All Forum Posts by: Chris Mason

You mentioned FHA, so I'll assume you intend to owner occupy.

FHA 3.5% down as you identified

Conventional 25% down as you identified

Conventional 5% down if your income is in the magic goldilocks zone (hint: it probably isn't)

Conventional 15% down is also out there for owner occ duplex

Quote from @Jared Elms:

Buying multiple houses a year, How do you avoid so many credit checks?? Especially if you do it personally and with an LLC or two

 I mean... has it occurred to you that if you're going from having 1 mortgage, to having 6 mortgages (or whatever), in 1 year, a lowered FICO score is an example of the system working? 

Objectively, you probably should have a lower credit score, until a history of [ on time payments X 6 mortgages ] is established. 

A standard thing I say to FTHB at closing is to expect your credit score to tank for a while. Historically you've serviced $3000 in credit card debt, now you have $900,000 in debt and zero track record of servicing it (yet). Soooo, yeah, your credit score should go down. That's evidence of the system working. 

It's not the credit inquiry that gets some of those FTHB by the way (TLDR: it's never the credit inquiry), it's the departure from historic patterns (depending on what those patterns are, YMMV). And it's temporary until the new track record is established. 

Quote from @Account Closed:

Hello. I am closing on my first property and closing costs appear to be much higher than what I projected. Purchase price is 91k and I’m putting 5% down. I have a good credit score (750) and am buying 2 points to get the interest rate down to 4.99%. Let me know what you think, thanks.

 Borrow 3x as much money, and watch the lender fees magically decrease by 2/3. 

Check this out. The maximum lawful fees a lender can charge goes UP as the size of the loan goes DOWN. If the rules for $100k mortgages were the same as the rules for $500k mortgages, no one would do $100k mortgages. You could equate the small loan size to about a 75 point FICO reduction. 

Quote from @Irina Sharp:

Hi all,

me and my husband have substantial student loans (over half a million). We are on a REPAY program where you only pay 10% of your discretionary income. We are looking to buy an investment property. We talked to a lender who said they count 1% of all student loans if they are in forbearance and 0.5% if they are in repayment no matter what our actual monthly payment is. Is this a standard practice among all lenders or should we talk to others as well?

Thank you! 

 For Fannie/Freddie type loans, that's not quite right. If any payment greater than $0 appears on your credit report, even $20/mo, that number is the one used. But this is by tradeline, so some people's "student loan" is actually 10 student loans. If 9 have payments of $20 but one has a payment of $0, then the $20 x 9 would cover the 9, and the last one would be the % of balance. 

For Jumbo loans (a lot of folks with that much student loan debt are "jumbo" borrowers, good chance the letters "M.D." or "Esq" follows your name), that "0.5% no matter what" might be one particular lender's particularly conservative approach (I bet the rate is pretty decent, relatively speaking, since they're being so conservative), and if that is the case, then in your case you should probably just take your business elsewhere. 

It's interesting watching DSCR get more and more attractive over time, just by the mechanism of DSCR rates/fees/terms barely moving.... meanwhile, Fannie Mae seems to be doing her darndest to "price match" upwards to meet up with DSCR and fist bump. At some point, maybe soon who knows, it's just going to be "pick your poison, rate and terms will be about the same either way... do you want to upload a bunch of paperwork (Fannie) or do you want to pay 1.25 discount points (DSCR)?"

As recently as 6 months ago, there was no comparison. You took Fannie if we could, and DSCR if you had no choice.

Quote from @Jesse Richardson:

I super excited to announce that I passed the MLO endorsement exam yesterday. I passed on first attempt too.

With that, I submitted my paperwork to retire from the Air Force after 21 years

I will be a full time MLO starting in April of 2022 with Citizens Financial in Vacaville, CA. We are currently licensed in CA, but are opening offices in NV, OR, ID, TX, and FL.

Things are falling into place and I'm ready for this next chapter in our lives.

 Congrats!

In the military, stacking certifications helps you get ahead. So I understand why you'd think that getting set up in a bunch of different states is beneficial. 

But, to be honest, it's not. It's a waste of your time to worry about other states while your market share is still 0.00% in California. 

I have a trophy on my desk that says "2021 top 1%," and even I have absolutely zero interest in getting setup in a dozen different states. 

Our market is already 40,000,000 people. We aren't in Rhode Island, or even South Carolina.

