After nearly three years of doom and gloom in the mortgage industry, housing experts — including Fannie Mae economists — are expecting interest rates to ease.
While Fannie Mae expects mortgage rates to drop to below 6% by the end of this year, the government-sponsored enterprise also forecasts that if there isn’t significant supply growth and buyer demographics remain strong, home prices will rise once again.
Regarding the highly anticipated Federal Reserve interest rate cuts, economists at Fannie Mae expect the reduction to come as early as May. They noted that their forecast for the U.S. economy centers around slow growth given that there are still factors in play that are highly correlated with a recession.
Read on to learn more about what Doug Duncan – Fannie Mae’s senior vice president and chief economist — and Mark Palim – Fannie Mae’s vice president and deputy chief economist – had to say about the housing market, the Fed’s interest rate cut timeline and their views on overcapacity in the industry.
This interview was condensed and lightly edited for clarity.
Connie Kim: Fannie Mae calls for mortgage rates to dip below 6% by the end of this year. But you also project that the decline in rates won’t be enough to incentivize existing homeowners to move. How much will the inventory shortage contribute to the rise in home prices this year?
Doug Duncan: We’ve had a discussion among ourselves about whether the response to declining rates is linear or nonlinear. In other words, if it drops one increment, you get one additional unit, or as it drops further, you get more and more units.
If mortgage rates get down to 5%, then I think there is a nonlinear piece to it. But it depends on what happens with income. If incomes are not rising, then you may not get that move, and we are forecasting slow growth.
If there’s not a significant growth in supply and demographics are still quite strong, that could simply suggest price increases again. We have home prices increasing 3% in 2024.
Kim: Fannie Mae removed its explicit call for a recession in 2024 and now expects “below-trend growth.” At this point, how high is the risk for a recession?
Duncan: It was more of a marginal move from our perspective. There’s still a bunch of things that are highly correlated with recessions in the past that are still pointing in that direction.
There is an inverted yield curve, leading economic indicators have fallen for 21 months in a row, monetary aggregates are in decline and temporary work has turned down. There are seven or eight things that we watch that are still pointing that way, but the combination of all of them has not been enough to tip the market over. And with the Fed clearly making a shift in December, financial conditions eased significantly and that’s going to provide some support for them as well.
The market has gotten a little too enthusiastic in our view, so the change in our view on the Fed was only to change the number of cuts from three to four in 2024 with slow growth.
Kim: Compared to the beginning of January, more investors believe that an interest rate cut in May is more likely than a cut in March. Why do you think investors are throwing their hats in for a delayed rate cut by the Fed?
Duncan: I think that the markets were overenthusiastic, and a couple of Fed governors went on and walked it back, making statements along the lines of ‘let’s make sure we’re moving carefully.’ I think that was the primary thing.
Consumer spending numbers that came in at the end were quite strong, at least to the headline piece of that. On the flip side of that, consumer delinquencies for credit cards and auto loans are rising fairly quickly, which is a sign of stress in the consumer.
Kim: What is your expectation for the Fed’s timeline to cut benchmark rates?
Duncan: May, June, December and somewhere in the middle of there, where they may pause after the June meeting to see what the data looks like. It’s an election year, so it’s a little tricky to figure out exactly when they’ll do that.
Could they possibly move it up to March and May to get it out of the way of the election? They could, but I don’t think they’re going to be influenced that much by the election.
Kim: As mortgage rates increased, borrowers paid more points to buy them down. Do you think this will be a more permanent shift in the mortgage market even as rates stabilize?
Mark Palim: Part of what made it economical for the builders to offer rate buydowns was that the bond market was skeptical that the high rates would last long. So, the cost of buying down rates wasn’t as high as it might otherwise be from the perspective of borrowers and the builders subsidizing it with a buydown. I think it depends on the conditions and what the expectations are for rates.
Duncan: The 2% buydown saves you X amount of dollars monthly for as long as the market rates reach the level that you bought it down to. You have to make a judgment on how long rates will stay above that level for you to save that amount of money.
Kim: Overcapacity in the industry has resulted in lenders slimming down through layoffs and consolidations. How close are we from being done?
Duncan: I sat in on a meeting with about 30 small and midsized mortgage company CEOs where they said they made so much profit in 2020 through 2022, some of them are actually running at a loss knowingly to keep their best people.
Some are calibrating when they think volumes will pick up, how much of that pickup would be their business and what the cost is of carrying employees for this period. It may be the case that some of the employees would be willing to take a pay cut during that time period, knowing that the alternative is they lose their job.
