Rates went 7.18% to 7.42% in four days. Is that the top or the new range?

Question

Two trading days in a row this week, the daily mortgage rate index jumped 0.12%. Mortgage News Daily's 30-year went from 7.18% Monday to 7.30% Tuesday to 7.42% Thursday. The 10-year Treasury is back above 5% for the first time since October 22, and the 30-year bond auction cleared at 5.441% with the weakest demand since June.

If you saw Freddie Mac's 7.11% on Thursday and figured rates fell, that's not wrong, it's just late. Freddie's survey collects Monday through Wednesday and averages the week, so it mostly caught the market before Tuesday's CPI. Next Thursday's survey is the one that'll show this week.

Here's why it matters on a flip. On a $264,000 loan (20% down on a $330,000 house), principal and interest went from about $1,788 to $1,831. Hold the payment at $1,788 and your exit buyer can carry about $257,800 instead of $264,000. That's roughly $6,200 of budget gone in four days, and half of it went Thursday. A softer resale comes off what you pay, not off your margin.

Houston's October numbers lean the same way: sales down 14.9%, pendings down 17.6%, median down 3% to $320,000, and supply at 5.5 months, tied for the highest since 2012. So the ARV is softening at the same time the buyer's budget is.

October producer prices come out this morning. I'm underwriting resales at 7.40% or higher until something says otherwise. I write these up most weekdays on my website, which you can find through my profile.

What rate are you using for your exit buyer right now, and did this week change it?

Christian Trapp · Answer

I'd probably be underwriting closer to 7.5% right now. Not because I think rates are going higher, but because I don't like building a deal around something I can't control. What stands out to me is investors seem to have adjusted to higher rates faster than sellers have adjusted to lower affordability. Most active investors I talk to aren't waiting for lower rates anymore, they're just getting much pickier on acquisitions. Feels like the bigger risk right now is missing the exit price rather than missing the interest rate.

G. Brian Davis · Answer

I’d be more conservative with the exit rate right now. If your end buyer is going to be financing the property at 7%+, that affects what they can afford to pay, which ultimately affects your ARV. I wouldn’t build a flip assuming rates will be lower by the time I sell. If the deal only works at a lower exit rate, I’d probably pass or negotiate the purchase price accordingly. Rates are just another risk you need to account for before you buy, not something to hope goes your way afterward.

Jaron Walling · Answer

@Steve Waller Dumb question but are investor actively flipping right now?

I feel like the strategy has come to a crawl in the C/B class "starter home" neighborhoods. The exit buyer pool is on a rollercoaster ride with interest rates which means it's hard to say what they can afford. So is the appraisal and estimated profit margin. We sold a a flip in the spring of this year for $185k. If we in the same deal right now I'd be upside down. Sold comps have dropped $20-25k. We would have pivoted, cut costs anywhere possible, and BRRRR'd the deal.

Rates went 7.18% to 7.42% in four days. Is that the top or the new range?

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