How to Overcome Declining Purchasing Power with Real Estate

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By Rick Tobin

Homeowners are 40 times wealthier than tenants. Real estate is an exceptional hedge against inflation because home values tend to rise at least as high as the published inflation rates.

If you’re fortunate to own real estate over years or decades, it’s very likely to be the main reason for the bulk of your family’s overall net worth. Conversely, tenants will be losing money over time as their rents continue to rise right alongside skyrocketing inflation rates.

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Americans in 2023 need to earn more than $11,400 to be able to enjoy the same standard of living as they did in 2021 thanks to the rapidly declining value of our dollar, according to CBS News.

If your earnings rose by 34% from January 2020 to October 2023, the purchasing power of your labor kept pace with higher costs. All of us who aren’t earning 34% more since January 2020 have lost ground. It now takes more hours of work to buy groceries and everything else. To offset declining purchase power, real estate ownership may be your best option.

The purchasing power of $100,000 in income in January 2020 is only $66,000 in purchasing power today (34% reduction). To keep pace with the rapidly falling purchasing power of the dollar, $100,000 in income in January 2020 would need to rise to $134,000 in income today or your investments would need to appreciate at the same rate to offset your dollar losses.

Rising Prices for Goods, Services, and Assets

Between 2008 and the 1st quarter of 2023, let’s review some of the “official” government published data for consumer goods, services, and assets from sources such as the U.S. Bureau of Labor Statistics:

  • Hospital services: +99.8%
  • College tuition: +64.4%
  • Child care: +62.1%
  • Medical care: +57.2%
  • Food and drink: +52.8%
  • Housing: 48.3%

Again, these are the published numbers that are likely underreported and much lower than the true inflated price changes. To me, it seems like all prices are significantly higher here in the 4th quarter of 2023 as compared to the 1st quarter this year. If so, the actual price gains may be significantly higher as we head into 2024.

All-Time Record High California Home Prices

In spite of mortgage rates more than tripling over the past year or so, housing prices statewide in California have never been higher for owners, new buyers, and tenants.

Shocking Los Angeles Home Price Swings

The median home sales price in Los Angeles County hit a record high of $914,640 in September 2023.By comparison, the median Los Angeles County home price was $318,075 (12/08).

Near the peak of the previous housing bubble and near the official start of the Credit Crisis or Great Financial Recession in late 2008, the median home sale price was almost $600,000 lower in Los Angeles County than median-priced homes in the same region. How is this not shocking?

Today, Los Angeles is ranked as the #2 most expensive U.S. city and the #6 most expensive worldwide city for residents to live in, according to KTLA News.

Many California homeowners have never been wealthier due to rapidly increasing home equity gains while many tenants have never been poorer due to their all-time record high rental payments, sadly.

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Expensive Coastal Regions and Inland Moves

Because some of the most expensive real estate prices in the world are located in California coastal counties like San Diego, Orange, Los Angeles, Ventura, Santa Barbara, and San Francisco (both a city and county name), more residents are moving inland to places like Riverside or San Bernardino counties in Southern California or out of state to Arizona, Nevada, or Texas.

Buyer demand still exceeds the available home supply while pushing home prices higher, especially in the Riverside County region, which is much more affordable than the near $840,000 statewide home price average for California.

Riverside County Home Spotlight Region

The median sale price of a single-family home in Riverside County was a new all-time record high of $620,960 in October 2023, up from $600,000 in September, with a rise from $599,990 in October 2022, according to the California Association of Realtors.

  • Lake Elsinore: $575,000 ($175,000 below the Temecula average)
  • Canyon Lake: $662,000
  • Menifee: $547,500
  • Murrieta: $657,500
  • Temecula: $750,000
  • Corona: $759,000

Adding Value to Real Estate

Owners or interested buyers who are thinking about purchasing a new one-to-four unit property to boost their wealth and/or monthly income with rental units have several options these days which may include:

  • First-time owner-occupied homes
  • A move-up from a smaller to a larger home
  • A short-term or long-term rental
  • Adding tiny homes or ADU (Accessory Dwelling Unit) to a residential property site to increase monthly cash flow.
  • Remodeling an existing home with a new kitchen, bathroom, or bedroom.
  • Building a brand new home, duplex, triplex, or fourplex from the ground up.

One-Time Close Construction Loans

I’ve worked on numerous individual home construction loans and large residential development tracts over the past few decades. Yet, I’ve never seen a better, easier, and more affordable home construction loan option for owners who are interested in building a brand new “dream home” for their family.

Generally, a person may need two or three separate loans to build a new home that may include a land purchase loan (40% to 50% LTV ranges are more the norm), construction loan, and a final 30-year takeout or permanent loan to pay off the construction loan.

With a One-Time Close Construction Loan, the borrower applicant qualifies for one loan to buy the land, build the home, and keep the same loan for up to 30 years all within one loan closing option. This way, there’s one credit report pull, one loan underwriting and approval process, one down payment unless it’s a VA loan (up to 100% financing) or a very low down payment requirement for FHA-insured and conventional loans (up to 95% to 96.5% LTV).

Let’s review below some of the loan product highlights offered by one of my main lending partners:

Conventional Loans

* Available on 15-and 30-year fixed conventional, high balance and 7- and 10-year ARM options
* Eligible on primary, second or vacation home, and investment property purchases and rate/term refinances
* Loan amounts up to the conforming loan limits
* 700+ FICO, up to 95% LTV
* 11-month maximum build period with 1-month modification period
* Interest-only monthly payments during the build period

VA Loans

* Available on 30-year fixed loans
* Loans up to $4M
* Eligible on primary home purchases and cash-out refinances
* 580+ FICO, up to 100% LTV
* 11-month maximum build period with 1-month modification period (build period is deducted from the loan term)
* No monthly payments during the build period

Rule of 72 and Power of Leverage

Real estate has proven to be an exceptional hedge against inflation over the past 100 years. In some economic boom years, home values may double in value every 2, 3, 5, 7, or 10 years. With minimal down payments, the true annual cash-on-cash returns are much higher than most people realize.

The Rule of 72 is an investment formula used to estimate how long it may take for an asset to double in value using a projected annual rate of return. If homes in your region have increased 7% per year over the past several years and home appreciation continues at the same pace in the future, then it may take 10+ years for your new home to double in value using the Rule of 72 (72/7 or 7% = 10+ years).

Most first-time home buyers use high mortgage leverage within a 0% to 6% down payment range (6% down is average).
Let’s use 20% down payment for an estimated cash-on-cash return for an owner-occupied or investment property buyer. At a 7% annual appreciation rate average, the cash-on-cash return is actually 5 times 7% (20% down – 1/5th; 80% bank – 4/5th) for a total 35% annual cash-on-cash return.

Time and inflation can be two great allies to eliminate the mortgage debt as your home rises in value thanks to the power of leverage and inflation.

Is the housing market positive, negative, or neutral? It depends on the home region, the regional home listing inventory supply, and the price range is perhaps the safest answer to give.

Why doesn’t it feel like a slow home sales market to first-time buyers? Let’s take a closer look at the national home sales numbers for October 2023 as provided by the National Association of Realtors:

  • 66% of homes for sale were sold in less than a month.
  • 62% of surveyed real estate professionals said that their first-time home buyers had to put in four or more offers before closing on a home.
  • The median home sales price for an existing home was $391,800, up 3.4% compared to a year ago.

Invest in Your Future Today

The average homeowner at retirement age has 83% of their net worth tied up in their primary home. 60%+ of Americans surveyed say that they live paycheck to paycheck, so saving is challenging. Middle-income parents may spend an average of $310,605 by the time a child born in 2015 turns 17 years old in 2032, per Brookings Institute. What about college?

The average Social Security benefit paid out in 2022 was $1,657/mo. ($19,884/yr.). Median savings rate (excluding retirement funds) by age: $3,240 (under 35); $4,710 (35-44); $5,620 (45-54); and $6,400 (55-64), per a Federal Reserve survey. The median retirement savings for all families is $87,000, according to the 2022 Survey of Consumer Finances.

There’s good debt (mortgages) and bad debt (credit cards at 28% to 33% rates, etc.). Mortgages help create long-term wealth, especially after they are paid off in full. To shorten the time to pay off a mortgage, you might pay biweekly and add some principal to reduce 10 to 15+ years in payments while the home asset potentially doubles or triples in value.

Our dollar’s purchasing power is on track to continue falling in value. If so, the prices paid for consumer goods, services, and assets like real estate may keep rising as well. As a result, equity gains for real estate ownership may increase while giving you more options to pay off debt and build a brighter future.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

What’s Your Blended Debt Rate?

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By Rick Tobin

A blended rate is a combination of interest rates on multiple loans for an individual or household and calculated as if they were just one rate.

Those very fortunate mortgage borrowers with existing 1st mortgage rates at or below 3% or 4% might be hesitant to choose a new cash-out refinance 1st loan to pay off their rising unpaid consumer debts that may vary between 10% and 30%+ each.

More than 40% of all U.S. mortgage borrowers funded their purchase or refinance loan in either 2020 or 2021 when rates were at or near historical lows, according to data published by Black Knight. Many homeowners don’t want to lose their record low rate by refinancing the mortgage debt or selling, which is akin to a lock-in effect.

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A blended rate analysis for an existing debt comparison to a new cash-out 1st or 2nd mortgage or HELOC (Home Equity Line of Credit) can be simplified by comparing the existing monthly debt obligations for the consumer with a proposed new cash-out mortgage or HELOC that pays off all of the existing mortgage and/or non-mortgage debt.

For example, the Jacksons have a $400,000 1st mortgage that has a 3% fixed rate for 30 years. They funded the loan near the all-time record low time period in early 2021 and now have just under 28 years remaining on the loan.

The Jacksons also have $50,000 in credit card debt that’s compounding at close to 30% and two used car loans which combine for another $50,000 that average near 12%. To simplify this calculation, I used the exact same balances for an easier interest rate calculation estimate of 21% (30% + 12% = 42% / 2 = 21%).

Let’s now add the $400,000 mortgage at 3% to the $100,000 in credit card and automobile loan debt at 21% for a grand total of $500,000. Four-fifths ($400,000) of the Jacksons’ monthly debt is at 3% while one-fifth ($100,000) is at 21%.

● $400,000 mortgage balance: 3% rate
● $50,000 credit card balances: 30% rate
● $50,000 automobile loan balances: 12% rate
● New blended interest rate for all debt: 6.6%

The Jacksons’ blended interest rate in this example is 6.6% for all of their monthly consumer debt when including their mortgage, credit card, and car payments.

The Jacksons explore their HELOC (Home Equity Line of Credit) options that would be recorded in second position behind their existing 3% fixed rate 30-year mortgage that they don’t want to lose.

As of October 18, 2023, the current average HELOC interest rate was 9.02 percent, as per Bankrate (all rates and fees are subject to change). Rates, fees, and APRs (Annual Percentage Rate) are all over the place, depending upon the lender, borrower’s creditworthiness, and daily financial market trends that may rise or fall.

With this HELOC rate estimate provided, we will explore both a 9% and 10% HELOC rate to get the Jacksons $100,000 to pay off their 30% credit card and 12% automobile loan rates.

