December 1, 2022

I write a monthly letter to my past clients and pre-approved buyers, and I wanted to share it with you so you could share it with your clients. I know this is not my usual update, but after yesterday's news, we will see buyers get a little excited over rates coming down.
Also, please note that the new conforming loan limits were announced, and they are now $726,200.00 in Los Angeles County. That means a buyer can buy with 3% down to $748,600 and 5% down to $1,146,600.00 in LA and Orange County!

I hope you are doing well, and Happy December!

Have you ever noticed how fast things happen in this world today? I have been in the mortgage industry for 32 years, and I have seen a lot of changes, but never have I seen interest rates increase as they did this year. The higher interest rates slowed the Real Estate market, and prices have dropped by around 10% in most parts of California. Inflation was out of control, so the Federal Reserve intervened, raising rates multiple times to cut out inflation and slow down the economy. Just yesterday, Federal Reserve Chairman Powell said he is ready to slow the rate rise in December. People are still predicting that he will raise short-term interest rates by .50% this month, but the mortgage trend is to the downside.

Interest rates are in the 5’s as of now and were in the 7’s just a short time ago, and we are starting to see things pick up quite a bit even though this is the slow time of year. I am not saying we are back to where we were in the Spring, and we are nowhere close to where we were a year ago, but values will start to rise as interest rates improve.

Remember that inflation pushes rates up, and The Federal Reserve target rate is 2% annual inflation, and over the past four months, the annualized Consumer Price Index (CPI) has been 2.8%. If rates continue to slide, we will likely see prices rise again, but here is some perspective.

Rates went from 2.75% to 7.250%, a 45% increase in payment! Prices dropped about 10% during the same period. Prices seemed to have stabilized with slightly lower rates, so at what point will the craziness start with 5-10 people offering on the same property? My guess is in the 4.00% – 4.5% range, but the jury is still out.

So let’s look at payment on a house today vs. the peak of the market in February.

February Pricing and rates – $1,000,000.00 Purchase price – $200,000.00 down – 30 year Fixed rate 3.75% – Principal and Interest $3704.92 + Property Taxes $1041.67 + Insurance = $150.00 = $4896.59

September Pricing and rates – $900,000.00 Purchase price – $200,000.00 down – 30 year Fixed rate 7.250% – Principal and Interest $4775.23 + Property Taxes $938.00 + Insurance = $150.00 = $5863.23

Today – $900,000.00 Purchase price – $200,000.00 down – 30 year Fixed rate 5.75% – Principal and Interest $4085.01 + Property Taxes $938.00 + Insurance = $150.00 = $5173.01
When rates hit 4.50% – $900,000.00 Purchase price – $200,000.00 down – 30 year Fixed rate 4.500% – Principal and Interest $3546.80 + Property Taxes $938.00 + Insurance = $150.00 = $4634.80

If rates are at 4.5%, we will have bidding wars –  Payment at $950,000.00 will equal payment at $1,000,000.00 at 3.75%.

There is a 3-4 month window before we will see rates start to fall, and prices shouldn’t rise immediately. Rates will fall in anticipation of the Federal Reserve cutting rates in the future. Most Economists believe that the Fed will reduce rates in the 3rd or 4th quarter of 2023, and some say the first quarter of 2024.

This email is getting to be long, but I am not working on January 1st! LOL!

Affordability has been the big issue this year, and one of the most popular loans is a 2/1 buydown! Assuming the 5.75% 30-year fixed-rate above, the seller would pay a fee to buy the rate down for two years. The start rate would be 3.75% for months 1-12, 4.75% for months 13-24, and 5.75% for months 25-360. the fee to do this is about $15,000.00 on the above $700,000.00 loan. The best part is if you refinance in, say, eight months, you would have used just $6700.00 of the $15,000.00 that the seller paid, and you would get the $8300.00 back in your pocket when you refinance. So if rates do what I think they will do and you or someone you know is looking to make a move, then get started! Get the credit while it is still slow enough to get a credit from the seller! Keep your payments low and refinance next summer!

That is enough info for one month. Have a Happy Holiday Season! Thank you for the business you have sent our way, and have a healthy and safe New Year!

Feel free to modify the above letter or share it as a letter from the smartest, hardest-working lender you know. I will be around all weekend if someone is interested in buying a property! My cell is 661-714-6258, and my office line is 661-260-2970 xt. 2222. Please text me at 661-714-6258 or email me at Mike@AugustaFinancial.com. Have a great day and a better tomorrow! Please call me when you have a client that needs to borrow!