In the Money Insight: The Housing Market with Pat Doyle

Pat Doyle, a mortgage advisor with Guild Mortgage, recently joined me on?In The Money Insight?to discuss the state of the housing market as interest rates and inflation continue to rise. A summary of our conversation is below.

Pat Doyle, a mortgage advisor with Guild Mortgage, recently joined me on?In The Money Insight?to discuss the state of the housing market as interest rates and inflation continue to rise. A summary of our conversation is below.

Cory:?After an outrageous few years, can you talk about where the housing market stands today as we talk in late June 2022?

Pat:?The housing market is still very short on supply—the real estate industry is propped up on the basic economic principles of supply and demand. Demand has exceeded supply for a while. Millennials are entering the market and the supply just isn’t there for them. I expect this trend will continue through at least 2025.

Cory:?I know the pandemic has shaken up the real estate market, but there were supply issues before COVID, correct?

Pat:?Yes there were. Typically, a few month’s worth of inventory is available to buyers. Right now, there is less than a month’s worth of inventory available. It’s been like this since roughly the start of 2019.

While rising interest rates are frightening some buyers, the number of serious buyers is still higher than the number of available homes for sale. We have seen mortgage interest rates just about double from the start of the year, as they’ve jumped from just over 3% to about 6% for many buyers.

Cory:?I do find it interesting how it seems that both a surge in housing prices and interest rates haven’t priced large numbers of buyers out of the market. Can you shed any insight on that?

Pat:?Rising home prices and interest rates have impacted the budgets of many buyers. But what we tell our clients is, “Marry the house, rent the rate.” What goes up must come down, and I certainly think there is a good chance mortgage rates will drop in the coming years if we enter a recession. We hope many of our clients who have 6% mortgage rates will be able to refinance at a lower rate in 12-18 months.

Cory:?There has been a lot of talk about if we are in a recession or could be trending towards one. GDP numbers were negative in the first quarter of this year and I think it’s possible we will find out this summer that the economy has been in a recession.

In our world, it’s worth noting that a bear market doesn’t mean we’ll have a recession, but bear markets often preclude them. The stock market often bottoms out before the overall economy. I’m not sure how that relates to the housing market, but I agree it’s most likely that interest rates will go down in the next 12-18 months as the economy and inflation cool off.

Pat:?Indeed. In our industry, we watch 10-Year US Treasury Bonds. As people start seeking out safe investments in a recession and the yields start to drop on these bonds, I think we will see interest rates drop as well.

It’s worth noting that the Federal Reserve’s Funds Rate—which is the main rate they control—doesn’t directly impact mortgage rates. The main purpose of the Funds Rate is to be a tool the Fed can use to cool off inflation. Mortgage rates are more affected by comments from Fed Chair Jerome Powell.

While recessions can be painful, after taking two big steps forward in recent years, I think it will be ok for us to take a step back and collect ourselves so we can continue to move forward. An economy can’t run hot forever. Recessions are a natural reset. I expect interest rates to decline once we are officially in a recession.

Cory:?Is there any kind of historical precedent for the surge we’ve seen in interest rates this year?

Pat:?No. It stems from the fact that the Federal Reserve bought so many mortgage-backed securities and bonds during the pandemic to prevent the market from going haywire, and they’re now trying to get those securities and bonds off their books. And of course the increase in inflation was another big factor—I expect year-over-year inflation numbers will remain high for at least a few more months. I hope we’ll see interest rates start to fall by the late part of the third quarter.

Cory:?I don’t necessarily think higher interest rates will lead to a housing market crash, but can you talk about what a housing market crash would look like in 2022, and what changes have been put in place since the last crash during the Great Recession of 2007-2009?

Pat:?I wasn’t in the business during those years, but that crash was mostly due to lenders. If you had a pulse, you could get a mortgage. Today, our industry is much more heavily regulated, and I think that’s why foreclosure rates are so low. And during the pandemic, lenders learned more about how to work with people who are temporarily unable to make their payments.

Like many industries, supply chain challenges and a shortage of workers are impacting the home building industry. It often takes several months longer to build a new house than it did a few years ago. This also contributes to the supply shortage and it’s why I don’t envision a real estate bubble that could lead to a crash happening anytime soon.

Cory:?What do you say to someone who believes the housing market will crash and wants to wait to buy until that happens?

Pat:?I tell them demand will continue to rise because Baby Boomers are holding onto their homes longer (as they’re living longer), just as Millennials focus on buying. Demand will continue to rise, and I don’t think supply will catch up. I tell them home values will continue to rise, too, and they may even be able to refinance at a lower rate in the not-too-distant future.

And even if the value of your home does ever go down, that doesn’t mean it will stay there forever. The rapid increase in home values we’ve seen in recent years should hopefully mean fewer people will ever be underwater on their mortgages, even if values were to decline.

Cory:?What tips are you giving people during this year’s changing housing market?

Pat:?The main tip I give is to take care of your home. Make sure you’re staying up to date on maintenance. Focus on doing the things that will increase its value. And obviously, keep making your mortgage payments on time.

For those preparing to buy, don’t worry too much about rates going up, because I believe it’s a temporary phenomenon. Make goals for yourself for a down payment and eventual mortgage payment—although consider going $100 a month above your ideal payment if it’s for your ‘forever dream home.’

And make sure you have your documents ready so that you can get pre-approved for a mortgage. These include W2s, pay stubs and bank statements. I would aim to get pre-approved 2-4 weeks before you’re ready to jump in the market. If you’re trying to get approved after you’ve seen the house you want, it’s likely too late.

Cory:?It sounds like it’s important to have everything in order before you go out to look at homes on the market. Anything else to add, Pat?

Pat:?I think what separates my team is we aim to help our clients build wealth. If a client refinances and has cash on hand and they suggest putting it back into their home, I will often ask them to pause and think about if they’re investing in their 401(k)s, IRA, life insurance, etc. We take the time to sit down and learn about our clients and their goals.

Cory:?It sounds like our teams have something in common. At Falcon Wealth Advisors, we aim to take a 360 degree view of our client’s life so that we can help them achieve their financial and retirement goals. It’s nice to see a mortgage advisor with that same perspective.

One final point I would like to note: While real estate can be an investment vehicle, I believe the primary purpose of owning a home should be having somewhere comfortable to make memories with family. That’s why I think rising prices and interest rates shouldn’t scare people away from the housing market. They just must be realistic about what’s available within their budget.

Pat:?Well said. Housing is more expensive right now, but you’re not stuck with your mortgage forever. Most people keep their house longer than they keep their mortgages.

Cory:?Thanks so much for joining me, Pat. If you would like to connect with Pat, you can reach him at (314) 706-5175 or?[email protected]. And if you would like to discuss how housing should fit into your overall financial plan, please contact me today. You can reach me directly at?[email protected].

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