● $400,000 mortgage balance: 3% rate
● A new $100,000 HELOC: 9% rate
● New blended interest rate for all debt: 4.2%

● $400,000 mortgage balance: 3% rate
● A new $100,000 HELOC: 10% rate
● New blended interest rate for all debt: 4.4%

Either way, a new HELOC that’s used to pay off consumer debt may decrease the total monthly blended rate for all monthly debt by at least 2% (6.6% blended rate – 4.2% or 4.4% blended rate = 2.4% to 2.2% blended rate improvement).

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My best HELOC programs (10-year interest only, 20-year amortizing) may be interest-only for the first 10 years while later adjusting to fully amortizing with principal and interest for a total loan term of 30 years. If I calculate these HELOC rates as interest-only for the first 10 years, the total blended rate payments would actually be even better.

To check your actual current blended rate debt as well as your potential future blended rate if you welcome a new HELOC loan, please enter your own consumer debt data (loan amount, rate, and number of individual loans) here to find out: Blended Rate Calculator.

The average borrower is in their home for about seven years, not 30 years. This is also about the average time period that a borrower holds one or two mortgage loans on their property before they later sell or refinance at a hopefully lower rate.

Snowballing or Compounding Credit Card Debt Examples

Credit card delinquency rates at small banks reached 7.51%, the highest level ever recorded according to the St. Louis Fed.

Average credit card rates surpassed 28% nationwide recently. However, retail store credit cards are now closer to 30%. By comparison, credit card rates averaged closer to 12% back in 2008.

In the 3rd quarter of 2023, new credit card delinquencies reached 7.2% according to the New York Fed Consumer Credit Panel and Equifax.

The average annual percentage rate (APR) for merchant cards, which many holiday shoppers will be using online or at nearby shopping malls, just hit 28.93%. This is a new all-time record, up from 26.72% in 2022, according to Bankrate.

Credit Card Debt Payoff Examples

Now, let’s compare how much time and interest is required to pay off a credit card debt balance of $20,000.

Many credit card issuers may have different minimum payment allowances which may vary from a minimal fixed dollar amount up to the interest plus 1% of the unpaid principal balance that’s paid monthly.

For example, let’s start with minimum payment example #1 that includes just interest-only with no principal paydown each month:

Credit card payment #1:
Unpaid credit card balance: $20,000
Interest rate: 28.93%
Annual interest paid for one year: $5,786 ($20,000 x 28.93%)
Monthly interest-only payments: $482.17 ($5,786/12 months)

If the borrower just pays the absolute minimum interest-only payment of $482.17 per month, it will take 41 years and 7 months to pay off the unpaid balance. If so, this is 11 years and 7 months longer than a brand new 30-year fixed rate mortgage.

The total interest paid by the borrower over this time period would be $220,496.44 (11 times the original $20,000 balance). To verify yourself, here’s the specific credit card payment example #1 link on Calculator.net.

Credit card payment #2:
Unpaid credit card balance: $20,000
Interest rate: 28.93%
Payment option: Interest + 1% of principal balance
Annual interest paid for one year: $5,786 ($20,000 x 28.93%)
Monthly interest-only payments: $482.17 ($5,786/12 months)
Payment of an extra $200 in principal ($20,000 x 1% = $200)
Total minimum monthly payment (interest + 1% of principal): $682.17

The payment of the absolute minimum interest-only ($482.17/month) plus 1% of the original $20,000 unpaid principal amount ($200 in principal) for a grand total of $682.17 per month will take 4 years and 4 months to pay off the entire balance in full. The total interest paid will be $15,134.49. To confirm yourself, here’s the specific link for credit card payment example #2 on Calculator.net.

Student Loan Debt

U.S. student loan balance: $1.8 trillion (fourth quarter of 2023)

Just 500,000 borrowers out of 43.5 million student loan borrowers, a 1.15% payment rate, were paying on time prior to the October 1, 2023 payment restart date. Many of these average $500+ per month student loans are adjustable and are likely to increase over time, sadly.

The average federal student loan debt is $37,338 per borrower. Private student loan debt averages $54,921 per borrower. Twenty years after entering school, 50% of the student loan borrowers still owe more than $20,000 each on outstanding loan balances, according to the Education Data Initiative (May 22, 2023).

Just 90 days after the October 1, 2023 student loan payment restart date, any ongoing delinquent student loan payments may be shared with the credit bureaus as early as January 1, 2024. If so, the FICO credit scores for delinquent student loan borrowers may begin to fall as their borrowing costs for future loans may rise as well.

Worsening Automobile Loan Sector

In September 2023, Fitch Ratings reported that 6.11% of automobile loan borrowers were at least 60 days late on their payments. This is the highest delinquency rate since the early 1990s.

While a 30-day late can often be a mistake by a borrower who forgot about their payment, a 60-day later indicates possible significant financial challenges. Few people want their car repossessed, so it’s usually a top priority monthly debt obligation that a borrower will focus on to get paid each month. Without a car, how does someone get to school, work, or to visit friends and family if they don’t have access to affordable and convenient public transportation nearby?

  • Average subprime car loan rates are reaching the 17% – 22% loan rate range.
  • The percentage of subprime auto borrowers who are 60+ days past due on loans hit an all-time record high of 6.1% in September (#2 highest: 1994 – 6.0%; and #3 highest: 2008: 5.0%).
  • The average new car price is now higher than $48,000.
  • Average new car payment rates are near $750/month and the average student loan payment is just over $500/month. For consumers with both forms of debt, they are paying close to $1,250 per month for just their car and student loan while not counting insurance, gasoline, or maintenance for the car.
  • The average used car price now is $30,700 as compared with an average used car price just under $8,000 back in 2008.
  • The average loan-to-value ratio for a used car is 125% LTV (no money down + taxes, license, registration, warranty, other fees, and declining value over time).
  • There are now 20,000 car repossessions PER DAY (600,000 per month) while rising exponentially each consecutive month. If the same pace of rising and compounding car repos continues onward, there might be upwards of one million car repos PER MONTH in 2024 (yes, one million per month).

There are approximately 100 million car loans across our nation. However, there are an estimated 276 million automobiles nationwide, so the car loan-to-total cars nationwide ratio is just over 36% (100 million/276 million = 36.23%).

Moody’s recently warned about potential automobile loan and credit card default rates as high as 9% to 10% in 2024. If so, this might be equivalent to nine to 10 million car loan defaults or repos out of the total 100 million car loans. If proven true, a nine to 10 million car loan default rate would make the one million car repossession projection for 2024 seem much too conservative and only a fraction of how bad the car delinquency numbers may reach.

California Mortgages: 50-Year Analysis

Between April 1971 and September 2022, the average 30-year fixed mortgage rate was 7.76%. Today’s 30-year fixed rates for consumers are fairly close to this historical 50-year average, depending upon their creditworthiness and whether it’s a conventional, FHA, VA, or non-QM type of loan.

The 30-year fixed rate peaked near 18.6% in October 1981. In January 2022, some 30-year fixed rates temporarily reached the high 1% to low 2% rate range.

Over the past 50 years, the typical California homebuyer spent 43% of their income on house payments. Today, the average homeowner spends closer to 58% to 65%+ of their monthly gross income on mortgage payments (principal, interest, taxes, insurance, and HOA, if applicable). After paying state and federal income taxes, many California homeowners are more likely paying closer to 70% to 80% of their net monthly income towards their monthly housing debt.

The median price of a California home over the past 50 years was $331,000. In September 2023, the median statewide price reached $843,340, according to the California Association of Realtors. This is almost more than double the median national home sales price that hit $431,000, as per the St. Louis Fed.

Over the past 50 years, the average monthly mortgage payment was $1,627 at 80% LTV with 20% cash down. In 2022, the average mortgage payment reached $4,043/month, a 148% increase.

In the fourth quarter of 2023, let’s review a potential new mortgage payment for a median home price in California that’s near $840,000:

Down payment percentage amount: 20% down payment (average is 6% down nationwide)
Down payment dollar amount: $168,000
New loan amount (80% LTV): $672,000
30-year fixed mortgage rate: 8% (example only, subject to change)
Monthly mortgage payment: $4,930.90 (principal and interest)

This example above does not include any monthly property taxes, insurance, or homeowners association (HOA) payments, if applicable.

The average household income for Californians over the past 50 years was $45,700. Today, the average income is closer to $84,000. This 84% increase in income isn’t enough to cover the 148% increase in mortgage payments, sadly.

A 20% down payment over the past half century for Californians was $66,000. In 2023, the average down payment increased to $168,000, which is a whopping $102,000 down payment increase.

Finding more affordable monthly blended rate payment options are what you should focus on these days as we all see consumer debt balances and interest rates either heading towards or surpassing all-time historic highs.

Please contact me today for a FREE blended rate analysis of your personal debt. You may be pleasantly surprised to learn how I can help reduce your overall blended rate, monthly payments, and possibly eliminate years or decades’ worth of extra debt payments.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Have Home Prices Peaked Yet?

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By Rick Tobin

Since 2019, the median price of a U.S. home has increased by more than $100,000. Last month, the median home price nationwide reached an all-time record high in spite of skyrocketing mortgage rates. How is this possible?

Inflation-adjusted home prices are now 85% above their historical average dating all the way back to 1890. Additionally, inflation-adjusted home prices are now 20% above the 2008 peak, according to Case-Shiller and Reventure. The 2008 peak highs for home values were followed by almost five years of home price declines through 2013 in many regions.

Even after accounting for inflation which has severely weakened the purchasing power of one dollar ($1) from back when the Federal Reserve opened for business in 1913 to just 2 or 3 cents today, home prices have never been this unaffordable.

Home Payment-to-Median Income Rates

The home payment as a percentage of median income calculation is used to quickly determine how affordable or unaffordable the monthly payments are for each homeowner. Many years ago, it was quite common for owners to pay just 25% to 35% of their monthly gross income towards their monthly mortgage payment. Now, it’s almost double those numbers (50% to 70% of the gross income) as home prices and mortgage rates continue to rise together.

The median home payment as a percentage of median income ratio nationwide is now near 49% or 50%. This is gross or pre-tax income, so the home price-to-net income after taxes paid is much higher. This is especially true in areas with high state income tax rates like those found in California, Hawaii, New Jersey, Oregon, Minnesota, New York, Vermont, Iowa, and Wisconsin.

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Home Payment as Percentage of Median Income by State:

1. Hawaii: 68%
2. California: 67%
3. Montana: 57%
4. Oregon: 55%
5. Washington: 54%
6. Massachusetts: 53%
7. Idaho: 52%
8. New York: 51%
9. New Jersey: 50%
10. Vermont: 50%
11. Maine: 50%
12. Colorado: 49%
13. Florida: 49%
14. Rhode Island: 49%
15. Arizona: 48%

To simplify these calculations using $10,000 gross income for a household (married couple earning $5,000 each before federal or state income tax), a 68% home payment as a percentage of median income in the priciest state of Hawaii would mean that the total monthly mortgage payment (principal, interest, property taxes, homeowners insurance, and homeowners association payments if applicable) would equal $6,800 per month ($6,800 monthly mortgage payment/$10,000 household income = 68%).