You will actually get more business, and better business, by building relationships with LOs in other states. Instead of competing with the guy in Nebraska for his $100k deals (disproportionately for broke people with poor credit, especially if they're calling you in California for a mortgage), why not let him have all his $100k deals, and take his California $750k referrals (where >5% down and great credit is more likely anyways)? :P

Quote from @Greg R.:

@Chris Mason great points. Funny video as well. Thanks again for the time and thoughtful/ detailed response. This is definitely a complex puzzle to solve. Great point about fixed rate though... for a principal residence, even with a high fixed rate, it will likely be worthwhile 3-5 years from now as rents continue to increase.

On a side note, I do kind of feel like that a**hole from CA going to TX. I'm going to be submitting offers in the next 2-3 weeks lol. 

Proof is in the pudding, you look at the same data points as everyone else, which includes interest rates, and decided to be that a-hole bidding up real estate, in spite of the higher rates. And, just like everyone else, you're hoping the higher rates reduces competition. If the people doing exactly what you're doing outnumber (by $ to spend, not by # of people) the folks who back out of the market, well, there you go: values can go up even as rates go up.

Quote from @Greg R.:

@Chris Mason I just read the Malaysia study (very interesting), however there were two main things I took away. First, this study looks at data from 10-20 years ago. Further, I'm not sure how Malaysia relates to the US and what we're doing here. I am not an expert on the Malaysian economy, currency, loan regulations, bond market, lending/ qualification requirements, and all the other factors that are relevant. However, I've never heard of anyone using Malaysia as a point of reference for US economics. One sentence in the article states "The results are insignificant to explain the U.S. real estate boom occurred in the mid-2000s."

You're probably right regarding the gas, maybe they're aren't a ton of people who changed jobs because of gas prices. However, I do know one who is looking (my dad), as he currently drives 100 miles a day and can't take it any more w/ gas prices.

Regarding causality, I understand your point. But if you're unable to determine causality then I would argue that you're also unable to rule out that "x" factor from not being the cause. So basically, you can't prove or disprove causality. 

But let's just forget all the academics for now, can we agree that higher rates = less buying ability? If someone can qualify for 800K w/ 10% down when rates are 3.25, their ability to buy at 800k disappears when rates shoot up a point +. Maybe when the rates climb over a point they can only qualify for $760k (or whatever lower amount). I don't think we can understate that truth since a vast majority of buyers use traditional financing.

And if that's true, what evidence do we have that prices will stay where they currently are? The more reasonable prediction is that prices will have to dip some (maybe not crash), to get within the borrowing range of the buyers.

 Re: It's Malaysia. Yup, that's not the US. All the literature I could find said that the relationship between rates and home values was weak. I was looking for the counterargument, and that study out of Malaysia was all I could find, so that's what I included back in 2018 when I initially put that together, the last time "omg rates are trending up, so real estate values are about to plummet, it's 2008 all over again, and also we have to buy a house now because rates are going to be 7% next year!!!!" to get a sense of what we could actually maybe expect to happen, in response to rising rates (hint: the academic consensus is what happened). My takeaway at the time was that if Americans were perfectly rational and it was all a zero-sum game, home values in 2018 would fall. But if Americans are not perfectly rational and if other things go into home values besides rates (hint: they do), there's no reason to assume that the world would end (it didn't).

"can we agree that higher rates = less buying ability?" - for one individual family, yes. If the entire model is 1 family and there's 1 house for sale, then certainly they can qualify for less mortgage, which in turn would drive that one home's value down. There's a lot more going on than that, it turns out. I'd invite you to check out the other ones, which aren't Malaysia. 

I have no idea if home prices will drop. In California, they certainly did not drop in 2018. The major markets in California all went up in value even as rates ticked up from 3.75% to 4.75%. Until the 2020/2021 refi boom, 2018 was actually my personal best year ever, and obviously no one is going to refi their 2016 mortgage from 3.75% to 2018's 4.75%, so it was virtually all purchase business. Your one family above purchased a less expensive house, sure, but the other person with deep pockets, who was previously content to rent, entered the market as a buyer, because of FOMO. Rent is a substitute good for homeownership. Rents go up over time, and inflation accelerates that. All of a sudden, a 30 year fixed mortgage, even at a higher rate/payment, starts to look a whole lot more sexy, simply because it's fixed. So it's not just about that one family who had their buying power reduced from $650k to $550k, there's also the other family that could easily qualify for a $1.5m mortgage but is totally fine with a $750k mortgage because that's sufficient for their family needs. 

Check out this video.

