feel great locking in a six and a half or a 7.5% mortgage right now. But relative, you know again it’s all a function of timing.

Now I yeah, somebody reported me recently and said Well home prices went up to ten x right in in the same timeframe. Well, I won’t argue that but real wages have as well. Right. So, this is where when we talk about the now and try to compare it to any other timeline, I personally don’t buy into that. I think it’s important to work within the environment that we have presently and then think about where it is ultimately in the future.

And by the way, I personally don’t think the current interest rate environment should detract or preclude someone from buying a home if they’re choosing to buy a home. And the reason I say it that way is simply because right now the environment is what the environment is. There’s a lot of sellers who are saying, I’m going to wait to sell my home until interest rates come down. Right. And what’s going to happen then? Well, now all of a sudden, you’re going to get potentially a lot more buyers as well coming in, which is going to continue to drive the prices up.

We’re in an environment right now with higher interest rates where because things are still potentially sitting on the market, you have a little bit of negotiating flexibility right there. This is the time that if you’re trying to buy, go ahead and buy right now and then be very diligent with regards to refinance.

And so, when we talk about, you know, mortgage products and what someone should or shouldn’t do, I think it is important to talk about what a mortgage is, how it impacts someone’s ability to afford. By the way, the calculus for qualifying for a mortgage is a very simple formula based upon what someone makes. There’s a front-end ratio back-end ratio, 32% of income, 38% of income. That’s what would ultimately qualify someone for a mortgage. That’s what the lenders are using, as the goalposts, if you will, to determine a qualification for a mortgage.

But then there’s all different types of mortgage products. There’s a 30 year, there’s a 15 year, there’s a 5/1 ARM, there’s a 5/6 ARM, there’s a 7/6 ARM. The reality of it is, is that this is a great period of time to talk to a financial advisor for what is appropriate for your situation. A lot of this conversation is where we’re engaging with the kids of our clients right when and happy to be a resource there.

But I do believe, you know, right now there’s not a whole lot of incentive to go with a variable rate product based on the differentials in the rate. So, you know, personally, I would look at doing a 15 or 30 year, depending upon what my cash flows would provide for me to be able to, to afford.

You know, there was a whole trend where and this is going back maybe ten years now where interest only mortgages were extremely attractive. I think that’s very dangerous for somebody who doesn’t have a tremendous amount of either assets or income to offset those, because what happens with those interest always is those mortgages reset at whatever the duration is. Some of them are five years, some of them are ten years, whatever the duration is. And that’s where people get in trouble. And by the way, that’s essentially what was built during the 2008-2009 great financial crisis. Right. So, these resets are all happening.

So, my point with all of this is if you’re going to get a mortgage, make sure you understand what you’re doing in terms of what the implications are. If there’s going to be a time where that mortgage is going to shift or reset, because of a higher or lower interest rate environment, right, just to understand it. But then at the same time, to understand what is that doing in terms of your discretionary cash flow. Do you have the ability to continue to live the life that you want, or are you going to become house poor? Right. So just build all of that into these assumptions here.

Now I do to my core believe interest rates are coming down. If anything, if I was a betting man, I’d be wrong. Even for 2024, I would have thought rates already would have materially come down.

We went from a seven-cut prediction. So, I agree with that. I don’t, I don’t know exactly the schedule of what’s going to look like going forward. But yes, I mean, the momentum and the direction are that we will find ourselves.

Well, and truthfully, like I go back to 2019, that year, I refinanced twice that year. Because rates kept coming down. It becomes a basic math formula for anybody who doesn’t know, refinancing means that you essentially go get a new mortgage for a house that you already own, and it enables you to bring the interest rates down, bring your payment down, right. Or you could potentially look at changing the type of mortgage that you have.

I ended up actually, I remember in 2019 I went from a 15-year. I’m sorry, from a 30 year to a 15 year, and my payment only went up by a couple hundred bucks, right? Because of the way that interest rates came down. And of course, accelerated repayment.

You know, it’s fascinating because we talk about the aristocracy of rates right now, the challenge that a lot of homeowners that have, they’re talking about selling is anybody who bought a home between 2020 and 2022 or early 2022, that has the sub 3.5% mortgages. A lot of them don’t want to sell simply because they’re never going to be able to see that mortgage rate again. And that’s a struggle, right? Like, and the hardest part, I actually sold a home that I bought in 2022, locked in the rates. I had a 2.875% mortgage. The hardest part about selling that house was giving up that mortgage rate, right? Like, you know, ultimately decided to downsize the house itself and was able to reduce cost structure. But, you know, that was hard, right? Like not having that you’re giving up that lower mortgage rate.

All right. So, let’s talk a little bit about, you know, where we see things going in the future. We’ve kind of touched on it a little bit as we’ve gone through the talk so far. You know, I think as I said, there’s a conversation for two to maybe three cuts in 2024, which, by the way, is what the Fed came into the year anticipating or guiding. Market came in with 6 to 7 and has since revised its expectations back. But going into 2025, we’re anticipating five rate cuts. So, you know, that’s what the Fed is indicating at this point.

So, the reality of it is, rates are going to come down. We just can’t tell you when. So, with regards to mortgages. Now by the way the Fed’s fund rate does not have a direct correlation on mortgage rates. But it does impact the trajectory. So, I think it’s important to just be diligent, be ready. I could see a scenario where people are going to refinance multiple times. By the time, you know, this rate cycle is fully done, you know, going into 2026 and 2027.