Unsustainable Home Price-to-Household Income Ratios

The home price-to-household income ratio (P/E) is a quick mathematical formula that we can closely look at to determine how affordable average prices homes are for one or more metropolitan regions. Because home values in California are the highest in the nation, our homes tend to have double-digit P/E ratios compared with other states with much lower P/E ratios somewhere within the 4x to 7x range (or home prices are 4 to 7 times the household income). 5.3x is the latest median home price-to-household income ratio calculation.

Let’s put these P/E ratios to work for us to better understand how unaffordable homes have become across the nation. A newly married couple earns $80,000 per year with their combined salaries. As per the national average of 5.3x, this couple would likely pay close to $424,000 (5.3 times the applicants’ household income = the average home price or $80,000 household income x 5.3 = $424,000).

By comparison, the P/E ratios for California metropolitan regions are as follows:

* Riverside: 10.5x (or times)
* Los Angeles: 14.0x
* Santa Rosa: 14.0x
* San Diego: 14.3x
* San Francisco: 14.6x
* San Jose: 16.2x
* San Luis Obispo: 17.6x
* Santa Cruz: 20.0x

Now, let’s look at Santa Cruz, California where the home price-to-earnings ratio is 20 times the household income. If we used the same $80,000 household income as before, the average home price there would be 20 times the household income average ($80,000 household income x 20 = $1,600,000 home price).

Key points: Homeowners are paying almost double the national home price-to-household income average in Riverside, California region (10.5x vs. 5.3x) and almost four times the national P/E average in Santa Cruz, California (20.0x vs. 5.3x).

A 99% Unaffordable Rate for Homes

The typical American individual or family today cannot afford to purchase a new or older home, according to the most common mortgage lending standards such as FICO credit scores, debt-to-income (DTI) ratios, and cash reserves for loan qualification purposes.

In fact, a recently published report shared by the ATTOM real estate data company named the U.S. Home Affordability Report for the third-quarter of 2023 found median-priced single-family homes and condominiums are less affordable in 99% of counties across the nation compared to historical averages. The analysis found that the home prices were beyond the reach of the vast majority of average income earners who earned just over $71,200 per year.

With average and median home prices reaching all-time record highs in possibly 99% of regions and mortgage rates hitting 23-year highs, this combination has made home purchases less affordable than ever before.

A Shaky Small Business Sector

Historically, consumer spending has represented upwards of 70% of the total GDP (Gross Domestic Product) for the US economy. With credit card balances recently surpassing $1 trillion dollars and average annual rates hitting 28.1% per Forbes, it will directly impact both in-person and online shopping.

A whopping 53% of an estimated 40,000 surveyed small business owners responded that they are only making half or less of what they were earning prior to the pandemic declaration back in March 2020, as per Alignable. For businesses that are one to three years old, 60% of respondents said that they were earning half or less of what they were earning just one year ago.

The same Alignable survey also found that 40% of small business owners could not pay their rent in full or on time for September.

Some of the factors mentioned for declining business income were as follows:

  • 50% of the small business owners surveyed said that the 18 months of rising interest rates have cut into their profit margins. Many small business owners are paying high double-digit rates for their business operations that make today’s 30-year fixed mortgage rates seem much more affordable by comparison.
  • 52% of surveyed business owners said that they were paying more for rent now than just six months ago, with 14% of respondents claiming that their rent jumped by 20% or higher.
  • 46% of business owners said that the higher-than-usual gas prices have slowed down their business growth as an increasing number of people are buying products online partly to save gas money.

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The implosion of the retail sector continues onward, sadly. The previous six years in a row (2017, 2018, 2019, 202, 2021, and 2022) each shattered the all-time retail space closings per square foot in US history. Please note that e-commerce (online retail sales for Amazon, Walmart, and thousands of other small, medium, or larger online sites) only represented the following percentages as compared to total retail sales nationwide as per Statista:

  • 10.4% of total annual retail sales were online in 2017;
  • 12.2% of total annual retail sales were online in 2018;
  • 13.8% of total annual retail sales were online in 2019;
  • 17.8% of total annual retail sales were ecommerce in 2020;
  • 18.9% of total annual retail sales were ecommerce in 2021; and
  • 18.9% of total annual retail sales were ecommerce in 2022.

According to the U.S. Small Business Association (SBA) and the U.S. Chamber of Commerce, small businesses of 500 employees or fewer make up over 99% of all U.S. businesses. For many Americans, they think that Walmart, Amazon, and Target are the primary business operators who employ a very high percentage of Americans. While it is true that their size and market dominance continues to rapidly increase, the small business sector is the “heart and soul” of the U.S. economy.

Any loss of income for employers and their current or former employees who were laid off will eventually have a significant impact on home values for purchase and for lease. Loss of income is usually the #1 reason why a homeowner is in a distressed mortgage payment situation (forbearance, loan modification, foreclosure, or short sale). It doesn’t matter too much if the homeowner has a 2% or 3% fixed rate mortgage in place if they don’t have any income to make the payments.

Underwater Cars & All-Time Record Payments

The average car loan balance in the U.S. as of the 1st quarter of 2023 was 125% loan-to-value (LTV), as per TransUnion. Many of us remember underwater or upside-down homes following the previous economic bubble burst during the 2008 to 2013 years when the mortgage debt exceeded the current home value. Now, it’s becoming increasingly common to see underwater cars with increasingly unaffordable payments.

The average new car price today is about $48,000. The average new car payment is $750 per month and the average used car payment is $551 per month. The average new car rate is 9.48% and the average used car rate reached an all-time record high of 14%.

  • 1 out of every 3 cars are 30+ days late
  • 1 out of every 5 cars are 60+ days late
  • 1 out of every 7 cars are 90+ days late
  • Moody’s forecasts 10% auto loan delinquencies by 2024.
  • Upwards of 20,000 cars are being repossessed for nonpayment every single day nationwide.

A former Ford CEO recently said that a borrower may need to earn $100,000/yr. to qualify for a new car. The United Auto Workers union just went on strike demanding more pay and fewer work week hours as the auto sector is imploding.

The 7-Year to 10-Year Housing Bubble

The common link between less affordable payment options for homes, cars, and business operations is due to the Federal Reserve’s aggressive interest rate hike campaign which began in early 2022. Things may improve for the overall economy if and when the Federal Reserve suddenly pivots or changes direction and starts slashing rates again to stimulate the economy.

Historically, our housing and economic cycles tend to last somewhere between seven and 10 years. Almost all housing boom and bust cycles are directly related to the available supply of money that’s either affordable or not. When rates are near historic lows like we’ve seen for most of the past 10 years, then home prices are more likely to rise.

Conversely, rising rates eventually may cause home prices to stagnate or fall. Yet, we may not see home prices fall for months or years depending upon the available supply of homes and the demand for housing.

In past housing cycles when the Federal Reserve promoted aggressive rate hikes like the 17 rate increases between June 2004 and June 2006, there was a one to two year lag effect before home prices suddenly started to fall. It still took about five years for the home prices to bottom out before the Fed’s aggressive rate cuts down near 0% acted like the fuel for the biggest home appreciation cycle in U.S. history.

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Our previous housing bubble burst lasted about five years between 2008 and 2013. Today, we’re 10 years past the previous housing bottom here in 2023.

If you’re thinking about selling or refinancing (cash-out or reverse mortgages) at the potential peak of the latest housing cycle, then you might be seeing the highest peak prices sooner rather than later. If you’re thinking about buying near the bottom of the next housing downturn, then keep a close eye on unemployment numbers, home listing inventory supplies, days on market averages for home listings, distressed mortgage or foreclosure numbers, and mortgage rate directional trends.

The key to success with buying and selling real estate is partly tied to a combination of basic economics, good or bad luck, personal financial and family situations, and timing. Please keep researching as many data trends as possible so that you make the most informed decision as either a buyer, seller, landlord, or tenant to minimize your downside risks and to maximize your potential gains at the same time.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Credit Fears – Fight, Flight, or Freeze

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By Rick Tobin

What you avoid in life controls you, so you must confront it or attack it head on for the pain and fear to dissipate.

At our true core, we have just two root emotions – love and fear. All other feelings are just other sides or aspects of love (compassion, generosity, trust, empathy, etc.) and fear (guilt, shame, anger, envy, greed, etc.). As it relates to money, most people quickly react with fear when making financial decisions with a “fight-or-flight” type of fearful reaction.

Many people, sadly, freeze up with “deer-in-the-headlights” type of looks and do nothing until it’s too late. If so, the months or years of stress holds them back like an anchor and the financial trauma may continue to worsen.

Fight: Medical bills and divorce are the two main causes of financial insolvency and bankruptcy here in the US. Many times, the main argument point between once loving spouses is about household debt.

Flight: The most common reaction is to avoid the debt anchor topic partly by way of seeking out addictions (drugs, booze, excessive spending) to numb our emotions and not to think about it too much. In the short term, it may be helpful. However, it can crush you emotionally, physically, and financially in the long term.

Freeze: The proverbial “deer-in-the-headlights” is perhaps the most destructive reaction of them all. While being frozen with fear, the oncoming figurative car or train in the tunnel may eventually run you over and cause a heart attack, stroke, horrific addictions, broken relationships, or suicidal tendencies. At the same time, the maxed out credit card lenders may later start a credit freeze on the person’s account or drop their balances down to near zero.

Be Proactive, Not Reactive

Our nation is built on the issuance of credit and debt. Many times, the debt like seen with mortgages later helps us create the bulk of our net worth with increased equity gains in our real estate holdings. As such, mortgage debt can be viewed as a more positive type of debt than credit cards with an APR (Annual Percentage Rate) which can be as high as 25% to 35%+ after factoring in annual fees.

First and foremost, please write down your true monthly budget if you’re interested in reducing your debt and increasing your overall net income at the same time. Most people may think that they’re spending $3,000 per month when they’re more likely spending more than $5,000 while living off of their credit cards.

While rates have risen at a fast pace for mortgages and credit cards, payday and pawn shop loans can vary between a 300% and 500% APR while making mortgage and credit card rates seem incredibly cheap by comparison.

Between 2006 and 2014 during the depths of the Credit Crisis, there were 10 million Americans who lost their homes to foreclosure over this 8-year span. Within just a few months in 2020 (March to May), we saw almost 50% of that 10 million foreclosure number with at least 4.7 million mortgages delinquencies. However due to the pandemic designation moratoriums, a near historically low percentage of delinquent mortgages had foreclosure filings. At some point, lenders and mortgage loan servicing companies will accelerate their foreclosure filings.

To Refinance Consumer Debt or Not

A high percentage of homeowners and real estate investors these days are equity rich in their homes while cash poor. In addition, they may be paying the highest amount of monthly debt ever in their entire life partly since we’re truly facing the highest inflation rates ever in our nation’s history and the most unaffordable housing market for both buying and leasing.

A recent small business owner survey completed by Alignable that was published on August 31, 2023 was truly shocking about how far that small business income has fallen. The survey found that a whopping 50% of surveyed small business owners responded that they are only making half or less of what they were earning prior to the pandemic declaration back in March 2020. Please support your local small businesses more so than the global corporations so that they can remain in business.

