All Forum Posts by: Kenny Simpson

Here to help so ask away....

Looking forward to hearing the feedback on this question?

I keep hearing that everyone feels stuck with their low rate.  What is the MAGIC rate do you think for you or others need to be at to sell or refi?

How is everyone's STR doing?

What market/s you in?

Are you up/down?

Are you seeing any changes in your market?

thanks :)

The mortgage rates went from ALL times low’s when the pandemic started to 20 year ALL time high’s. If you look at the chart below you can see how high interest rates were from the 70’s to 2000’s. The government helped push rates down after the GREAT recession to help stimulate the economy and housing market. As we ALL know, this worked, made values shoot way up across all real estate. We all got used to these low rates, NOT just here in the US but many other countries around the world as well. 2022 we witnessed rates double and triple depending on the product and type of loan. That cost of capital is starting to have its Affects on the market in all real estate.

Now fast forward to 2023 and rates are NOT coming down as fast as we like. Inflation is coming down but NOT as fast as we like either, so the FED is staying hawkish and pressing hard on the breaks to slow everything down. There is so much fear in the market today because no one really knows what is going to happen and so that fear is reflected in pricing and values in assets/rates/etc.

Should mortgage rates really be this HIGH? The technical answer is NO but the REAL answer is YES. There is a BIG fear margin in mortgage rates that is NOT being discussed enough. When we follow mortgage rates we look at the 10 Year Treasury which sits at about 3.74% as I write this blog. In a normal world, not sure what is normal but lets just call it that the historic spread between the 10 YR T and 30 YR Fixed mortgage is about 1.8%. When rates spiked from 3% to 7% lets call it in a year that is NOT a good thing and it sure is NOT a good thing if you are in the servicing business. Companies that service your loan, meaning collect your money, pay the investor that holds your mortgage, the ones that send you your monthly mortgage statement. They need to hold a loan for about 3 to 5 years to make money, if they are paid off lets say in 1 year they will lose money. These servicing companies know that rates are going to come back down soon and that MOST of us will refinance out of these HIGH rates. So they need to protect themselves and build in a margin to make money now. So remember that 1.8% spread, well that was at 2.7% and recently it went up to 3.2% due to this fear.

The TRILLION-dollar question is when will that spread drop and give us rate relief? The answer is easy, when the 10 YR T drops, rates drop, inflation drops, and the FED changes its tune. I said trillion-dollar question because that is how many loans are being locked at high rates year after year until rates come down. So when do we expect the 10 YR T to drop? My guess, in the next 6 + months. Once rates drop, spread will come down because servicing companies know that we will most likely going back to a lower rate environment. No one is predicting 2 and 3% rates, but at this point we cannot leave anything off the table.

The average mortgage rate across the US is 3.8% and there are many reasons why that is great. There are also reasons why this is becoming a BIG problem for the current housing market. The obvious reason is that rates are double now, values are up 36% on the average PRE-PANDIMIC, there is no inventory to buy and there is little to no motivation to move/sell.

There is also something that is starting to happen and seems that we will only see more and more of it. People are starting to move for all the typical reasons; job, bigger house, new area, and the list goes on. The issue is that they are locked in at a nice low rate, low payment and now the house they could sell looks better as an investment property that can return some nice cash flow. Rents have shot up over 20% on average across the whole country with inflation, lack of inventory to buy and demand for rental units.

Sellers are more inclined to keep their existing property, rent it out and buy a new one. Yes, they have equity locked up in their house, but they also have a fixed rate, fixed payment, and cash flow. Sounds like a little nest egg or retirement that was created in the last 3 years. This will NOT be an option for everyone, but many will take advantage of this. I have talked to many clients that will be keeping their current house and purchasing a new one. The extra cash flow helps offset the payment on the new house, they feel very good about being real estate investors and having an asset to fall back on if needed. Cash flow is cash flow.

Anyone else seeing this with clients?

This is scheduled to go before the City Council for a second reading on May 16 and then the Mayor will sign it into law. We estimate it becomes effective around June 16.

Highlights (all page number references relate to the clean version of the ordinance):

• Short-term leases of 3 months or less are exempt from the ordinance – see top of Page 7 under definition of “Tenant.”
• New definition for “substantial remodel” beyond AB 1482 definition – see Page 15.
• Eviction registry – see bottom of Page 17 for just-cause evictions and bottom of Page 19 for no-fault evictions. Note the language explicitly states this section, “shall not apply until 30 days after the Commission (San Diego Housing Commission) establishes a submission portal and provides the public notice of its creation.” I anticipate it will be well into 2024 before this applies.
• For no-fault evictions, landlord must pay 2 months rent relocation and tenant is eligible for a third month if tenant is a senior or disabled – see top of Page 20.

Next steps

• Second reading of ordinance on May 16.
• Law becomes effective on approximately June 16.
• City of San Diego – with industry input – will create administrative guidelines for how ordinance is implemented and enforced. This will take place throughout June and July.

Speak up

This new law will pass and most likely will NOT be in end of changes to the “Tenant Protection laws”. It was great that so many owners talked about how rent control has already impacted how they run and operate their investment properties. It was also good to see that so many landlords are helping and doing their part to help tenants. These new laws are making it harder for owner to run and operate their buildings and it ultimately hurts that tenants in the end.

If you did NOT make the meeting please reach out to the city officials and let them know how this has and how it will continue to IMPACT your business. We need a bigger voice, city officials need to hear from us and we need to educated and share the real stores of what is going on today in San Diego being a landlord.

Contact city officials

As the housing market continues to change, you may be wondering where it’ll go from here. One factor you’re probably thinking about is home prices, which have come down a bit since they peaked last June. And you’ve likely heard something in the news or on social media about a price crash on the horizon. As a result, you may be holding off on buying a home until prices drop significantly. But that’s not the best strategy.

A recent survey from Zonda shows 53% of millennials are still renting right now because they’re waiting for home prices to come down. But here’s the thing: the most recent data shows that home prices appear to have bottomed out and are now on the rise again. Selma Hepp, Chief Economist at CoreLogic, reports:

“U.S. home prices rose by 0.8% in February . . . indicating that prices in most markets have already bottomed out.”

And the latest data from Black Knight shows the same shift. The graph below compares home price trends in November to those in February:

So, should you keep waiting to buy a home until prices come down? If you factor in what the experts are saying, you probably shouldn’t. The data shows prices are increasing in much of the country, not decreasing. And the latest data from the Home Price Expectation Survey indicates that experts project home prices will rise steadily and return to more normal levels of appreciation after 2023. The best way to understand what home values are doing in your area is to work with a local real estate professional who can give you the latest insights and expert advice.

Thoughts?  Should buyers wait or should they purchase now before mortgage rates go lower and more buyers come off the sideline?