But, you know, the reality of it is, I would not let the current interest rate environment preclude someone from buying a home today, if that’s ultimately what their plan is. Now, if you’re on the fence, if you have uncertainty. Yeah, absolutely. Don’t buy that. So that’s, you know, kind of generalized guidance.

The other thing while I’m on it is, I will say if you’re going to be in a destination or location less than three years, I typically would steer you away from buying in the base case. Right. And the reason I say that is simply because of transaction costs alone. And then of course, market risk associated with whatever happens in the housing market, if you know, you’re only going to be there for a very finite short period of time, I would encourage to rent don’t buy, because you’re 6% just in realtor fees alone, plus whatever market rate does, and then whatever it is to buy the house, get in the house and then move. I would tell you, just rent if that’s the case, if you’re going to be more, more in a shorter period of time right.

Now, future outlook. I want to talk a little bit about those segmentations, because I think it’s important to, to talk, relative to under 500,000, 500 to 1.5 and then 1.5 and above. I do think that when we talk about the under 500, there’s just absolutely not enough inventory of them. And a lot of that is because what used to be under that price point has moved to the 500 to 1.5, thresholds. Right. So, we’ve seen price escalation happen. So there really isn’t enough inventory at that, that lower price point.

And I think that the reality of it is, the cost of construction still precludes new entrants into that market. So now we’re seeing, you know, more of the high-density housing at those price points, townhouses, for example, condos, etc., right? Like usually are in those, those price points.

But then the 500 to 1.5, you know, we’re starting to see some inventory building up there, but really not a lot materially. And then honestly, the 1.5 and above, in my opinion, that is a separate, separate market class that the goods will continue to transact quickly. The stuff that’s overpriced is going to sit, which is ultimately going to preclude someone from getting a transaction. Anything you want to add there, Daniel?

No, I mean, when you look at it from, you know, going forward, cost of segments. I mean, if you were a homeowner, before, you know, this environment, I mean, now you’ve got a lot of equity, you know, with your, you know, your price in your home, increasing there. So, it’s, there is an availability or there are funds to move towards it or buy another property.

You know, going forward, you know, I believe that, you know, barring some kind of recessionary, you know, environment that these rates are or where they’re going to be and they are more impactful in our, you know, sub-500, segments there. I mean, the median price and that national average is gone. They skyrocketed. Interest rates have skyrocketed. That question of affordability in that segment is always going to be there right now.

I mean the quite the you said it the answer is there’s just not enough supply for I mean there’s not. And even with the new builds, I mean they’re still even struggling to meet with it as well. So, I don’t, I don’t see that. You know, kind of our mid segment, it’s, it’s basically there’s going to be a balance, you know, there. And I think that balance is, is dictated by, by interest rates, you know, there and, and you know, creating an environment that’s more favorable to selling your house and, and realizing, you know, some of the equity, in the, in the price fluctuation there.

Well, and then I think regarding some of the, the, the work from home trends, right. We have to continue to watch that. I do think that we’re starting to see more of, let’s just say a hybrid, more businesses are either doing a 60% or an 80% in office. Which then means that if you had moved to an area that was two, three, four hours away from where your primary office was, that’s a lot harder. And so then, you know, that, of course, is starting to create some of that pressure back.

Now, I will admit that I have a hard time believing businesses are going to just outright fire people for not coming back to work. But again, I think it depends more on a macroeconomic environment and really the strength of the employer and the workforce.

You know, and one of the things that I’ve been told recently that, you know, I’ve been putting a lot of thought into, but it is this workforce and this is now talking about millennials and Gen Zs, is that you need to meet them where they are. And what is it that they want? You know, and this is where, as an employer, I still struggle a little bit with that conversation because, yes, we want to be as accommodating as we possibly can, but there is a lot of efficiency with being in office and a lot of efficiency and having the workforce together, etcetera, etcetera, etcetera.

So, my perspective may be a little jaded in what the work from home thesis is, but the reality of it is, is that is still going to be a very big driver with regards to the future of the housing market. And I don’t see that changing, by the way. And so, watching that closely, will ultimately have a direct implication, especially if you’re in the market to buy a house and you’re trying to, to kind of navigate where you want to be.

You know, and by the way, certain economies have had more impact than others, you know, and like I have direct exposure to Virginia and Texas. You know, and Texas, the work from home narrative never really gained a ton of momentum. Whereas Virginia absolutely did. And so, you saw, a relatively large, let’s just say, divide in terms of mindset associated with work from home. And so, then when your businesses, you have multiple locations, multiple, areas that are being impacted that, well, the housing markets are just different right.

Now by the way. Northern Virginia, it’s just kind of an animal of its own simply because we have so many government jobs here. There’s just not enough inventory. Period. The end. And you’ve seen this sprawl that’s happened. I would add anecdotally, it doesn’t have a very good mass transportation system to be able to facilitate, you know, the kind of the inbound. Similar even with Texas, the Houston market, for example, just has no mass transportation, really. I mean, some buses, right. But so of course it places more emphasis on road systems.

All in all, I will say this. I think that housing is still going to be very much driven by lack of inventory. The interest rate environment to me is going to have an impact, but it’s anecdotal at best. If you need to buy, go ahead and buy. But I think ultimately, it’s one where be mindful of the decisions that you’re having integrated with the financial plan and making sure that you’re talking to your financial advisor along the way.

Yeah, spot on, yeah, at the end of the day, it’s how this works, within your own affordability, your own financial plan, which is an imperative component. And as we kind of navigate this market and the decision of, you know, buying and selling a home.

Daniel, thanks for the time today. I appreciate it.

Absolutely. Thanks James.

Take care.