To simplify, I will just focus on the monthly payments and not the overall consumer debt principal amount which may be close to $200,000 combined. In this example, the borrower only has two months’ worth of cash reserves near $9,500 in liquid funds at his or her bank.

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Let’s quickly look at a fictional borrower with a $400,000 mortgage and a California home valued at $1,000,000:

  • $400,000 – 1st mortgage at a 3% rate: $1,686/month (not including taxes and insurance)
  • Student loan debt: $900/mo.
  • Automobile loan: $1,020/mo.
  • Monthly credit card payments: $600/mo.
  • Unsecured small business loan: $500/mo.
  • Total monthly payments: $4,706/mo.

The borrower not only needs to reduce their household’s monthly expenses, they also need to replenish their savings so that they don’t run out of cash. Without money on hand, they might default on their mortgage, credit cards, automobile loans, student loans, and debt and lose their hard-earned equity in their home to foreclosure.

The new mortgage refinance option offered to the homeowner with or without full income verification might be near a 70% loan-to-value (LTV) in this fictional example with a fictional lender. If the home does appraise at $1 million dollars, this would equal a new $700,000 cash-out loan.

The client is focused on lowering monthly payments, so he selects a shorter term fixed rate mortgage that’s fixed for 7 or 10 years before converting to an adjustable rate mortgage. This same loan allows much lower interest-only payments at 7% (8.25% APR – all rates are subject to change).

Out of this new cash out refinance, the client’s new $700,000 loan may pay off all of their household’s monthly debt and add another $100,000 in cash to their savings accounts. With a new shorter term interest-only rate at 7%, the monthly payment may be near $4,083. When comparing the previous monthly payment debts of $4,706, it’s $623 per month less and provides potentially increased mortgage interest tax deductions at the same time. All other consumer debt balances are now at ZERO.

The 7-Year Mortgage Average

Homeowners and investors may choose to pay off more expensive consumer debt with a cash-out refinance by way of a new 1st, 2nd, or reverse mortgage with no monthly payments. Here are some of my previous article links about how to convert home equity to cash and the benefits of reverse mortgages with no monthly payment obligations: Converting Home Equity to Cash and Moving Forward with Reverse Mortgages.

The average length of time that a property owner holds their mortgage loan before later selling or refinancing is seven years. Property owners also own their properties on average about seven years as well. If so, a 7-year fixed mortgage rate that’s interest-only with much lower monthly payments might be an exceptional option for many borrowers.

With a 30-year fixed rate mortgage, the principal amount doesn’t really begin to reduce or amortize down until after the same 7th year term anyway. Or, your original principal balance on your mortgage on the day you closed escrow may be very similar to the same balance amount seven years later. This is partly why more borrowers are choosing shorter fixed rate terms of 3, 5, 7, or 10 years that may also have interest-only payment options that are much lower than a fully amortizing mortgage which includes both principal and interest.

The monthly payments on an interest-only shorter-term mortgage can be similar to a 30-year fixed mortgage rate that’s almost equivalent to a rate of 2% lower than some of the best 30-year fixed rates today.

At a later date, if and when the housing market bubble pops again, the Federal Reserve may suddenly and very aggressively cut rates back down to near historical lows once again after the economy possibly takes a turn for the worse like following 2008.

Credit and Debt – Worldwide, US, & Consumers

The U.S., with 4.5% of the world’s population, creates 25.5% of the world’s gross domestic product (GDP).

2023 Equity, Money, and Debt Data

* Global Derivatives: $3,000+ trillion
* Forex (Foreign Exchange Currency Market): $2.409 quadrillion ($7.5 trillion traded daily)
* US bond market cap: $52.9 trillion
* US stock market cap: $46 trillion
* U.S. federal debt: $32.6 trillion (August ’23)
* All US mortgage debt combined: $19.4. trillion (1st quarter ’23)

Housing and consumer debt trends:

* 140 million housing units in America.
* 64.8% of homes have a mortgage (96,320,000).
* 31.2% of homes have no mortgage (43,680,000).
* 1.7 million housing units under construction.
* 44 million rental units across the nation.
* 80% of retirees own a home while nearly half live near poverty.
* Credit card rates today average 25% as compared to 12% in 2008.
* Today’s 30-year fixed mortgage rates are at a 22-year high.
* U.S. credit card debt – $1.2 trillion
* U.S. auto loans – $1.56 trillion
* U.S. student loans – $1.77 trillion

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Household Income and Mortgage Debt Numbers

* House payment as % of median household income in Los Angeles County: 80.59%
* House payment as % of median household income in California: 65.19%
* Mortgage debt by state (1st quarter 2023): 1. California: $2.3 trillion; 2. Texas: .88 trillion; and 3. Florida: .85 trillion
* California’s total unpaid mortgage debt is almost three times more than Texas with only a 25% larger population base.

Rising Consumer Debt & Imploding Savings

The average credit card balance per U.S. consumer is $5,733, according to CNBC. Back in 2008 when the average credit card rate was 12% near the start of the Credit Crisis, it would take 5 years and 10 months to pay off the balance in full if the borrower paid the minimum monthly payment. If so, the borrower would pay approximately $2,243 in additional interest.
By comparison here in 2023 after a series of rate hikes, the average credit card rate is 23.99%. It will now take upwards of 24 years to pay off the debt in full with minimum monthly payments while accruing more than $27,337 in additional interest over and above the original $5,733 balance.

Crashing car market: The average car loan balance in the U.S. as of the 1st quarter of 2023 was 125% loan-to-value (LTV), as per TransUnion. The average new car price today is about $48,000. The average new car payment is $731 per month and the average used car payment is $551 per month. The average new car rate is now 9.48%, which is a multi-decade high.

The cumulative excess U.S. household savings dollar amount fell from a peak high of $2.1 trillion in August 2021 down to $91 billion in June 2023, as provided by JP Morgan Macro Research. The average U.S. homeowner has the bulk of their net worth tied up as untapped equity in their primary home.

There’s an estimated $10.5 trillion dollars’ worth of tappable equity in residential properties nationwide. The average homeowner has almost $200,000 in home equity.

Skyrocketing Energy & Inflation

We have a petrodollar (“oil for dollars”) currency system. As our oil supply declines, so does the purchasing power of our petrodollar while inflation skyrockets right alongside interest rates. Generally, energy costs are the root cause of core inflation trends, so keep a close eye on this developing story.

Oil prices per barrel are near $87 for WTI (West Texas Intermediate). By comparison in July 2008 shortly before the financial system almost imploded in late September 2008, oil prices were trading as high as $147 per barrel. As our oil supply continues to be reduced here in the US and elsewhere in Saudi Arabia, Russia, and Venezuela, demand may exceed supply and prices may rise up even more.

There are rumors of oil prices rising again very soon well above $100 per barrel. If so, the one investment that has consistently benefited from rising energy and overall inflation trends is real estate.

Buying Power of $1 (1933 – 2023):

1933: $1.00
1943: $0.75
1953: $0.49
1963: $0.42
1973: $0.29
1983: $0.13
1993: $0.09
2003: $0.07
2023: $0.04

Sadly, a $1 back in 1933 would have the same purchasing power as 4 cents today.

Are Home Prices Peaking or Declining?

The average mortgage rate for existing mortgage loans across the nation is about 3.6%. If so, this is under half of the most recent average 30-year fixed mortgage rates. Yet, today’s higher 30-year fixed mortgage rates are only about 30% as high as the average credit card rate near 25%.

For the first time in U.S. history, median new home sale prices are about to fall below existing home prices. With a record 1.7 million new housing units being built this year, home builders must slash prices and offer significant amounts of seller credits to the buyers to sell their properties. Unlike the millions of older distressed shadow inventory that owners, lenders, and loan servicing companies can attempt to keep postponing for sale, builders have to offer these completed homes for sale as soon as the Certificate of Occupancy is received.

In the near future, home values may start to fall yet again like in past housing bubble bursts. A recent video provided by the brilliant folks at the National Real Estate Post makes the claim that today’s housing bubble may potentially be more than twice as large as the previous housing bubble near the peak highs in 2007 and 2008. If so, home prices may be peaking in certain regions if you’re thinking about selling or refinancing at the top of the market.

No matter what you decide to do with real estate and with life, the most important step is the very first one because action is much better than inaction.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Top 10 Housing, Financial, and Government Trends

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By Rick Tobin

The 2023 year continues to be one of the most interesting, perplexing, and challenging years that many of us have ever seen. From my perspective, there has never been a year like this year to compare it to as it relates specifically to housing, finance, investments, insurance, and to our federal government.

The only constant in life is change. Remember, if you always do what you’ve always done, you will always get what you’ve always gotten. As such, please be flexible and ever-changing as needed to minimize your downside risks and to maximize your financial gains.

Let’s take a look next at my Top 10 topic points that I will be sharing and discussing with my So-Cal Real Estate Investors group this month:

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1. Credit downgrades for the US, Fannie Mae, and Freddie Mac:

The Fitch credit rating agency just downgraded our federal government and the two largest secondary market investors for 70% of all mortgages named Fannie Mae and Freddie Mac, which have both been under government control since the fall of 2008 when they both almost imploded. The new credit rating is AA+ for all three entities after falling from the highest AAA credit rating.

As a result, the borrowing costs will likely increase while moving mortgage rates higher along with the 10-year Treasury yield which is inverse to the 10-year Treasury bond price like a seesaw. All 30-year fixed mortgage rates are tied to the 10-year Treasury yield directions, not to the fed funds rate which affects other consumer debts like credit cards, school loans, and car loans. Don’t be surprised if we soon see double-digit mortgage rates above 10%. The all-time record high 30-year fixed mortgage rate reached 18.6% in October 1981, by comparison.

Both Fannie Mae and Freddie Mac are highly leveraged with derivatives (a complex financial and insurance hybrid instrument) which can cause them to default on their investments due to triggering factors like rising distressed mortgage or foreclosure rates. If so, they may be forced to sell off some of their tens of millions of mortgages held in their portfolio to deep-pocketed corporations like BlackRock, Vanguard (largest BlackRock shareholder), and Blackstone (a BlackRock spinoff that’s also the world’s largest commercial real estate owner).

2. Why did mortgage rates reach all-time record lows in recent years?

Answer: The Federal Reserve created the Quantitative Easing (QE) program in November 2008 shortly after the US and global financial markets almost collapsed on September 29, 2008. The QE program is a fancy name for creating money out of thin air to buy stocks, bonds, and mortgages so that asset values don’t fall.

Back in 1961, President John F. Kennedy helped back the Operation Twist monetary policy program in an attempt to drive down long-term interest rates while buying and selling gold and gold-backed dollars at the same time. The “twist” name was partly derived from the Chubby Checker Twist dance craze.

In 2011, Operation Twist was brought back on a larger scale as both short-term and long-term bonds were simultaneously purchased and sold to artificially suppress the 10-year Treasury yield while driving the 30-year mortgage rate down to as low as the 2% rate ranges to boost home sales and prices. In recent years, the Federal Reserve became a net seller of assets purchased through Quantitative Easing. Due to fewer buyers for our debt, the lowered demand pushes the price down while boosting the 10-year Treasury yield. When bond prices fall, yields and corresponding 30-year fixed mortgage rates and borrowing costs rise.

