There are certain things that are just true. Spandex bodysuits shouldn’t be worn by most people. Mullets probably shouldn’t come back in style. And mortgage rates right now are just too low.
The truth: Mortgage rates this low have helped create a chaotic housing market and they need to go up. I tweeted this yesterday and while there was some great discussion about housing trends, literally nobody disagreed about rates.
Image above from Freddie Mac.
Downplaying demand: Throughout the pandemic the housing narrative has tended to focus on the supply side of things by saying, “The issue is we don’t have enough listings.” I get it because we definitively need more listings and we’re absolutely feeling the effect of years of lackluster new construction. But often it seems like we’re ignoring the demand side of things because we’re so fixated on supply. The reality is one of the big reasons the market feels as aggressive as it does is because rates have juiced demand since they’ve been hovering around three percent since July 2020. On one hand it’s great to see so many buyers entering the market, but rates this low have been like a steroid to help the market feel like an auction. Having 20% price appreciation year-over-year in Sacramento and California doesn’t seem sustainable for the long haul either. On a national level Altos Research states prices are up 17% from last year.
Up and down: Recently mortgage rates started to increase and we saw a few weeks in a row with fewer purchase applications in the United States. But then rates went down again and we saw purchase applications increase. This tells us what happens with rates DOES matter for the number of buyers and if we want the market to become tamer we simply need rates to increase. This won’t solve all our problems or the housing shortage, but it would at least be a step in the right direction. Check out the Mortgage Bankers Association for weekly updates on purchase and refinance applications.
Closing thoughts: Look, there are many reasons why the market is the way it is today and it’s not all about rates. I’m just saying at some point I think we have to admit it feels pretty unhealthy to have rates this low because it’s making things too chaotic.
Q&A Video: Here’s ten minutes of Q&A I did at the end of a presentation for SAFE Credit Union. Enjoy. Or not.
NOTE: This post was in no way meant to offend anyone who wears spandex bodysuits or has a mullet. Be yourself.
Thanks for being here.
Questions: What do you think of the points above? Anything else to add?
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Sounds like you have a problem with ’80s hair bands.
But solid point, we’re seeing auction prices instead of a normally functioning market.
Bring on the hairbands. I’m all for it. Skidrow for life… 🙂
Exactly. Well said Joe.
Auction fever, get that property before the other guy !!
Pretty much. FOMO is a big deal right now (that’s Fear of Missing Out in case any onlookers weren’t in tune).
The market increases are turning the market itself into a risk factor and increasing liability issues for all concerned, specifically buyers, appraisers, and lenders. When I measure increases where a home price will double in 16-24 months or really anything more than 1.5% per month which works out to be roughly 18% year over year, we all need to take a deep breath. I was appraising in the Reno, Nevada market just prior to 2005 and I identified home prices doubling in 36 months, and we all know how that ended.
Thanks Joseph. I appreciate it. The fundamentals are so different in today’s market compared to 2005, yet we have to concede this type of rapid price growth is still not healthy or sustainable. Yes, buyers are qualified and lending guidelines are incredibly strict, but this rapid growth is still abnormal – especially in our tenth year of a real estate cycle.
Good Afternoon Ryan. I love all your work. I have been following your blog to try to make sense of it all.
I also wish rates were higher but I would not hold my breath. As my layman’s eyes see it, an increase in mortgage rates would correlate with higher rates elsewhere in the system. That means higher costs to service debt, which at like 28T is now 129% of GDP, up from 101% before COVID. So an increase in rates would mean some portion of government spending would have to shift from providing services to paying interest. Which then means higher taxes and/or a reduction in benefits….and probably both. Higher rates would also cause an outflow from stocks (most people are in the markets not because they love stocks, but because they have no other option with low rates eroding the value of their savings).
So I think what you are asking for would cause falling asset prices in all markets, not just R/E, and higher taxes. So a lot of pain all around. I think the system is overall kind of painted into a corner with not a lot of great options
https://fred.stlouisfed.org/series/GFDEBTN
https://fred.stlouisfed.org/series/GFDEGDQ188S
Thanks Nick. I love the commentary. I’m not an economist, so I won’t pretend to speak to how a change in rates would affect everything else. I just know this is too chaotic for real estate and after many months of watching this unfold I wanted to put something out there. I welcome your take and others though.