The "tell me about that apple, why should I buy it" character at the start just had his buying power reduced. But at the end, we have a new market entrant. That's who dictates what the apple sells for. They're looking at an inverted yield curve, predicting stocks are about to tank, so they don't want to leave their money in the stock market. They also see that there's inflation, and they google searched "best inflation hedge" and the answer came back saying mortgaged real estate. 

But, who knows. We blew on some dice, they might come up snake eyes. I've no reason to believe that the dice won't come up snake eyes. I've just never seen anything more compelling than the theory-based user-cost model (which academics can't find compelling evidence in support of) that blowing on those dice causes snake eyes to appear, or appear more frequently. But we all know how good old Jake works, he'll blow on those dice 100 times and then point only to the one time it came back snake eyes as proof of causation. He might even have a theory about how blowing on the dice included some spit that came out of his mouth, making one side of the dice heavier, making snake eyes more likely...

Quote from @Greg R.:

@Chris Mason thanks for taking the time, what a thoughtful and detailed response.

I don't know if I agree with your statement regarding people not driving less. People in my circle are absolutely driving less when given the choice. We used to frequent the beach/ boardwalk which is about 20 miles away, now we're hanging out by home and almost never drive that far unless we have to. This sentiment seems to be universal amongst people I know with the primary reason being the $6 per gallon gas.

I bought a primary residence (owner occupied) home in June of 2019 and got a 4.25% rate, which was ok at the time. Not the best, but not bad. Fast forward to June of 2021 the average rate was below 3%. I don't understand how we can argue that the low rates weren't a primary cause of increased values. Certainly not the only cause, inventory is/ was a major factor as well. However, people are only able to qualify for a certain amount. 

On a 500k loan @ 3%, P&I is $2,108. On a 500k loan @ 6%, P&I is $2,998. That's a 42% increase. If someone's DTI will only allow them to borrow up to a $2,108 payment every month, then at 6% the most they can borrow is 352,000. They can't just say that they're cool with the rate and borrow anyway. They are limited by their DTI and other qualifying factors.

Depending on the area, homes purchased by traditional financing range between 75-90%. There are not enough cash buyers alone to keep values over inflated. I just got a rate quote yesterday for a 5.25% , I cannot qualify for as much now as I could have a few months ago. With that, sellers now have a choice, they can meet the buyers where they're at & what they're able to qualify for, or they can hold out and hope for one of the few cash offers to come their way.

I think it will take some time for this to start showing, but in my mind it's pretty clear. Borrowing power is starting to decline, borrowers are not able to borrow as much. Maybe the market doesn't crash per se, but I don't see how it wouldn't at a bare minimum stabilize.

 That's the "user cost model." It's discussed at length in the literature. The academics go into it expecting the predicted/obvious outcome you pointed out, in terms of actual evidence (what you listed is perfectly valid theory, but it's not at all evidence, you aren't actually pointing to actual people that did actual things in response to actual things actually happening to them), and sometimes they find it, but sometimes they don't. They are generally unable to establish causality. Sometimes you blow on the dice and get snake-eyes, sometimes you don't. What matters, in that case, is that the dice are loaded, ie there are other factors nudging them this way or that, and those are what win the day.

Read the study that took place in Malaysia. 1 in 5 regions had the price drops that were correlated with rate hikes, that they were able to establish as being linked by causality. 4 in 5 regions, facing those same rate hikes, they didn't observe the predicted causal house value drops. They concluded that their model/theory was correct, but that Malaysians in 4 out of 5 regions are inefficient people. Which is kind of funny (I'd say that perhaps the model is in need of revision). But, so be it, people are inefficient. That's why your circle are "driving less when given the choice," but it's nowhere near proportional to how much gas has gone up. I bet very few of them have changed to a job 20% closer, or moved houses to be 20% closer, in response to gas being 20% more expensive. Oh, look, so we have non-gas-price factors (like a good job, or liking your coworkers, or liking where you live now, or liking the car you drive, etc) are having an impact. Probably a bigger impact. Your circle of friends would be called "inefficient" according to the researchers that looked at Malaysia. But your friends aren't wierdos, they're presumably just normal people, and normal people have patterns, that are sticky to a degree, etc. It's unlikely any would turn down a promotion and a great new job with higher income because the commute is slightly longer, and MOST families use MOST of their gas on the commute. 

Here's what some people with Ph.D after their names have said about the relationship between mortgage rates and real estate values. Note, they're concerned with causality. Sometimes rates go up when real estate values go up, and sometimes they go up when real estate values go down. You can't just point to the times you blew on the dice and got snake eyes as proof that blowing the dice causes snake eyes, you have to look at all the incidences of blowing on the dice. 