The Fed’s record-setting rate hikes makes the borrowing costs for the US Treasury much higher as well. We’re on pace for $1 trillion dollars per year in interest payments made on the all-time record federal debt.

3. Insurance costs continue to skyrocket:

About 22% of homeowner insurance companies have completely stopped offering homeowners insurance here in California. As shared before, more than 70% of residential properties in California have a mortgage that requires active homeowners or landlord insurance. If not, it can trigger a foreclosure filing because the lender or mortgage loan servicing company requires homeowners insurance that lists them as a “named insured” in the event of a fire, flood, or some other type of property damage.

State Farm, Farmers, AIG, Chubb Geico, and others are just some of the insurance companies that have decreased or completely eliminated the issuing of new or renewal policies in California, Florida, and elsewhere. The reinsurance market is freezing up for insurance carriers, which is somewhat akin to their version of Fannie Mae, Freddie Mac, or secondary market derivatives investors who replenish capital for banks or insurance companies.

Due to fewer investors for riskier insurance in the reinsurance marketplace and fewer insurance companies willing to write new policies, the prices charged for new borrowers has absolutely skyrocketed. For example, a homeowner in St. Augustine, Florida (America’s first city) saw her annual insurance premiums for her 120-year old home rise from $8,800 to $36,000.

4. Housing and mortgage trends nationwide:

  • There are 140 million housing units in America.
  • 64.8% of homes have a mortgage (96,320,000).
  • 31.2% of homes have no mortgage (43,680,000).
  • There are almost one million Airbnb and VRBO rental units.
  • There are currently 1.7 million housing units in America under construction.
  • There are 44 million rental units across the nation.
  • 80% of retirees own a home while almost half live near poverty.
  • Retirees (Baby Boomers and older Generation X) own 55.58% of the nation’s housing stock (55.8% of 140 million housing units = 77,812,000; 44% of these units have a mortgage or 34,237,280 properties). If half of these property owners are in distress, this could equal 17,118,640 properties, which might be equal to almost 39% of the rental market.
  • The IRS continues to remove family transfer benefits by way of trusts and other entities that may rapidly increase the amount of capital gains taxes which the heirs of older American property owners must pay following death. If so, it may accelerate the number of future listings so that heirs can pay their higher taxes.

5. Homeowner bailout options:

Forbearance agreements: The lender agrees to postpone or delay their foreclosure actions with the delinquent borrower. Sometimes, these foreclosure postponements may last months or years.

Deferment: The lender agrees with the borrower’s request to delay or defer their delinquent payments until a later date. In some cases, the late payments and penalties are added years later when the loan may become all due and payable.

Loan modification: The lender or mortgage loan service company agrees to reduce the existing interest rate and/or monthly payment amount so that the mortgage is more affordable as a way to avoid foreclosure.

Loan repayment plan: Both the lender and borrower mutually agree to add unpaid delinquent payments and late fees to the existing mortgage which may slightly increase their monthly payments or increase the loan term to give the borrower more time.

Reinstatement: After the borrower and lender agree to modify the monthly payments to avoid foreclosure, the loan is removed from foreclosure status and reinstated in “good standing.”

Seller-financed sales: If the homeowner needs a quick sale to a new buyer who can effectively take over his monthly mortgage payments and give the seller some much needed cash, the seller may consider creating some type of wraparound mortgage {contract for deed or all-inclusive trust deed (AITD)} or “subject-to” property transfer in which the buyer receives the deed to the property that is “subject-to” the existing mortgage still secured by the property.

Short sale: If and when the mortgage debt is greater than the current market value for the property (aka “upside-down” mortgage), the homeowner may consider contacting an experienced local Realtor who can help negotiate a discounted mortgage payoff with the lender when they find a qualified new buyer.

“Cash for Keys”: During the depths of the last major national foreclosure crisis between 2009 and 2013 especially, lenders were offering delinquent homeowners upwards of several thousand to $25,000 + to vacate the home while not damaging it or removing appliances.

Bankruptcy: For homeowners who are days away from losing their home at the final lender auction sale, they may consider filing Chapter 7 (complete liquidation of most debts) or Chapter 13 bankruptcy (a longer term workout payment plan).

6. The collapsing automobile lending sector: There are now 20,000 car repossessions per day and 600,000 repos per month.

  • Car insurance has increased almost 20% over the past year.
  • In 2019, the average car payment was near $350 – $375. Today, it’s closer to $730 per month. Yes, car payments have doubled in just four years as the purchasing power of the dollar rapidly declines.
  • The average cost of full coverage car insurance in Florida is now $300 per month. In 2021, Florida averaged more than 1,100 car accidents per day with 449 of these accidents involving alleged injuries which is a major factor for skyrocketing insurance costs there and elsewhere.
  • 85% of new cars are financed with upwards of 125% loan-to-value (LTV) being fairly common partly to cover taxes, tags, warranties, and other costs.
  • 1-in-6 Americans pay more than $1,000 per month for car payments. After adding insurance ($200 to $300+), gasoline ($200 – $300+), oil changes, and other maintenance expenses to the monthly payment, many people are paying upwards of 20% to 40%+ of their gross monthly income just for their car while paying another 40% to 50%+ per month for housing. (Partial source: First Notebook)

The choice between paying a mortgage or rent payment and making a car payment on time becomes more challenging as the economy continues to weaken.

7. Commercial real estate trends:

Multifamily apartment buildings have fallen the most out of all commercial property asset classes with a -13.8% year-over-year price drop as of May 2023. This is almost double the annual percentage losses for office buildings.

Right now, we’ve never had more residential housing units under construction at the same time with upwards of 1.7 million units, which includes a high percentage of new apartment units. The wave of new housing units that later hit the market for sale or lease may drive down sales and rental prices for other nearby properties.

Approximately 22% of all commercial mortgages nationwide were non-recourse loans as of 2021, per the Federal Reserve. A “non-recourse” loan makes it easier for the borrower to walk away and avoid deficiency judgments.

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8. Estimated U.S. Cost of Living:

Food – $1,000 per month
Car Payment – $716 per month
Car Insurance – $150 per month
Gas – $200 per month
Cell phone – $100 per month
Housing – $1,702 (average one-bedroom apartment rent)
Health or Medical Insurance – $500 per month
Utilities and Internet – $150 per month (it’s closer to $500/month in CA)
Student Loans – $300 (monthly payment is 40% below national average)
Credit Cards – $300 (monthly payment is 40% below national average)
—————————–
Total: $5,118 per month
Annual: $61,416

Median Individual Gross Income: $34,987
Median Individual Gross Losses (taxes not included): – $26,429 (negative)
Median Household Income: $80,440 (two or more income sources)

How to set aside money each year: If you break down $10,000 into a daily savings goal, you would need to save about $27 per day to reach $10,000 in one year. To save $20,000 per year, reduce your monthly expenses by $54 per day.

9. Credit card debt:

Unpaid credit card debt recently surpassed $1 trillion for the first time ever and rates and fees reached all-time record highs this year.

“A credit card borrower with the average $5,733 credit card balance at 20.55% will be in debt for over 17 years if they make just the minimum payments every month, according to Rossman. They will also pay about $8,400 in interest on top of the $5,733 balance, he said.” – CNBC

Sadly, a higher percentage of credit card rates today are closer to 25% to 30%+, so it will take much longer to pay the debt off.

Paying off credit card debt: 1. Opt for zero percent balance transfers; 2. Create a debt payoff plan; 3. Seek professional help; 4. Keep saving, if possible; and 5. Consider filing for bankruptcy protection (as low as $200 online for do-it-yourself plans). If so, I will teach you how to quickly rebuild your credit after the Chapter 7 bankruptcy discharge.

10. Finding distressed properties:

There are millions of distressed homes in probably just California alone. Please look for unkept front lawns, FSBOs (For Sale by Owner), and seek out distressed property lists that may include mortgage, homeowners, and property tax lien lates.

Network with groups like ours and share business cards with your sphere of influence which include details about how you offer quick cash for homes. If you have an exceptional deal but no cash, please bring the deals to our next meetings or email them to me.

Our So-Cal Real Estate Investors group can be found at www.socalrealestateclub.com and my brand new Learn Real Estate group is now on Facebook. Remember, out of chaos comes opportunity!

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

How Raising Your Business Credit Score Can Help Your Company

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By Vista Capital Solutions

You probably remember using your personal credit lines to take out the initial loans needed to open your business. Before starting a company, you don’t have any business credit. Even after a few years, it is possible that your company still won’t have established business credit. If you don’t actually work on your business score, then you may never have this kind of credit. Discovering ways to beef up your business credit score can help your company realize a whole host of untapped opportunities.

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Repair Your Personal Credit

Your personal credit score and business credit score are two totally different entities. However, the first factor in establishing a business score is maintaining a decent personal credit score. Before you can start building business credit, you should focus on any necessary personal credit repair first. If you find that your individual score needs improving, there are some things you can do. Any derogatory marks can keep your score down, so try to dispute these items with each of the different credit bureaus. If you’re successfully able to remove any of these negative marks, your score will increase as a result.

Build Your Business Credit

Although the first step toward building business credit is focusing on your personal credit repair, there are additional measures you should consider. One way to start having good business credit is by paying your bills as early as possible. This factor is very important to the bureaus that determine business scores. Checking with these bureaus can help you understand other factors that make up your score, so you don’t waste time with unnecessary actions.

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Understand the Benefits of Good Credit

Before you go through the necessary credit repair to begin building your business score, you want to understand why this type of credit is significant. Not all companies have established business credit, and it may limit future growth in many ways. A good business credit score makes you eligible for financing opportunities that can dramatically expand your company. A good business score can make or break a deal, especially when purchasing or leasing commercial real estate. If you want to grow your business and make exponential profits, you should pay attention to building business credit.

There are many benefits to establishing a decent business credit score. Your personal credit will improve, your business will grow, and you will realize many new opportunities as a result of your hard work.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

The Lock-In Effect and Keys to Success

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By Rick Tobin

There sure seems to be more bad news than good news these days about the state of real estate. During turbulent times like we’ve all seen in recent years, the most common first human reaction is usually denial or acting somewhat like a locked up “prisoner” with a frozen “deer-in-the-headlights” look in our eyes. Yet, this is exactly when we should stay focused on the potential opportunities more so than the temporary obstacles standing in our way.

As foreclosure filings continue to increase to an average near 50% higher than the pre-pandemic years (2019 and earlier), struggling homeowners and landlords will need to focus on solutions such as loan modifications, forbearance agreements, short sales, and quick sales for cash. As an investor in the near future, you will likely find more deals readily available to choose from if you know where and how to look for them.

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Some metropolitan regions like Houston have 56% higher foreclosure rates. Other places like Minneapolis/St. Paul saw +106% foreclosure rates in March. Nashville was +35% higher and Phoenix + 33% higher in May; Rhode Island was up 32% in May.

During the depths of the Credit Crisis / Great Financial Recession years between 2008 and 2013, California was hit the hardest with a -41% home price drop average from peak to trough. Nevada, Arizona, and Florida weren’t too far behind.