For any onlookers, mortgage rates tend to follow the 10-year treasury yield, so pay attention to this metric to get an idea of what might happen with mortgage rates. https://fred.stlouisfed.org/series/DGS10
When did mullets go out of style? And I was so proud of my pandemulllet. A concern is those that pay substantially above market in 2021 attempting to refinance in 2022 getting a value below the purchase price. I don’t think the public understands that the new neighbor that paid $1 million likely received an appraisal at $900,000 and brought an extra $100k into the transaction. Just because a home sells for a price does not necessarily mean that it appraised for that amount.
Love the word. Haven’t heard of “pandemullet” yet. Nice Mark. It’s going to be interesting to see how this shakes out in years ahead. Or what happens with an appraisal waiver situation where the property really shouldn’t have closed that high? Will it be no biggie or a big deal? Time will tell. I will say there is such a thing as buyer’s remorse. The reality though is paying above asking and even above the appraised value is what it takes right now to get into contract in so many cases. Bottom line. If someone wants a house they might have to overpay.
By the way, for any onlookers, here is a post from almost ten years ago about what I call a “parcel mullet”. You know, business lawn in the front, party lawn in the back. https://sacramentoappraisalblog.com/2012/04/10/parcel-mullet-real-estate-word-of-the-day/
I can’t believe that was almost 10 years ago. I remember that one.
The Fed had a press conference today and this whole issue come up a couple times, the first time with a very comprehensive question:
https://youtu.be/HvqR0emS7Qs?t=4395
Later this gentleman flat out asks why they are still buying MBS which to me is a an excellent question:
https://youtu.be/HvqR0emS7Qs?t=6470
Thank you Nick. I really appreciate you taking the time to link to both of these videos. If you have any takeaway from this conference, I’d love to hear what you think.
Sure Ryan, happy to link them. The second question on the video is a great one because it seems like the decision to unload their MBS holdings could slow the housing market without affecting other markets with something like a rate hike.
The Chairman’s answer is not that great: we bought it because of “severe dysfunction” and will keep doing that…but does not explain why they continue to keep doing so when housing prices are soaring. In fact nobody asks the big-picture question which is why the “Central” Bank is still intervening in this market at all. The Fed has been around since 1913, and I remember back in 2008 that adding these to their books was a big deal. Fast forward 12 years and they have not figured out how to wind this down? In fact in March of last year they started buying them again!
https://fred.stlouisfed.org/series/WSHOMCB
It is stating the obvious to say that any choice the Fed + Treasury makes has winners and losers. It kind of seems to me here that they pretty much have decided to prop up home values at any cost because of the wealth effect. This is great for retiring boomers and older, but a bad deal for the 20-30 year old range trying to buy their first home. If you have, or know of a graph on home ownership by age in Sacramento, it would be interesting to see. It kinda seems like the current situation is if you are over fifty, your wealth effect is centered around housing, and if you are a twenty something it’s crypto or some crazy stock purchase like GameStop
Thanks for the commentary Nick. Please keep it coming. You can post comments any time here and they will automatically post (if you share a link they are held for moderation though as a part of the spam filter). I know Freddie Mac has put out some stuff regarding home ownership by age, but I couldn’t find anything with a quick search. If I find something I’ll link to it.
NICE!
Mortgage rates are JUST a piece of the puzzle. I still can’t believe a 2X4 is $7./each!!
Definitely, there are many layers. Though this sole piece has been a steroid for the market, so I’d say it’s a big piece right. Realistically mortgage rates don’t tend to drive value as rates have basically gone down for forty years and we’ve had multiple up and down cycles in the midst of that. Yet rates below 3% are absurd and for the time being they are creating so much demand. It’s unreal.
I totally agree on 2x4s. Unbelievable.
