Higher Rates = Less Volume

The mortgage rates are heading for 7% again, which is shocking, given it was 5.99% on Feb. 2nd.

Higher rates will discourage both buyers and sellers, and make them want to wait for a “better market” some day in the future.  Whether that day will come isn’t considered – all they know is that it isn’t today.

It should mean that the market will be cleared of any casualness, and only the highly motivated buyers and sellers will be engaging. Buyers will be more picky, and sellers will need to be sharp on price.

How sharp?

It will be different in each neighborhood, but I’ll give you one example.

After I set the market on fire in Encinitas Ranch at the end of 2021, this one-story house went for sale. It got bid up a million over the list price (which was deliberately set low by the seller), and the buyer paid cash:

I think the buyer passed away, unfortunately, and the house is coming back on the market.

Today’s list price, just a year after purchase? $2,900,000.

It is possible that 2023 is going to be as good as it gets for sellers – at least for the next few years. The Fed is adamant about crushing the economy, and we could see mortgage rates well into the 7s and, dare I say, we might be pushing 8% mortgages by summer.

The number of sales will be lower than ever, which means more volatility.  It will be wild and crazy for some, and that might be entertaining for the casual participants but it won’t draw them off the sidelines.

The higher the mortgage rates go, the less volume there will be and some markets could freeze up.

And this could be as good as it gets for a while – yippee!

Been Here Before

Thanks to JBREC for the chart, and article!


An excerpt:

In the mid-1990s when 30-year fixed mortgage rates climbed over 9%, ARM usage jumped to 35% of all mortgages. In 1999-2000 as 30-year fixed mortgage rates shot above 8%, ARM usage raged once again to 34% of all mortgages. For comparison, the percentage of homebuyers using ARMs today is just 9%, even as housing affordability resides near its all-time worst and 30-year fixed-rate mortgages have more than doubled in the span of 19 months. As noted by the CEO of KB Home during its Q3-2022 earnings call September 21st: “We have some great and compelling interest rates on adjustable mortgages, where it’s a 10-year fixed. And if I were a buyer, I would take that in a minute. Those [rates] are couple of hundred basis points lower than the 30-year fixed, and nobody is taking it so far.”

Back in the day, ARM usage around here was probably more like 2/3s of the loans, instead of 1/3 of mortgages nationally.  Rarely did anyone think they were buying their ‘forever’ home, and moving again within 2-5 years was the plan.  I used to just go back to my past clients every two years!

It when I coined my all-time favorite slogan, “Don’t unpack, I’ll be back!”

I predict that over the next 3-6 months, the mortgage industry will be heavily advertising alternative loans like the short-term (5-year and 7-year) fixed rate, or the 2/1 buydowns.  These were the products that kept the party going after the new 2-out-of-5-year law was passed in 1997, and serial movers could cash out tax-free every couple of years and buy a better home.

It was later, around 2004-2005, that Countrywide developed their toxic version of the neg-am loan, and then was offering 100% financing to anyone with a 700 credit score that the bubble started popping.

I think we are all convinced that the Fed is going to deliberately cause a recession in the next 1-2 years, and will have to lower rates again – and continue their biggest boondoggle in history.  Anyone who buys with an adjustable-rate mortgage can refinance to a lower 30-year fixed rate then.

Wouldn’t it be great if the mortgage industry brought back the convertible loan where you could change your ARM into a fixed rate without having to refinance!

The key to igniting the demand will be a 3-handle, and it’s already in some ads:

Some listing agents are offering a seller credit to buy down the mortgage rate, but it’s vague and uncertain. Will it be enough to make a real difference? Do I have to go through your lender to get it?

I think the mortgage industry needs to advertise the specific rates and terms to gain acceptance in the marketplace.  Buyers have only been thinking about getting a 30-year fixed, and will be slow to consider an ARM.  But it might be the best hope of a softer landing.

Trigger Lead

From a buyer who recently applied for a mortgage:

Buyer: I’ve had about 40 calls since 7am this morning for mortgages.

I didn’t take any of them and most of them are leaving VMs and texts saying they got notified by Experian that my credit was pulled for mortgage purposes and they want to help. Not sure why and how Experian is sharing my information. I am sure there is a fineprint somewhere.

Lender: It’s not uncommon these days unfortunately. It’s called a trigger lead. Very annoying thing the credit bureaus do.

Here is some info:

What is a trigger lead? When a borrower applies for a mortgage, the three credit bureaus take that information and sell it as a “mortgage lead” to any lender that is willing to pay for it. The “mortgage lead” has the borrower’s name, contact information and the date they applied for credit on it.

Why would someone buy a trigger lead? A trigger lead is a really good indicator that someone is in the process of refinancing or a purchasing a home. A lot of lenders feel this a great opportunity to try to steal the transaction for themselves.

Why is it so bad right now? With interest rates going up and refinance activity going down, most lender’s pipelines have begun to disappear. In response to that a lot of them are buying trigger leads right now.

