September 27, 2022

All I can say is wow!
I had a ton of calls over the past 24 hours, asking if it is still an excellent time to buy even though rates have jumped through the 6’s and into the 7’s! Yes, I am talking about a 30-year fixed-rate mortgage and other options, but none look great right now! So why would I buy now? Do prices have to go down now that rates have increased again? You would think, but will they? Inventory is still extremely low. Not too many people have to sell. Will higher rates push rents up? Will your Landlord sell and kick you to the curb? Why, again, do people feel they need to own a home? Um, Price Appreciation, stability, equity, savings, freedom, predictability, and Tax Benefits! Hmmm, tax benefits with higher rates are probably better. Let’s talk about that!

Most of our clients are in the 22%-32% tax brackets depending on their marital status, income, and write-offs! There is also the state income tax, which is hard to get a write-off from, so we will ignore that for today. We are limited to writing off interest on a mortgage to a $750,000.00 loan amount, so let’s play with that number since most buyers in the surrounding areas will get a mortgage close to that. We will use a 7% interest rate for fun, although rates will never be that high again. Oops, I spoke too soon!

So we have a buyer buying for $1,000,000.00 with 25% down and getting a loan for $750,000.00. His payment with everything at a 6.99% rate will be $6151.40. If he closes escrow on 12/31/2022, he will be able to write off the interest of $52,183.00 for 2023. Assuming this buyer is in the 27% tax bracket (which doesn’t exist), the buyer will get about $14,000.00 back on his taxes when he files in 2024 just from interest and another $2700.00 back on property taxes. That’s $1391.67 per month. This buyer can choose to increase their deductions on their paychecks and take home an additional $1391 per month, or wait until the end of the year and get a big fat refund for $16,700.00. In addition to this big write-off, they will also pay off $7633 in principal in the first year ($636 per month), and if property values increase by 4% (average is almost 6% over the past 70+ years), they will pick up an additional $40,000.00 ($3333.33 per month) in equity. By the way, a $1,000,000.00 property will now rent for about $5000.00 per month.

So if they pay $6151.40, get back taxes of $1391.00, pay off the principal of $636.00, and have appreciation of $3333.33, how much does this house really cost? Yup, $791.07 per month is cheaper than any apartment in the area! One more thing, when inflation goes away (I hope next year) and we have 5% interest rates (I think we will see 4’s and maybe even 3’s again) and prices start to rise again, this buyer will drop their payment to $5192.83, but they will lose about $400 a month in tax write off! The good news is that the house will now cost them $191.07 if all of the above is true.

I know this all sounds too good to be true, and those who don’t use us as your lender are probably wondering why your lender can’t talk to your clients this way. LOL, call me if you need help, and I promise to speak with your clients this way and explain why they should buy now! One more thing is we are still 6 Million homes short of having enough housing in the US, 3.5 Mil homes short in California, and 1.5 mil homes short in LA County! That all adds up to low supply, and any demand is higher than our supply. Any price reductions will be based on higher interest rates that will be temporary. If you wait too long to buy, rates will drop, and you will pay more!

Yesterday was the big selloff in Mortgage Bonds and Mortgage Backed Securities. There is a lot more here than the inflation in the US as we have a global economy, and the weakness in Europe is causing issues here in the states. We are now at 20-year highs on 30-year mortgage rates, and the overall market is interesting. Lumber prices tumbled to pre-pandemic lows, which should help ease the pain on builders, but that doesn’t help standing inventory. I always say it is never as good as it seems and never as bad as it looks. I still believe the lack of inventory will win out, and people who buy now will be delighted in 18 months!

• 30-year Government Loans (FHA / VA) are in the mid 6’s.
• Conventional Loans up to $715,000.00 - low to high 6’s - low 7’s.
• High Balance Loans $715,001.00-$ 1,072,500.00 are in the high 6’s to low 7’s
• Jumbo loans above $1,072,500 are in the high 6’s to low 7’s
• 5/1, 7/1, 10/1 Arms are in the high 5’s to low 6’s
• Bank statement loans - They are available with 10% down again! 7’s + depending on down and credit score.
• Stated income loans – I have one bank with 30% down, but everything else has to be perfect! Interest rates are in the high 7’s - low 8’s.
• 0 down loans are in the high 7’s to low 8’s- 620 credit score min right now! Mid 6’s, for the most part, up to $735,000.00.
• Private Money lenders - hard Money Loans – 35% down!
• No Ratio Loans 30% down
• Debt Service Coverage loans with as little as 25% down
• Bridge Loans - are typically 7.99% with limited fees – But they get you where you need to go!

Interest rates are subject to change without notice! Above are LA County Loan Limits.

I will be around all week if you have any questions or if someone 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!