I am ready for the rate to increase some. I am enjoying the work but I just feel that it is going to hurt those who overpaid in the future. Plus I am tired of having to go into depth on ROV request. Also, this is a tax assessment year in Tennessee, I believe that will play a part as well. Hoping to get some tax appeal work though. 🙂
Thanks Laryssa. These rates sure have maxed out so many of us in various real estate professions this year. I find many people are on edge or just simply exhausted. I’ve heard this from appraisers and agents alike. And of course that’s exactly how so many buyers feel. What a time.
I agree they should cut back on buying MBS one good thing is that older housing stock has been getting updated in a huge way
Thanks Scott. I appreciate your take. What do you mean? Maybe people doing refinances and updating their homes? I wasn’t sure if that’s what you had in mind.
Lots of flipping some run down neighborhoods are looking better
Makes sense. Thank you.
If only salaries would rise as home prices have. The high cost of living starts eliminating segments of the population which simply cannot qualify for mortgage loans. The good, bad and ugly of California living.
Thanks Grant. Yeah, stats show home prices have far outpaced wage growth in recent years. I came across a study recently and I can see the graph in my mind. Of course low rates have really helped people afford more house for their buck, but it sure would be nice to see the job market become a more significant driver here with real estate prices. The market is so tight though for both purchasing and renting. It’s tough out there.
Preach Ryan Preach!
Amen Sista. 🙂
Exactamundo Ryan! George Dell also has written about this. He has made some of the following points. 1. Buyers and sellers are acting speculatively with exuberance. 2. Sale prices are affected by the auction euphoria and the buyers and sellers are avariciously motivated and biased as well as uninformed and advised by commissioned salespeople. 3. Marketing times are non-existent with off market sales or less than a week DOM. This is crazy and impossible to maintain without buyers putting down more cash to support the sales prices! Well written article Ryan and kudos for all you do!
Thank you Andrew. I really appreciate hearing what George has to say also. I think I missed that post (or wherever he said that). Thanks as always for the kind words. Hope you are well and not too overworked. 🙂
Down payment or other qualifying requirements for various market segments such as first time home buyers, etc versus investors is another major qualifier that could be used to keep the panic buying in check .
What do you mean John?
If the minimum down payment is moved temporarily higher, that would slow demand.
A higher down payment could be required for speculators.
Got it. Thank you so much.
Hi John, in the Tennessee market, I don’t think temporarily raising the down payment would work/help. About 98% of listing appraisals I do, the borrower is putting down over 50% or paying all cash with no appraisal. One Realtor told me that since there are people relocating to TN from CA, NY, etc and paying all cash, they are listing high to attract a cash buyer. However, someone like me has now been priced out.
Always a great conversation Ryan. I love reading all the comments on this one as well. Joe said it’s an auction right now and that’s right. Even when the market value data is overwhelming for a property along with strong price trend data for the comparable sales, it is hard to make sense of the contract prices.
Agreed. It is so lopsided out there. This has been very uncharacteristic growth so late in this real estate cycle. The market was slowing down for years and now it’s going warp speed. I just checked preliminary price stats for April and the median price is up over 11% from January 2021 (three months ago). These figures could change slightly, but that’s hefty price growth in a very short period of time. Of course not all of this translates perfectly to actual value for each house (just in case onlookers were thinking your home is worth 11% more compared to January).
Great article Ryan! I have been saying the same thing. I too am not an economist; however, it feels insane out there and something has to give. Your insight is greatly appreciated! Thank you for being such a wealth of information.
Thanks so much Adriana. It really does feel insane out there. Going below 4% in 2012 was one thing, but below 3% is just madness.
Rates rising a lot would do great damage. The reason the fed is keeping their rates low is because so much of the economy is tied to corporate wages which we all know don’t rise quickly, thus we are still likely staring at a demand problem with still millions fewer ppl working then prepandemic. Here in MN I just bought a house for 16% over asking price but even as I combine houses holds with my significant other, our monthly payment will be lower than what it was prior even at the inflated house prices. More money for the rest of the economy.
