How to overcome the cracks in the economy

Remember a few weeks ago when everybody was rejoicing about rate cuts? The Fed told us that everything was awesome and real estate agents and lending officers around the country rejoiced as if it was the news blessing the market was waiting for.?

I hate to be the bearer of bad news… but that ship has sailed. Why?

Let’s investigate it a little because it’s important that you understand what’s happening so that you can have better conversations with your clients about pricing listings as well as submitting/reviewing offers.

So let’s start at the top.

If you haven’t been paying attention, rates spiked back up at the end of last week. If you had buyers who were telling you, “Rates came down… I want to wait until they come down again because they have to come down.”

Really? Do they?

The obvious answer is no… just based on the evidence. Now, for anybody who’s been doing this for any sort of time, you already knew that… but we don’t always communicate it well.

And, then again, sometimes buyers just don’t want to believe us. It’s just like when the stock market is screaming upward, everybody is buying in because it just can’t come back down.?

When investors get greedy (or when they don’t know better), they ignore the P/E ratio (The Price to Earnings ratio). The P/E Ratio is a measure of how long it will take to earn back your initial investment in years.

P/E of 100? Who cares! The market will always go up!

And then those investors get murdered financially.

The same thing has happened with buyers getting greedy about mortgage interest rates. And, listen, it’s not their fault. They buy into the hysteria created by the media and those who stand to gain from a drop in rates.

Or they just think they know better. Chalk it up to wishful thinking.

So, between Friday and about 4pm on Monday, rates have jumped around 83 basis points. Not so great.

And we have another ugly thing to consider.

I had to call 2 reliable sources to help me really understand the above curves because first of all, you know me by now and my NEED to really understand… and I needed to understand how to explain it to you in layman’s terms.

Along the bottom are the different types of Treasury Notes. When the US Government has debt, they sell the debt and promise to pay the investor a return on their money.

One would think that the longer period of time one agrees to invest their money (1 month versus 30 years) the more the investor would be paid in interest. It’s a pretty safe assumption.

But that’s not what’s happening. When you hear the term “Inversion Curve”, this is what they mean. Right now the US Treasury is paying a higher rate of interest on short-term Treasury Notes.

There are a number of reasons for that but I want to avoid the political conversation of mismanagement of the economy and the Dollar by those in charge.

Why did the rate jump up though?

Did you hear the Jobs Report that came out at the end of last week? The government told us that 275,000 jobs were added to the economy in September, which was better than expected.

Of course I want to see Americans do well. I want the economy to do well… and yet I am fully expecting the jobs numbers to be revised down in a few months as has been the case over and over the last few years.

Regardless, the jobs numbers going up means that another rate drop by the Fed isn’t likely to happen. The market did not like that. Just keep in mind that a rate drop by the Fed doesn’t mean mortgage rates will drop… but it’s generally a good indicator. So now investors don’t really want to invest in Treasury bonds… so to entice them, the rates went up on the short-term bonds (because investors are a little shaky on the longer term debt because of our massive government deficit spending and massive government borrowing, which I’ve mentioned in previous articles).

None of this is particularly good.?

But, our job as professionals is to best guide our clients whether they be buyers or sellers. Based on these changes, here’s what you need to understand…

For Buyers:?

1. If you’ve had buyers sitting on the sidelines because they’ve had no success getting their offers accepted, now is the time to get them back in the game. I will tell you that I’m seeing offers getting accepted with as little as 5% down.
2. Work with a lender who will have the pre-approval underwritten so that the only thing the lender needs is a property address.
3. Property is sitting a little longer… so don’t be afraid to write below asking price offers.
4. Don’t be afraid to include a Rate Buy Down or Closing Credit as part of your additional terms.

For Sellers:

1. Inventory is creeping up slowly and pendings are slowing down. You need to bring market data with you on appointments. Having a tool like Altos Research is helpful because consumers are relying on the news and that data is typically 90 days old. Have better, up-to-date data.
2. Which means that Sellers need to be realistic about pricing. Unless the property is in a very hot market (like Hopkinton has been this year), you cannot price in front of the market. Sellers have to price to entice a buyer because multiple offers have drastically dropped. Otherwise they’ll need to make price cuts (40% of listings are having price adjustments) and buyers will wait for the price to keep dropping.
3. If sellers are not offering co-broke compensation, the market has changed and failure to offer compensation is going to hurt them.
4. Sellers should expect to see offers with less money down. They shouldn’t reject an offer off the cuff just because it’s only 5% down, for example. Counter to get better terms like having the pre-approval underwritten.
5. To get the price they want, they may need to offer to purchase a rate buydown or offer closing credits.