Some California home prices have risen as much as +41% over a period of just 18 to 24 months in recent years, so an equivalent -41% price drop is easier to imagine as some values may drop back towards 2021 levels.

The typical home today is about $80,000 higher than it was just two years ago. The average monthly rent payment today is more than $1,000 higher than it was in 2020. Middle-income first-time buyers are unable to afford 70% of homes. As California unemployment rates continue to rise at a faster pace than most other states (Big Tech layoffs, especially), it will be more challenging to continue making mortgage payments.

Rental Market Trends

Today, there are 65% more active short-term rental listings on Airbnb and VRBO (965,000+) than all homes listed for sale nationally (554,000+), as per Realtor.com and other sources. At some point, the vacant short-term rentals will become listed homes for sale or distressed properties due to higher vacancy rates.

Ironically, the founders of Airbnb originally used air mattresses to cover their own San Francisco apartment unit’s rent. Eventually, air bubbles go pop one way or another.

Rent Increases

The following metro areas have experienced the greatest year-over-year rental price percentage increases through May 2023:
Providence-Warwick, RI-MA (+17.44 percent)
Kansas City, MO (+13.20 percent)
Minneapolis-St. Paul-Bloomington, MN-WI (+8.97 percent)
Raleigh-Cary, NC (+8.05 percent)
Charlotte-Concord-Gastonia, NC-SC (+7.65 percent)
San Jose-Sunnyvale-Santa Clara, CA (+7.59 percent)
Hartford-East Hartford-Middletown, CT (+7.47 percent)
Columbus, OH (+6.81 percent)
Los Angeles-Long Beach-Anaheim, CA (+6.20 percent)
Riverside-San Bernardino-Ontario, CA (+5.97 percent)

Rent Decreases

The following metro areas have experienced the largest year-over-year rental price percentage decreases through May 2023:
Austin-Round Rock-Georgetown, TX (-20.76 percent)
New Orleans-Metairie, LA (-20.42 percent)
Las Vegas-Henderson-Paradise, NV (-10.57 percent)
Houston-The Woodlands-Sugar Land, TX (-8.42 percent)
Seattle-Tacoma-Bellevue, WA (-8.28 percent)
Cincinnati, OH-KY-IN (-6.49 percent)
Phoenix-Mesa-Chandler, AZ (-6.46 percent)
Birmingham-Hoover, AL (-5.98 percent)
Memphis, TN-MS-AR (-4.85 percent)
Oklahoma City, OK (-4.44 percent)
Source: Rent.com

Multifamily Trends in Southern California

Sales and prices for multifamily apartment buildings have started to really fall in Los Angeles and other metropolitan regions across the nation. Specifically within Los Angeles, the number of units fell 11% in the first quarter of 2023 as compared with the previous fourth quarter in 2022. More shockingly, multifamily apartment building prices collapsed by -37.5% year-over-year as per a report shared by NAI Capital.

During the same first quarter time period, the average sales price per apartment unit dropped by 18.4%. One major factor for the falling price and sales volume numbers for Los Angeles County was directly related to the Measure ULA “mansion tax” that affected both luxury homes and commercial real estate properties priced above $5 million as of April 1st.

While $5 million may seem pricey for a luxury home in Los Angeles or elsewhere, the same $5 million dollar price tag for a rather small multifamily apartment building is much more common.

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Strangely, both vacancy rates and apartment rents continue to rise together at the same time in many parts of Los Angeles and elsewhere. Average rents rose to $2,156 per apartment unit in Los Angeles, a +1.9% year-over-year increase.

Some regions of Los Angeles had more negative rent, sales price, and vacancy trends. For example, the first quarter numbers for these Los Angeles multifamily submarkets were more negative than positive and were as follows:

  • San Fernando Valley and Santa Clarita Valley: The average multifamily sale price per unit fell by -35.9% year-over-year while the vacancy rates increased by +22%.
  • San Gabriel Valley: The average sales price per unit decreased by -20.3% while vacancy rates skyrocketed by +32.2%.
  • L.A. Westside: The average sales price per unit fell by -9.5% while vacancy rates increased by +10.7%.

Historically, rising vacancy rates and rental payment trends are usually inverse to one another like a seesaw with payments falling as vacancy rates rise. We shall see how long this trend lasts.

A very high number of landlords haven’t collected a rental payment for two or three years either, especially in Los Angeles County. When will the foreclosure and tenant eviction rates really begin to accelerate and adversely impact both tenants and landlords?

The Locked-In Homeowner and Unlocked Treasures

There are upwards of 16 to 20 million vacant or distressed properties across the nation. Additionally, there are millions of distressed FHA mortgages alone. Many homeowners haven’t made a mortgage payment for more than three years just like so many tenants.

Loan modifications, forbearance, and loan forgiveness plans continue at near record paces across the nation. Lenders are not filing foreclosure as aggressively as they would have in years past, partly due to ongoing pandemic restrictions in place. This is a major reason why the national home listing inventory supply is so low.

Another reason why there are so few homes listed for sale is because upwards of 92% of homeowners with a mortgage have an existing rate at or below 6%, as per a study released by Redfin. Let’s take a quick look below at the fixed rate estimates for homeowners as of the first quarter:

  • 91.8% of mortgaged homeowners have rates below 6%.
  • 82.4% of homeowners have rates below 5%.
  • 62% of homeowners have rates below 4%.
  • 23.5% of homeowners have rates below 3%.

It can be rather challenging for a homeowner to consider losing their 6%, 5%, 4%, 3%, or even 2% fixed rate mortgage with a 30-year term and move to another home with a rate closer to 7% or 8%. As a result, it’s referred to as the “lock-in effect” because so many homeowners don’t want to lose their near record rate locks.

The market may change for the better or worse later this year depending upon a few factors such as follows:

First, will future unemployment trends improve or get worse. A loss of income is generally the #1 reason why someone loses their home to foreclosure.

Second, will lenders and loan service companies start to file foreclosure notices at a much faster pace than in recent years?

Third, will tenant protections in place be eased up or tightened? Most landlords are small investors who may be fortunate to own just one or two rental properties. After months or years of no rent collected, the landlords may be at risk of losing their rentals and primary home to foreclosure.

Your key to future success that unlocks your potential as either a homeowner, investor, or tenant is to focus on the positives and negatives while minimizing your risk and maximizing your gains. With the right mindset and guidance, it will be akin to a literal key that unlocks a treasure chest!!!

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

How Can Someone With Bad Credit Obtain a Hard Money Bridge Loan?

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By Michael Mikhail 

You only have the traditional institutions (banks), mortgage companies, and direct private money lenders as possibilities if you’re a borrower seeking for finance for your investment property.

However, many of the conventional finance sources would not be good choices if you are a real estate investor with poor credit. The majority of banks and mortgage firms don’t have mortgage loan programs for those with bad credit. Fortunately, a Hard Money Bridge Loan is a wonderful choice to get funds and even raise your credit score in the world of private money lenders.

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There are so many loans available, and a lot of them substantially factor a person’s credit score into whether or not they will grant them a loan. Thankfully, Hard Money Loans are an exception to this rule.

What conditions must be met to qualify for a hard money bridge loan?

The criteria for a hard money loan are your assets, not your FICO score. There is no required minimum FICO score for the borrower, but you must still furnish your credit score. Hard money lenders instead concentrate on the asset’s Loan-to-Value (LTV). There is no need to be concerned about bankruptcies, foreclosures, collections, etc. because there isn’t any underwriting involved in these loans either. They are typically limited to 75% LTV or below, with rates between 9.00% and 11.99%, and are always bridge loans for 12 to 24 months. True hard money loans never come with terms.

As was already mentioned, the emphasis is on equity and assets rather than credit. If there is enough equity in the property and the applicant can repay the loan, it may be possible to overlook the borrower’s terrible credit, prior bankruptcies and foreclosures. The property’s value is given additional attention. In comparison to typical loans, the financial checks for these loans are less thorough and take less time. Hard money lenders are exempt from many of the regulations that more conventional bank loan lenders must follow. As a result, a Hard Money Bridge Loan can be authorized considerably more quickly. Stratton Equities, the top Nationwide Direct Hard Money and NON-QM Lender, may fund a Hard Money Loan in as little as two weeks, when a standard bank loan might take 45–90 days.

There is more risk being assumed by the lender because of the short turnaround time and less stringent surface-level financial standards. Therefore, compared to regular loans, the repayment terms are much shorter. A Hard Money Bridge Loan must be repaid in a matter of years, as opposed to a standard loan, which may have a repayment period of around 20 to 30 years. Therefore, if a borrower has poor credit, the lender is taking a bigger risk and needs the money repaid faster.

How Can a Private Lender Improve Your Credit Score?

A real Hard Money Bridge Loan does not have a minimum credit score requirement and can even raise your score, in contrast to a term loan, which calls for a minimum credit score of 650.

If you are a real estate investor and you have a substantial amount of equity in your investment property (more than 50%), you may be able to use a hard money bridge loan to withdraw the funds and use them to settle debts or repair your credit.

Return to the private money lender and submit an application for a term loan after your credit score is more than 650. (ex. no documentation loan).

How can you submit a Bridge Loan application?

Due to predatory lending and expensive rules, hard money bridge loans are only permitted for investment properties. You cannot obtain a Hard Money Bridge Loan if you are shopping for an owner-occupied property.

Due to the substantial risks, some states have non-judicial foreclosure legislation as well. Due to the protection provided by these laws, lenders feel more secure providing these high-risk loans because they are not traded on the secondary market and the lender keeps the note. Additionally, rural communities are not eligible for these loans if they have poor FICO ratings.

If you have poor credit, get in touch with Stratton Equities to find out your available loan alternatives and which one will suit you the most.

Our goal at Stratton Equities is to make private mortgage lending simple, effective, and stress-free. With a straightforward three-step process that includes pre-approval, processing & underwriting, and funding, we assist other seasoned investors, borrowers, and experts in the mortgage and real estate industries in succeeding.

To find out if you qualify for loan pre-qualification, call us at 800-962-6613, send us an email at [email protected], or submit an application right away by clicking here!

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Michael Mikhail, CEO Stratton Equities

Michael Mikhail is the Founder and CEO of Stratton Equities, the nation’s leading hard money-lender to national real estate investors, with the largest variety of mortgage loans and programs nationwide.

Having launched Stratton Equities in early 2017, Michael has always been an entrepreneur and innovator in the real estate market, purchasing his first home at 19.

A serial entrepreneur with a foresight for business opportunities, Michael had a slew of small businesses prior to launching Stratton Equities. One of his most prolific ventures was a car wash connected to a gym he was affiliated with in Florida during 2001-2002 while attending college.

It wasn’t until he graduated from Florida State University with a degree in Business, that he officially joined the mortgage industry in 2003 and decided to travel to explore his options globally.

After travelling to 19 countries in 5 years, Michael knew two things; he wanted to start his own business and launch it in the United States. He knew that moving back to the states was the best place he could start something small and grow it into something infinite.

In 2017, Michael noticed how the mortgage industry had transformed after the regulations presented from 2008-2012, and knew it was time to set out something on his own, thus creating Stratton Equities.