Thanks Mike. I agree about a huge increase in rates. As far as mortgage rates, I just think we need to get out of the low 3% range. It’s creating too much chaos in this low-inventory market we’re having. Below 3% is completely insane. I suspect the market would start to feel different at even 4% (not dull, but not as aggressive). I’m all for Americans saving money. I know today I had a few people ask me what my problem was in saying rates need to go up. This has nothing to do with people and everything to do with the market being healthy and not so chaotic.
These observations demonstrate that the appraisal business is not on firm ground regarding purpose and practice. Is appraisal a predictive, or normative enterprise? The market value definition seems to indicate it is predictive: most probable price on a certain date. But the comments suggest an orientation toward the normative: “speculative,” “inflated,” “not sustainable,” etc. If everyone thinks appraisers should deliver an opinion of “sustainable value,” then we need the definitions and theory and engagements to implement that. Right now, our definitions and theory and engagements are to deliver the most probable price on the date of inspection. If someone wants to know what the prospective value is in five years after the next crash, that’s a different assignment, isn’t it?
Hi Vince. Thanks for your take. I guess I’m not quite following how your comment fits into the post. I mean, it’s fine if it’s a tangent, but I wasn’t entirely sure what observations you are referring to in your first sentence. You are welcome to expand if you wish. Thanks.
Ryan, it’s right in your first paragraph: “mortgage rates right now are just too low.” And therefore demand is “too high,” and prices are “too high.” The markets are “unhealthy… chaotic.” Many appraisers (not you, necessarily) seem to believe that appraisers should act as a restraint on the market. That appraisers should appraise property for what it “should” be worth. That’s what I mean by “normative.” Brad Bassi’s comment below illuminates my point. He says the current market isn’t “typical,” and that prices actually being paid are “auction/speculative value” and not market value.
What if you were asked to appraise a tract house where the last three sales were at $600k, $610k, and $620k, and the property is under contract for $630k? And housing prices are up 30% over the last two years, while household income is up only 10% over that time period? It’s a reliable prediction that on the date of inspection, or shortly after, the house will sell for $630k. It may also be your opinion that the value won’t be sustainable, that it will fall back toward $600k or less as interest rates go up and buyers lose the FOMO. What do you do with that opinion? Remember, the only item of interest to buyer, seller, loan officer, and everyone down the line, is the “market value.”
Economics has moved away from normative approaches – i.e., how the “rational man” should act – and toward predictive and behavioral approaches – how people ACTUALLY act. Appraisal hasn’t come to grips with this distinction. As I said, the market value definition seems to be a prediction of an event at a single point in time under certain assumptions, and there’s no room for value judgments there. But appraisers worry that prices are “too high,” or the market is “frothy.” Even the tools of our trade tend toward normative thinking. Do any ACTUAL buyers use the hallowed adjustment grid? Do you use an adjustment grid when you buy a car, noting horsepower and headroom in cubic inches and trying to create adjustment factors for gasoline mileage? Yet appraisers think there should be an adjustment for 100 SF difference in floor area. Because that’s what buyers “should” do.
Got it. Thanks Vince. I hear what you are saying, though my commentary is about the housing market rather than how appraisers fit into the market. I am making comments as a guy who analyzes the market rather than discussing how appraisers should or should not view the market or fit into it.
I firmly agree with you that appraisers are not a brake pedal or gas pedal. We exist to interpret the market and reflect value. Though we do have a role to play as a system of checks and balances too, so there is somewhat of a sense of being a voice of reason (and sometimes that can feel like a brake pedal for some transactions).
I don’t have a problem with appraisers analyzing the market and letting data form the narrative. I do have a problem with doom and gloom narratives without substance though and that’s an easy trap for lots of folks in the real estate community to fall into. In my case here I know I sound pretty subjective to say rates need to go up and some people really didn’t like my post. Or maybe just the headline set them off because I did get some comments saying, “Yo, rates aren’t the only thing driving the market.” I know and that’s exactly what I said in my post. 🙂 Ultimately my statement regarding rates this low is being made in a context of watching and reporting on the market very closely for years and coming to the conclusion rates around 3% have contributed significantly to increasing demand and the velocity of price appreciation. I don’t think there is any arguing over that frankly, though my sense is so many people want to pin this housing market solely on shifts in demographics while ignoring rates entirely.