Why doesn’t your bank do something about this? Unfortunately we do not have ability to block or restrict the credit bureaus from selling this information. This activity is not illegal, it’s legal for the credit bureaus to sell it as they are the owners of the data.

What can we do to help borrowers avoid this?  They can remove their information from being sold as a trigger lead. They can do this over the phone or through a website provided by the credit bureaus. Web link here: www.optoutprescreen.com  or phone here: 888–567–8688. This must be done before they apply for credit and can take up to 5 business days to process so this may not work for everyone.

Purchase Applications

The Mortgage Bankers Association (MBA) released its latest mortgage application numbers this morning and the modest movement belies the drama unfolding in the world of mortgage rates. As usual, the MBA does a good job of capturing average rate movement week to week and they correctly identified last week’s big spike to the highest levels since the first half of 2019.

Despite the surge, mortgage applications didn’t respond in a major way. Refi applications only fell 3% from the previous week. Purchase applications actually managed a small uptick of 1% after last week’s more substantial 9% improvement. But context matters.

As seen in the following chart, refi applications have declined massively from Summertime highs and even more massively from the high levels at the beginning of 2021. MBA notes this week’s tally is 49% lower than the same week last year. The news is less dire on the purchase side. Applications are still lower than most of the past few months, but higher than most of the late summertime months from 2021:

Speaking of context mattering, a longer term chart of the same data really helps put the magnitude of this most recent rate spike into perspective. It’s not an exaggeration to say it’s now the sharpest move higher that any of us have seen in more than a decade (the overall size is about the same as 2016-2018, but this one has happened in roughly 6 short months… not only that, but 2016-2018 was really a 2-parter).

The other takeaways from the chart include the notion that the purchase market is still firing on all cylinders relative to most of the past decade (even then, we can responsibly conclude it would be even higher if not for the low inventory situation) and that refi demand doesn’t have much farther to fall before hitting the historical bottom. In fact, due to the immense equity build-up of the past 2 years, the doldrums of 2017-2018 may not be a relevant baseline this time around.


Mortgage Rates Rise Again

Rates matter.

We gave credit to the ultra-low rates when they were in the 2%-range for helping to create the frenzy. Likewise, higher rates will have something to do with the way the market turns out in 2022.

It’s not because the payment are so much different. When the rate changes from 3.0% to 3.85% on a $1,000,000 loan, the payment only changes $472 per month.

The change will be because of the effect that higher rates have on market psychology.

We’re not going to get a memo on the day when buyers decide that they have had enough.

We know what signs to look for – higher market times, declining SP:LP ratios, and a growing amount of active (unsold) listings – to recognize when the market conditions are adjusting, and it’s been quiet so far.

Harder to measure is how quickly the demand could subside.

With the quality homes fetching an average of five offers each (roughly), then for every sale there is probably 2-3 losers that are literally priced out or voluntarily quit the race.  At that rate, the demand could be cut in half or less within a couple of months.

Add the war in the Ukraine, rates well into the 4s, and list prices starting at 10% above the comps, and you have all the ingredients needed for a slowdown.  Because the market is so hyped up, there will be ample overshoot and the frenzy should last into summer.  But everyone knows it won’t last forever.

Enjoy the next three months!

Rates Explode Higher

Automated Valuations

We see on every listing how the estimated values jump all over the place.

On my Aviara listing, the initial estimate was $2,247,615, but once the home hit the open market, the red team lowered their estimate by $313,637 to $1,933,978. A few days later, they have INCREASED it by $205,143 to $2,139,121…….which are some wild swings in less than a week!

It appears that the automated valuations can be wrong by 10% to 20%, and the guys behind the curtain are manipulating them as needed. A scary thought if people are relying on them.

Do people rely on them?

There are probably buyers who are believers, and use them to decide how much to pay for a home.

But it’s even worse for sellers.  It’s been happening more and more that home sellers are putting more faith in their zestimate and Redfin estimate. If those estimates are higher than what their agent tells them, of course they want to list for a higher price and they wave around their computerized values as proof.

In today’s frenzy it may not seem to matter much, but there will come a day when accurate valuations will become more necessary.

Or will it?

Rob talks about the changes being made to the GSE’s underwriting guidelines below.

Fannie Mae and Freddie Mac are issuing more appraisal waivers based on automated property valuations! Usually it’s because the down payment is sufficient enough that they aren’t that worried about a default.  But once the guidelines are changed, won’t it just be a matter of time before appraisals as we knew them become extinct?

Rate Bump

Mortgage rates in the mid-3s in January should put some pep in the buyers’ step. From MND:

Regular readers know that we’re fond of setting the weekly record straight in cases where day-to-day rate movements paint a drastically different picture than weekly surveys.  When it comes to the latter, there’s really only one game in town.

Freddie Mac’s Primary Mortgage Market Survey is not only the longest running weekly survey.  It’s also by far and away the most widely cited in financial media.  It’s even relied upon by the mortgage industry for certain calculations that affect borrower eligibility.