When I was at the Mortgage Bankers Association, we had a model that worked pretty well to forecast what the downturn would be. Lenders held on to employment for six months. That was the window in which they wanted to see, ‘Will the trend change?’ so we don’t have to do layoffs, because it’s expensive to lay people off and rehire them.
One of the things that has undoubtedly changed is the advent of technology, centered around getting to the consumer faster. It’s a speed game for independent mortgage companies. They will do loans at a loss to get them done quickly, and keep the volume flowing through the business and covering their variable costs.
So, I think that those couple of alternative strategies and the advent of more technological development has changed the degree to which you see the volatility across the cycle.
Palim: The other thing I would add — two points — is that the projections for the size of the U.S. labor force are not vigorous. Growth is going to be substantially lower than it has been historically. You see pretty low levels of layoffs in the economy and questions about labor hoarding. So, it would make sense that given how hard it was to attract talent, I can see mortgage companies being reluctant to downsize unless they really have to.
Second point is, we do have a pickup in mortgage originations if rates and the economy go where they’re supposed to go next year and the following year.
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Fannie Mae economists offer housing market outlook, potential timeline for interest rate cuts
After nearly three years of doom and gloom in the mortgage industry, housing experts — including Fannie Mae economists — are expecting interest rates to ease.
While Fannie Mae expects mortgage rates to drop to below 6% by the end of this year, the government-sponsored enterprise also forecasts that if there isn’t significant supply growth and buyer demographics remain strong, home prices will rise once again.
Regarding the highly anticipated Federal Reserve interest rate cuts, economists at Fannie Mae expect the reduction to come as early as May. They noted that their forecast for the U.S. economy centers around slow growth given that there are still factors in play that are highly correlated with a recession.
Read on to learn more about what Doug Duncan – Fannie Mae’s senior vice president and chief economist — and Mark Palim – Fannie Mae’s vice president and deputy chief economist – had to say about the housing market, the Fed’s interest rate cut timeline and their views on overcapacity in the industry.
This interview was condensed and lightly edited for clarity.
Connie Kim: Fannie Mae calls for mortgage rates to dip below 6% by the end of this year. But you also project that the decline in rates won’t be enough to incentivize existing homeowners to move. How much will the inventory shortage contribute to the rise in home prices this year?
Doug Duncan: We’ve had a discussion among ourselves about whether the response to declining rates is linear or nonlinear. In other words, if it drops one increment, you get one additional unit, or as it drops further, you get more and more units.
If mortgage rates get down to 5%, then I think there is a nonlinear piece to it. But it depends on what happens with income. If incomes are not rising, then you may not get that move, and we are forecasting slow growth.
If there’s not a significant growth in supply and demographics are still quite strong, that could simply suggest price increases again. We have home prices increasing 3% in 2024.
Kim: Fannie Mae removed its explicit call for a recession in 2024 and now expects “below-trend growth.” At this point, how high is the risk for a recession?
Duncan: It was more of a marginal move from our perspective. There’s still a bunch of things that are highly correlated with recessions in the past that are still pointing in that direction.
There is an inverted yield curve, leading economic indicators have fallen for 21 months in a row, monetary aggregates are in decline and temporary work has turned down. There are seven or eight things that we watch that are still pointing that way, but the combination of all of them has not been enough to tip the market over. And with the Fed clearly making a shift in December, financial conditions eased significantly and that’s going to provide some support for them as well.
The market has gotten a little too enthusiastic in our view, so the change in our view on the Fed was only to change the number of cuts from three to four in 2024 with slow growth.
Kim: Compared to the beginning of January, more investors believe that an interest rate cut in May is more likely than a cut in March. Why do you think investors are throwing their hats in for a delayed rate cut by the Fed?
Duncan: I think that the markets were overenthusiastic, and a couple of Fed governors went on and walked it back, making statements along the lines of ‘let’s make sure we’re moving carefully.’ I think that was the primary thing.
Consumer spending numbers that came in at the end were quite strong, at least to the headline piece of that. On the flip side of that, consumer delinquencies for credit cards and auto loans are rising fairly quickly, which is a sign of stress in the consumer.
Kim: What is your expectation for the Fed’s timeline to cut benchmark rates?
Duncan: May, June, December and somewhere in the middle of there, where they may pause after the June meeting to see what the data looks like. It’s an election year, so it’s a little tricky to figure out exactly when they’ll do that.