That is fairly said. The future of the profession, or trade, is on my mind as I near the end of my career (I’m a 60 year old commercial appraiser). Are appraisers supposed to be like the stock tables that used to be in daily newspapers, reporting the high, low, and last price for the previous day? That seems consistent with the market value definition and the “body of knowledge” of the last century. Or are we supposed to be more like stock fundamental analysts, providing some sort of long term or sustainable value estimate? Clearly the world was not happy with our performance in the Great Bubble and Great Recession. Despite some instances of unqualified and criminal appraisers, appraisers neither created nor prevented the bubble and crash. In that context, I think users and regulators are right to wonder, “What’s the contributory value of appraisals anyway?” And finding that the risk management contribution may not be equal to the price and delay of appraisals, they are willing to expand the use of AVMs and waivers where they can. I think the profession, or trade, or industry, or whatever it is, will continue to shrink. Whenever I see normative comments associated with appraisal (“too high,” “too low,” “too sweet” etc.), these thoughts come to mind. They also come to mind when I take continuing education classes that propose techniques or adjustments that buyers don’t actually make. They may seem logical, but are they grounded in research that validates their use?
Hello Ryan, First off sorry I am late but Doctors and anniversary with wife this week. Second, not sure how a mullet would look under my Stetson. Course you have to have hair to grow a mullet, hmmm.
Okay so now on to my thought. As you know my medical situation I have not been doing residential lending/ interior walk thru’s since the pandemic started. Thank goodness for Estate and litigation work. What concerns me is all the great points that seem to have a central theme in this thread. Auction / speculative value. My concern is that, we as the appraisal world/ profession should be directing the client, as a majority of the appraisals being completed now are using the wrong definition of market value in my opinion. Not our fault but the Fannie Mae Form asks us to value as if the seller and buyer are not under duress and knowledgeable I would submit that none of these items currently exist in most of our markets and hence I don’t think the definition of market value we are forced to use on the 1004 is accurate, we ain’t appraising like that right now. Now I am sure the USPAP folks are going WHAT, but I am concerned over the market value we all use in lending work right now. I don’t think it is accurate as this isn’t a typical market. A big reason why most of us couldn’t get close to the speculative pricing agreed to in the contract if our life depended on it. So when using the Fannie 1004, we should be including comments that this is not a typical market and the buyers appear to be under duress due the lack of inventory and the current frenzy to buy. Just my two cents.
Happy Anniversary Brad. I’m glad you are taking things a bit slower these days and a mullet would definitely improve your look… 🙂
I appreciate this point and I’ve heard a few colleagues talk about this also. Inventory is very extreme right now. Like I said in my post, I think our tendency in the real estate space is to focus exclusively on the number of listings, but we have to realize we have a demand problem too. Supply is limited and demand is extreme right now for a number of reasons (one of them being mortgage rates this low). So it’s really chaotic out there. It is a real market though and these are real dynamics. It’s just very much lopsided.
Being 6’3″ and looking like George Clooney or Brad Pitt would improve my look, not a mullet???!!!!!!!!!
Fair point, I guess. 🙂
Only fools are buying in this low inventory covid sugar high market.. We are in a a epic bubble and we know what happens with those lol!
Thanks Robert. I get what you are saying, though we have to remember most people buy real estate when their lifestyle and finances make it possible (as opposed to timing a market absolutely perfectly).
I talked with someone last month who is selling now to wait things out. I understand that sentiment as we are in our tenth year of price growth. Yet there is no guarantee today’s market will implode like it did last time. What happened then isn’t the new formula for today. Of course markets go up and down all the time, so at some point we would expect a dip because that’s what is normal. But if an implosion happened, let’s remember prices declined for 6.5 years last time around. Thus my question to the guy selling now is, how long are you planning to rent?
Robert, how does your opinion affect your appraisals?