Under Michael’s leadership, Stratton Equities has grown into one of the biggest leaders in the Mortgage and Real Estate industry across genres and platforms.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

A 33-to-1 Vacant & Distressed Home-to-Listed Home Ratio

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By Rick Tobin

Why are you just searching for listed properties for sale when the number of distressed, vacant, and “shadow inventory” homes is almost 33 times larger than the national home listing inventory supply?

How is this possible with my 33 number claim? First, upwards of 16 million homes were listed as “vacant” or shadow inventory in the fourth quarter of 2022, as per the U.S. Census Bureau, National Association of Realtors (NAR), and other groups. A vacant home can be defined as a vacation home, unsold new home building inventory (near record levels of new single-family homes and multifamily apartment buildings being built in 2023), distressed or pre-foreclosure properties, or homes held by billion-dollar corporations like BlackRock, Blackstone, or State Street for the long-term that just sit there with no intent to rent it out at present.

Second, there are at least a few million distressed mortgages (FHA loans, especially) currently in forbearance agreements in order to delay the lender’s foreclosure filing actions to bring the total to more than 18.5 million properties. Frankly, I think that the number is closer to 20 million after counting VA, conforming, non-QM, and private money loans, but we’ll just focus on the 18.5 million vacant or distressed home number.

Since 1934, FHA (Federal Housing Administration) has insured more than 40 million loans nationwide. Today, a relatively high percentage of homebuyers still rely upon FHA to purchase their homes partly due to the much lower interest rates and easier loan qualification guidelines such as loan programs which allow FICO credit scores as low as 500, debt-to-income (DTI) ratios up to 50% or higher, and loan-to-value (LTV) options near 96.5% to 100% LTV.

As of March 2023, the national home listing inventory was listed at 562,565 by data provided by the Federal Reserve Economic Data and the NAR. Let’s do the math as follows:

18.5 million distressed or vacant homes / 562,565 listed homes = 32.885 times

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Distressed FHA Loans & Continued Forbearance Extensions

There are three to four times as many delinquent FHA mortgage loans nationwide as compared to the entire national home listing inventory with somewhere near at least a few million distressed FHA loans.

February 8, 2023: Today, the U.S. Department of Housing and Urban Development (HUD) Secretary Marcia L. Fudge announced that, thanks to Federal Housing Administration (FHA) programs, approximately 2 million homeowners with FHA mortgages were able to stay in their homes from the beginning of the COVID-19 pandemic in March 2020 through December 2022 – when doing so was often a matter of life and death. During this period of time amid the pandemic, FHA borrowers whose ability to make their mortgage payments was impaired by the pandemic were able to obtain either a COVID-19 forbearance or a more permanent solution such as a loan modification that allowed them to avoid foreclosure.
Source: HUD Secretary Announces Major Milestone of Assisting Nearly 2 Million Homeowners Stay in their Homes

With a few million distressed FHA loans that they admit to and is probably undercounted, it’s no wonder why the federal government wants to keep offering FHA forbearance extensions.

Details of FHA’s COVID-19 Forbearance

Important information about FHA’s COVID-19 Forbearance:

To be eligible for the COVID-19 Forbearance or forbearance extension in the table above, you must request this relief from your servicer on or before May 31, 2023.

You can request a FHA COVID-19 Forbearance for up to 6 months. If needed, an additional 6 month extension may be requested. If you began your initial forbearance on or after October 1, 2021, you are only eligible for the additional 6 months if your initial 6 months forbearance will be exhausted and expires on or before May 31, 2023.

Additional forbearance options may be available to you after May 31, 2023. Your mortgage servicer may provide for a temporary pause or reduce your monthly mortgage payments to allow you time to overcome your financial hardship. An extended forbearance period may be provided to you if you are unemployed and actively seeking employment.

No extra fees, penalties, or interest will be added to your account during the forbearance period.

Source: U.S. Department of Housing and Urban Development (HUD)

There are also a significant number of distressed VA and conforming or conventional loans nationwide which are held by Fannie Mae or Freddie Mac in the secondary market that aren’t really being “officially” counted with the most up to date numbers. FHA and VA mortgage loans have both consistently represented close to 10% each of the annual national funded loan market. As a result, these government-backed or insured loans, which typically average close to 0% to 3.5% down payments for FHA, VA, and conforming, are something to keep a close eye on as the economy continues to soften.

The 40-Year Loan Modification Program for FHA Borrowers

Good news: National mortgage delinquency rates dropped 15% in March 2023 while reaching 2.92%, which was a new all-time record low.

Bad news: Millions of distressed mortgages are not being counted as “delinquent” once they enter forbearance agreements with their lender (FHA loans, especially). The national FHA loan default rate reached 12% in February and will likely continue to rapidly increase. Distressed FHA and VA loan investments are some of the best deals out there because they usually have the lowest mortgage rates that you can take over by way of creative seller-financing techniques.

A forbearance agreement is when the lender or mortgage loan servicing company agrees to postpone or delay their foreclosure actions with the delinquent borrower. Sometimes, these foreclosure postponements may last months or years.

On March 8, 2023, HUD issued their Mortgagee Letter 2023-06 with details described as the “Establishment of the 40-Year Loan Modification Loss Mitigation Option” with a stated purpose noted as “This Mortgagee Letter (ML) establishes the 40-year standalone Loan Modification into FHA COVID-19 Loss Mitigation policies.”

Several mainstream media analysts mistakenly described this new 40-year loan proposal offered by FHA as a purchase loan as well. Yet, this is not correct because it’s only for the refinance of currently distressed 30-year FHA loans into longer 40-year loan terms in order to reduce the monthly payments for borrowers. There is no published word about whether FHA will later consider offering 40-year purchase loans for borrower prospects.

Housing and Family Trends

Real estate is a people business, first and foremost. The #1 most important factor for housing trends is related to population trends and household formations for families especially. Without people, there’s no need for housing regardless of the affordable financing offered.

One of the main reasons why people purchase single-family homes is because they’re trying to either build a growing family or the need to house two or three generations of the family under the same roof. You can’t spell “single-family homes” without family in it.

The U.S. has the highest percentage of one-person households in the entire world. A few years ago, one-person households surpassed all other household formations in Canada.

In 2022, only 24% of U.S. households had at least one child under the age of 18. In 1965, upwards of 42% of households had a child under the age of 18.

The Decline of Family Households

Here are some of the published data numbers from sources such as the U.S. Census Bureau, the National Center for Health Statistics (NCHS), Pew Research, and numerous other data sources in regard to individuals and family structure trends:

  • National overall divorce rate in the USA: 50%+.
  • The California divorce rate is 60%.
  • The Orange County, California divorce rate is 72%.
  • 41% of first marriages nationwide end in divorce.
  • 60% of second marriages end in divorce.
  • 73% of third marriages end in divorce.
  • The average length of a marriage in the U.S. that ends in divorce is 8 years.
  • There is one divorce every 36 seconds in the U.S. on average; 2,400 divorces per day; 16,800 divorces per week; and 800,000 to 900,000 divorces per year.
  • The percentage of American men between the ages of 20 and 39 who are now married has fallen by half (35% of men are married as of 2017) since the early 1970s (70% of men were married).
  • Unmarried parents who live together are more likely to break up than married parents, per the Brookings Institute.
  • Per the CDC in 2016 through at least 2020, U.S. fertility rates were the lowest ever recorded as fewer couples are having children these days. Each consecutive year over the past five or six years reached all-time record lows.
  • 78% of all households in the U.S. contained one married couple in 1950. Today, married households are below 48%.
  • In 2010, the Pew Research Center reported that 44% of Americans polled in the 18-to-29 year old age range believed that “marriage was becoming obsolete.”
  • Divorce rates for people over the age of 50 have doubled between 1990 and 2015, per Pew Research Center.
  • In 1956, roughly 5% of all babies were born to unwed mothers. Between 2008 and 2016, babies born to unwed mothers were closer to the 40% range.
  • Upwards of 50% of children in impoverished regions of the U.S. live in homes without fathers.
  • 46% of children live at home with a mother and father who were in their first marriage together.
  • The average American woman in 1970 had her first child at 21.4 years of age. Today, the woman is near 25.6 years of age.
  • The U.S. has the highest teen pregnancy rate in the industrialized world.
  • More than 50% of children are born to unmarried women under the age of 30.

Saving Equity or Creating Newfound Wealth

What are your options as either a homeowner with an ongoing forbearance agreement in place with your lender, a struggling business owner, a commercial property owner and landlord with incredibly high vacancy rates, or as an investor seeking new opportunities if and when the economy suddenly pivots and we enter a more clearly visible deeper recession? If home values are more likely to be higher today than later this year, is it now a good time to sell? If so, where will be your next destination for a home?

Generally, loss of income is the #1 reason why homeowners lose their homes to lenders or mortgage loan service companies in foreclosure. The #2 reason why homeowners walk away from their home is when the mortgage debt exceeds the current market value and it’s upside-down or underwater. This is when short sale options become more prevalent.

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The real risk associated with homes purchased in recent years is related to the relatively low down payment averages for first-time buyers and others that were leveraged between 96.5% and 100% loan-to-value at the close of escrow. Effectively, these homebuyers were upside-down with negative equity at closing when factoring in the potential 6% to 8% closing costs to resell the homes after paying real estate brokerage commissions, title, escrow or attorney’s fees, transfer taxes, third-party inspection reports, and possible seller credits towards the buyer’s closing costs.

In 2022, first-time homebuyers represented 34% of all home purchases across the nation, as per the NAR. During the fourth quarter of 2022, purchase loans comprised 78.6% of all FHA mortgages funded. With a high percentage of FHA borrowers reported as first-time homebuyers, their average down payments were likely close to 3.5% or below. What happens if home values fall 5%, 10%, or more in value over the next year?

If you’re currently in a distressed mortgage situation as a homeowner or investor or are searching for discounted off-market listings as a buyer with very creative and flexible financing solutions, I can show you effective ways to save your equity or create newfound wealth with my mortgage and investment business named Realloans (Real Estate Loans and Creative Sales) and my real estate group linked here: So-Cal Real Estate Investors.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Economic Extremes & Consumer Shock

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By Rick Tobin

None of us have ever seen such wide-ranging extremes of economic and asset trends as we’ve seen over the past few years. In many ways, it’s like we’re on a giant yo-yo swinging wildly from side to side or on a bumpy roller coaster ride with wicked twists and turns that keeps moving onward for years at a time instead of over just a minute or two.

All of the economic jerking that we feel on a daily basis can be overwhelming. Some days we see very positive news which gives us hope for a bright future. Other days, the gloomy negative news can seem a bit shocking because much of these positive and negative economic data trends have never been experienced in past years or decades.

Let’s review some of the key economic data trends that swing from very bad to very good (or vice versa) in hours, days, weeks, months, or over the past few years:

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Home Price Changes

Nationally, home prices have risen consistently since 2011. Investor home purchases fell the most on record in the 4th quarter of 2022 at a whopping -46% decline pace. Home prices fell for six months in a row since peaking in July 2022 through the end of January 2023, according to the Case-Shiller U.S. National Home Price Index.