All of these academic articles are visible without any paywall or registration. The collection started in 2018, when we were last in a rising rate environment.

• The Housing Boom and the Decline in Mortgage Rates - 2021, NY Fed
• Can interest rates really control house prices? Effectiveness and implications for macroprudential policy - 2014, Journal of Banking & Finance
• Housing Prices at the Time of QEs in California: Effect of Mortgage Rates - 2017, International Journal of Financial Research
• Interest rates and house prices in the United States and around the world - 2017, Bank for International Settlements
• Real Interest Rate and House Prices in Malaysia: An Empirical Study - 2015, Economics Bulletin. 

The last one actually has an example of economists attributing, with causation, that real estate values went down because real estate mortgage rates went up (emphasis on the "because," as opposed to "at the same time as," which are not the same thing, as highlighted by our "I rolled snake eyes, ______ I blew on the dice" example). But here's the problem. They studied 5 regions of Malaysia. Home values only went down with statistical significance in one of the 5 regions. The academics, hilariously, concluded that people in that country are only "efficient" in the one region, and in the other 4 regions, the people aren't "efficient." Their model/theory/prediction is fine, you see, it's the people that aren't efficient. 

Anyways, here's the TLDR of the other 4.

- Real estate and housing demand is inelastic. Like gasoline. Is anyone here driving 20% less every day because gas is 20% more expensive? Didn't think so.

- Real estate has inertia. Family formation, job offers across the country, babies, old people dying, these things are largely not rate sensitive. And these things today is what represents demand tomorrow. No one in Fall 2021 said to their spouse "hey I think rates are going to be high in 9 months, so let's just cuddle tonight to ensure we don't outgrow our apartment in Q2 2022." But it is true that large group average sentiments, on happiness or sadness or optimism, may slow things down or speed them up, at the margins, and over time. 

- It may take upwards of 3 years of sustained high (or low) rates before rising rates has any measurable impact on home values. Something I will add (this is from me, not from an academic): Banks price discount points based on when they think rates will drop, in terms of "what's the break even point?" Has anyone else noticed discount point break-even points of 2 years or less, especially this last month? That means the banks are betting mortgage rates will come down before you break even on paying those points (if you buy the rate down and refi a year later, it's not like they have to refund you the discount points money, so they'd rather have the $ from you now than try to bet on collecting 5% on you for 2+ years).

- Real estate sales (as in, the number of sales) is sensitive to interest rates. 

- New house construction is sensitive to interest rates.

- "But but but didn't low rates in 2020/2021 cause the uptick in home values!" They certainly happened at the same time, but that does not equate to causality. Check out the 2021 article. 

None of us know what real estate values will do next week or next year, but I've not really seen anything compelling in terms interest rates and causation that had timeframes of less than 3 years. 

Anecdote: in the years leading up to the 2008 crash, the Fed had been jacking rates up to calm everyone down -- it had zero measurable effect (things KEPT going bonkers, from about 2005 to 2008 - 3 years - amid steady rate hikes). AFTER the 2008 crash, they lowered rates for years, again, with zero measurable impact, until several years had passed. The academics mentioned 3 years earlier, and we just saw that 3 years figure again. 2009 + 3 = 2012. Yup, that checks out, that's ballpark when things picked up again, after 3 sustained years of rate drops. I am not claiming that three years is a magic figure, but it jumped out at me while writing this (and it jumped out at me when reading one of the articles linked above), and seemed to line up.

JPOW and the Fed has a lot of power over the broad economy. Over real estate, however, they appear to be fairly weak. It looks like they have to do some stuff, which causes some other stuff in the broader economy, bla bla bla, which eventually, if they do the same stuff for 3ish years in a row, winds up impacting real estate, maybe and sometimes. They couldn't slow things down before the 2008 crash, they couldn't speed up the recovery afterwards, and the academics think the low rates had f-all to do with the jump in real estate values in 2020. Batting 0 for 3. 

Which, honestly, let's recall something: The Fed has 2 basic mandates. NEITHER of them has anything to do with real estate values. Inflation is one of the two mandates, but real estate values aren't even included in the official inflation 'basket of goods' that feeds into the inflation metric. So, literally, measured real estate values has zero impact on any of the things they're supposed to do (that's how you can have real estate appreciation be 3x the official inflation number - real estate isn't included!).