Unfortunately, the rate that Freddie published today (3.22% for a 30yr fixed) is a drastic departure from reality.  3.375% would be an aggressive rate quote this afternoon, and the average lender is closer to 3.50%!  A gap of just over 0.25% might not seem like a lot, but consider that it held inside a range roughly half as big for the entirety of the 4th quarter of 2021!  It can take months for rates to rise a quarter of a point and we just did it in a few days.


Cash Sales

Taking a cash offer is a sexy option but no guarantee to get past the home inspection. The best buyers work with the best agents, and another variable worth considering when selecting the winner.

Almost 27 percent of San Diego County home sales were in cash in the third quarter — the highest in seven years.  Attom Data Solutions said cash purchases, instead of loans, were up from 15.4 percent at the same time last year.

Sellers typically prefer cash buyers because it guarantees money for the home quickly, whereas mortgages can be delayed — or fall through — for a variety of reasons. San Diego has seen an increase in cash offers before, said Attom records going back to 2000. The real estate data provider said 36.2 percent of homes were purchased with cash in the first quarter of 2013 as the region came out of the Great Recession. At the time, many loan programs were still suspended from the housing crash and that made cash sales more of a necessity. The last highest level for cash sales was in the third quarter of 2014, with 27.2 percent.

The difference now is potential buyers face increased competition for a limited number of homes for sale and are trying to make the best offer possible, said Raylene Brundage, a Windermere agent who sells in several North County communities. “If it’s not contingent on a loan, there is less that can go wrong,” she said.

Brundage said sellers often go for cash sales over other loan types designed for first-time buyers and the military. Those types of loans require appraisals and inspections, making it possible a transaction could be halted. Cash sales not only mean money flows quickly into bank accounts but inspections, which are needed on loans, are often waived. A deal with a mortgage could take a month or longer to complete.

Brundage said she worked with two millennial couples this year who borrowed money from parents so they could make cash offers. Both were successful in getting homes. The majority of cash sales are coming from typical homebuyers, not investors.

Attom said 7.9 percent of the San Diego County sales in the third quarter came from institutional investors, which was lower than much of the nation.

In Atlanta and Phoenix, investors are making up 19.5 percent of sales; in Charlotte, 19.3 percent; in Jacksonville, Fla., 19.1 percent; and Tucson, Ariz., 18.4 percent. Parts of the South and Midwest have some of the smallest interest from institutional investors. In Madison, Wis., investors made up 2.3 percent of sales.


Mortgage Relief

Those who still think we have a foreclosure event in our future are unfamiliar with how the rules have changed in California. There’s never been a better time to be a deadbeat:

The United States Department of the Treasury has approved California’s plan to provide $1 billion in mortgage relief, clearing the way for the California Mortgage Relief Plan to provide help to as many as 40,000 struggling homeowners, according to a statement from Gov. Gavin Newsom’s office. “We are committed to supporting those hit hardest by the pandemic, and that includes homeowners who have fallen behind on their housing payments,” Newsom said in a statement. “No one should have to live in fear of losing the roof over their head, so we’re stepping up to support struggling homeowners to get them the resources they need to cover past due mortgage payments.” California already has provided renters and landlords with assistance, he noted.

“Now, with our California Mortgage Relief Program, we are extending that relief to homeowners,” he said. The program will help homeowners make past due housing payments — to a maximum of $80,000 per household — by making a direct payment to the mortgage servicers.

The funding, which is allocated through the federal American Rescue Plan Act’s Homeowner Assistance Fund, is provided as a one-time grant that qualified homeowners will not be required to repay. Californians at or below 100% of their county’s area median income, who own a single-family home, condo or manufactured home, and who faced pandemic-related hardships after Jan. 21, 2020, may be eligible for the program. Applicants can visit the California Mortgage Relief Program at CaMortgageRelief.org for more information. Online applications will soon be available.

Read more at:


All-Cash Offers

A reader asked about this company, and but I didn’t think they were operating in California yet.  But they are – and it sounded like a great idea too.

Their initial pitch was to charge 2% for providing the funds for buyers to make all-cash offers on homes.

But they just had to keep going, and now they now have a full staff of clerks to provide realty, mortgage, title, and escrow services too.


CEO and co-founder: Our approach—which brings every step of the process under one roof—helps buyers separate fear from risk to make more informed homebuying decisions. We are thrilled to bring our reimagined real estate process to create radically different experiences for homebuyers.

It will be radically different alright. They have had seven listings in San Diego County so far, and ALL of the listing agents got their real estate license this year.  Their office is in San Mateo.

The disruptors all think this business looks easy, and by hiring a few novices, they can load up on VC money and conquer.  But they could have offered the initial plan to all realtors and made their 2% on far more sales than they will with their skeleton staff cutting their teeth on the whole process.


Richard found a company that says they will provide funding for buyers to make all-cash offers, but their website doesn’t mention the program:



It could be a great idea if implemented effectively to all realtors!

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