A booming home price example: A young family purchases a new starter home for $300,000 in January 2020 shortly before the global pandemic designation. That same home would’ve peaked at $435,000 in the summer of 2022 using the same Case-Shiller data trends. If so, the family gained $135,000 in newfound equity in just 18 months or so.

The most horrific housing crash in US history took place between the market peak in 2006 and 2012 when the national housing average fell – 27%. California’s home losses were much more extreme with the peak to trough bubble burst falling as much as -41%.

Between 2019 and peak prices near the summer of 2022, many regions had home appreciation percentages of somewhere between massive 50% and 100%+ gains. Future home losses will need to be significant and the worst ever in national history to turn recent home purchases negative.

For people who’ve owned their homes for many years or decades, they will be more likely to ride out any significant price drops in the future. However, buyers who purchased with anywhere between 0% and 5% down in recent years may soon go underwater with the mortgage debt surpassing the market value.

Year-over-year home sales fell between 37% and 47% in Southern California counties through January. As sales volume declines, home price drops tend to follow even if most sellers aren’t willing to do it at first because they want peak record high prices like last seen in 2022.

Fewer buyers means less competition for quality properties and may lead to home listing price cuts and increased closing cost credits from sellers to buyers.

Commercial real estate properties: Upwards of 50% of all commercial property mortgage debt is a floating or adjustable rate. Additionally, the cost to insure the interest rate cap derivatives contract that protects both borrowers and lenders from the increasing risks associated with rising rates has increased 10-fold for borrowers, as per the Wall Street Journal. As such, it’s a double whammy for commercial mortgage borrowers in that both their mortgage and insurance rates have skyrocketed over the past year. The commercial sector is still getting hit harder than residential.

Listing Supply

The St. Louis Fed and Realtor.com share data together which shows both the current and past history for single-family homes, townhomes, and condominiums across the nation at any given time. As with other products available for purchase, a lower supply of something like eggs or popular toys will likely lead to higher prices due to the demand exceeding the available supply. Conversely, an oversupply of a product and falling demand will cause prices to fall.

Let’s review the national home listing trends dating back to 2016:

The US Census Bureau recently published data for the 4th quarter of 2022 which showed that there were 15 million vacant housing units (homes, condos, and rental apartments).

Vacant “shadow inventory” homes that are NOT listed for sale absolutely dwarf the total number of listed homes nationwide by a significant multitude. This has been true since at least 2009. If just 5% or 10% of the “shadow inventory” homes suddenly changed to homes available for sale, it could double the size of the national listing supply. “Shadow inventory” homes can also include homes already foreclosed upon by banks or mortgage loan servicing companies that are not offered up for sale.

Mortgage Rates

Approximately 75% of all homes nationwide were purchased with mortgages in recent years. Almost every boom and bust housing cycle over the past 50+ years was directly related to mortgage rate trends.

Between April 1971 and September 2022, the average 30-year fixed mortgage rate was 7.76% as per Freddie Mac. Today’s rates for borrowers with average FICO scores near 690 have fluctuated between 7% and 8% in recent months. The main difference today is that mortgage balances are two, three, four, or five times larger than in decades past.

We’re in the midst of the fastest mortgage rate increase in US history. The Federal Reserve’s rate hikes at a record pace over the past year are likely to later pivot and become massive rate cuts at some point in the future like we saw shortly after the 2008 housing bubble burst.

For comparison purposes about rate hikes, the Fed increased rates 17 times between June 2004 and June 2006 while pushing rates from 1% to 5.25% over 24 months while much smaller rate hikes that were closer to .25% at a time. This was the catalyst for the housing bubble burst later as so many adjustable rate option-like pay ARM mortgages and HELOCs doubled or tripled in monthly payment amounts.

Between the 1st quarter of 2022 and the 1st quarter of 2023, we’re on pace to increase rates 4.25% just like during the 2004 to 2006 era while doing it in about half the time (12 months instead of 24 months).

As of July 2022, approximately 80% of all open residential mortgages nationwide were priced at a fixed 4% rate or lower as per CoreLogic. Approximately 40% of all US residential mortgages were financed or refinanced near peak lows in 2020 or 2021.

Key point: The Primary Mortgage Market Survey conducted by Freddie Mac found that 99% of all residential mortgages nationwide had existing fixed rates lower than the national fixed rate average during the first week of March 2023.

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Three years ago near the start of the “pandemic” declaration in March 2020, the 10-year Treasury yield hovered close to an incredibly low and rather spooky 0.666% yield. The 30-year fixed mortgage rate is tied to the directions of the 10-year Treasury yield. Today’s 10-year Treasury yield closed at 3.966% on March 6, 2023 by comparison, which was about 3.3% higher.

Historically, the 30-year mortgage rate pricing is about 1.7% over the 10-year Treasury yield (0.6630 + 1.7% margin = 2.363% 30-year fixed mortgage rate, approximately). Over the past year, the margin has widened considerably to 3% or 4% over and above the 10-year Treasury yield to arrive at the latest 30-year fixed mortgage. This widening of the margin was partly due to perceived worsening financial conditions and the Fed’s Quantitative Tapering strategies which included their attempt to sell off trillions of dollars’ worth of mortgage bonds in spite of their being few buyers.

As a result, the 30-year fixed mortgage rate skyrocketed faster than ever to reach somewhere between 6% and 8%, depending upon the borrower’s FICO score and other creditworthiness guidelines.

Mortgage Applications

The lowest mortgage application reading of the 21st century was reached as of the 1st quarter in 2023 due to rising rates. By comparison when mortgage rates were at or near all-time record lows, there were 23.3 million home loan applications completed by consumers, according to the Consumer Financial Protection Bureau.

M1 and M2 Money Supply

“M1 is the money supply that is composed of currency, demand deposits, other liquid deposits—which includes savings deposits. M1 includes the most liquid portions of the money supply because it contains currency and assets that either are or can be quickly converted to cash. However, “near money” and “near, near money,” which fall under M2 and M3, cannot be converted to currency as quickly.” – Investopedia

The federal government has not published data about M3 since 2006. Our national money supply trends are more of a factor for causing rising inflation or falling deflationary trends more so than consumer spending.

High

The M1 money supply from $4 trillion to $20 trillion between just January 2020 and October 2021.

Low

M2 is a measure of the money supply which includes cash, checking deposits, and other types of deposits that are easily convertible to cash such as CDs. Last year was the first time when bank deposits declined within the same year since 1948. This is partly why banks are finally starting to offer higher savings rates to attract more deposits because they’re running low on cash.

The M2 year-over-year growth swung from one extreme to another between 2020 and 2023. It peaked at a +26% year-over-year growth in 2021 and later collapsed to a -2% by early 2023. In the past, a negative M2 money supply that was contracting was a foreboding or ominous sign of an upcoming economic recession or severe depression like seen back in the 1920s.

The M1 and/or M2 money supply directional trends tend to mirror inflation or deflation trends. The more money that is created, the more likely that inflation will rise as well while pushing assets like stocks and real estate much higher. Conversely, a falling money supply can create a deflationary economic cycle when asset prices fall as well.

Savings: US savings rates reached an all-time record low by the 1st quarter of 2023.

Stocks

Let’s take a closer look at some key dates for the Dow Jones stock index to get a better understanding of how wildly stock prices have swung over the past three years:

The Dow Jones stock index fell from a peak high of 29,551.42 on February 12th to a market low of 18,213.65 on March 23rd in 2020, which is more than a 38% overall percentage loss in just over a month. Of the 10 all-time biggest daily point losses ever for the Dow Jones index, eight of these days took place in either February or March in 2020. By comparison, the then all-time daily Dow Jones point loss record for the infamous day that almost took down the global financial system back on September 29, 2008 was only a -777 daily point loss.

Month & Year / Daily Point Loss

#1: 03/16/2020 / -2997
#2: 03/12/2020 / -2353
#3: 03/09/2020 / -2014
#4: 03/11/2020 / -1465
#5: 02/27/2020 / -1191
#6: 02/05/2018 / -1175
#7: 02/08/2018 / -1033
#8: 02/24/2020 / -1032
#9: 03/05/2020 / -970
#10: 03/27/2020 / -915
Source: Standard and Poors (through 03/27/2020)

Consumer Debt

Mortgage and other consumer debt is at an all-time record high. Credit card debt is near $1 trillion with the highest rates and fees ever averaging over 20%.

Distressed or pre-foreclosure numbers are listed as “below historical averages” today partly due to existing Covid-19 moratoriums. However, the true number of distressed properties that do not have foreclosure filings may later be on pace to reach peak 2008 to 2012 numbers and will likely be led by FHA mortgage defaults (95% to 96.5% LTV is the norm for FHA purchase deals).

After loss of income, the #1 reason why homeowners walk away from their mortgage and let the property go to foreclosure is when it’s upside-down, underwater, or the mortgage debt is higher than the current market value.

The #1 cause of financial insolvency or bankruptcy is related to unpaid medical bills; Americans have never been unhealthier than today, tragically.

Published inflation rates have varied between 6% and 9% in recent months. Yet, the true inflation numbers are closer to 15% to 17% if the federal government used the same data analysis techniques as a few decades ago.

Subprime automobile loans recently surpassed 6%, which is the highest default number ever.

Energy Price Swings

Back in April 2020, oil prices per barrel briefly went negative to reach -37 per oil barrel. As a result, the cost of the barrel itself was more valuable than the oil inside. Energy costs are usually a root cause of both inflation and deflation as we’ve all seen over the past few years. Some oil barrel prices later surpassed $100 in 2022 as many of us saw $5, $6, $7, $8, and $9 per gallon, especially here in California.

Derivatives

At the peak of the last housing bubble burst in 2007 and 2008, the estimated value of the global derivatives marketplace was about $1,500 trillion. Today, the global derivatives market is closer to $3,000 trillion and may reach closer to $4,000 trillion by 2027 if the same annual growth rates continue, as per Globe Newswire. The frozen global derivatives market was the main cause of the Credit Crisis or Great Recession back in 2008.

A derivative is a hybrid financial and insurance instrument that can be leveraged up to 50 times. Or, it’s a glorified bet on the future direction of things like interest rate directional trends as seen with interest rate option derivatives. Even though us mortgage brokers and real estate investors were blamed by the media for the Credit Crisis, defaulted subprime mortgage debt represented less than 1% of all debt that imploded back then.

Denial or Research – Pick Your Poison or Solution

What we avoid in life controls us. It’s usually best to research as many different positive, neutral, or negative sides to any story or asset class like real estate. You’re more likely to survive any economic downturn if you make precautionary plans and keep your eyes wide open for new opportunities that few others around you can see at the time.

Denial is usually the most common first reaction when presented with dissenting opinions or scary topics, especially if you work or invest in the real estate or financial sectors. Yet, you must thoroughly analyze all sides, question everything (especially your own perspectives), and focus on the potential opportunities or solutions.

The harder we fall, the higher we bounce back, hopefully. If the Federal Reserve does a massive pivot and starts cutting rates again and increasing their Quantitative Easing strategies with more asset purchases (stocks, bonds, and mortgages) to boost the economy again, the market may do another positive market swing skyward. Only time will tell, so get your popcorn ready!

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

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