Could they possibly move it up to March and May to get it out of the way of the election? They could, but I don’t think they’re going to be influenced that much by the election.
Kim: As mortgage rates increased, borrowers paid more points to buy them down. Do you think this will be a more permanent shift in the mortgage market even as rates stabilize?
Mark Palim: Part of what made it economical for the builders to offer rate buydowns was that the bond market was skeptical that the high rates would last long. So, the cost of buying down rates wasn’t as high as it might otherwise be from the perspective of borrowers and the builders subsidizing it with a buydown. I think it depends on the conditions and what the expectations are for rates.
Duncan: The 2% buydown saves you X amount of dollars monthly for as long as the market rates reach the level that you bought it down to. You have to make a judgment on how long rates will stay above that level for you to save that amount of money.
Kim: Overcapacity in the industry has resulted in lenders slimming down through layoffs and consolidations. How close are we from being done?
Duncan: I sat in on a meeting with about 30 small and midsized mortgage company CEOs where they said they made so much profit in 2020 through 2022, some of them are actually running at a loss knowingly to keep their best people.
Some are calibrating when they think volumes will pick up, how much of that pickup would be their business and what the cost is of carrying employees for this period. It may be the case that some of the employees would be willing to take a pay cut during that time period, knowing that the alternative is they lose their job.
When I was at the Mortgage Bankers Association, we had a model that worked pretty well to forecast what the downturn would be. Lenders held on to employment for six months. That was the window in which they wanted to see, ‘Will the trend change?’ so we don’t have to do layoffs, because it’s expensive to lay people off and rehire them.
One of the things that has undoubtedly changed is the advent of technology, centered around getting to the consumer faster. It’s a speed game for independent mortgage companies. They will do loans at a loss to get them done quickly, and keep the volume flowing through the business and covering their variable costs.
So, I think that those couple of alternative strategies and the advent of more technological development has changed the degree to which you see the volatility across the cycle.
Palim: The other thing I would add — two points — is that the projections for the size of the U.S. labor force are not vigorous. Growth is going to be substantially lower than it has been historically. You see pretty low levels of layoffs in the economy and questions about labor hoarding. So, it would make sense that given how hard it was to attract talent, I can see mortgage companies being reluctant to downsize unless they really have to.
Second point is, we do have a pickup in mortgage originations if rates and the economy go where they’re supposed to go next year and the following year.
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Home sales are growing. Will it continue?: Altos
Last week, the National Association of Realtors released their December pending sales data. The headline was an impressive 8% jump over December of 2022.
If you’ve been following along with the Altos data, you’ll know that home sales have been expanding for two months now. They obviously picked up in December when mortgage rates did a recent dip. We shared that sales growth data back in December as it was happening in the housing market.
The question is, will this trend continue for the year? Based on the data we can see now, it seems likely. However, December’s momentum slowed very quickly in January as mortgage rates jumped back up and as a deep freeze gripped the country. So, this growth is fragile. Meanwhile home price growth is pretty solid for the year too.
Homes in contract rises
There are more homes in contract now than last year at this time. I think this trend is durable, but it’s definitely not a guarantee. In fact, the new pendings/new sales actually came in fewer this week than last year at the same time. A few weeks ago, I confidently proclaimed that home sales would be up 15% in 2024, and since then the growth pace over last year has fallen four weeks in row!
Sales growth is not guaranteed
This week there were 56,000 contracts started for single-family home purchases. As the year progressed, most of 2023 saw 20-30% fewer home sales than 2022. Home sales were very very slow last year. Starting in November the trend finally turned positive. Finally back to growth. Just a few weeks ago, we printed 20% more sales in a week than the year prior. This week was 0.8% fewer. So it was a down week. As I said, this sales growth seems durable. But it is not guaranteed. If mortgage rates are in the 7s this year, this growth will not hold.
Home sales grow
There are now 276,000 single family homes in contract — 5% more than last year at this time. So we already know that home sales in the first quarter have grown by 5% over last year. That’s already in the bag. Despite this week’s little dip in the new contracts, I expect this growth trend to continue. Assuming mortgage rates stay in the 6s.
There are 276,000 single family homes are in contract vs. 264,000 last year at this time. Make no mistake, 276,000 is still almost 30% fewer than were in process in January of 2022, right at the end of the cheap money frenzy. One reason the housing market can grow this year, is because we’re coming off such a very low base. Very few home sales in ’23, so ’24 is on track to grow.
Mortgage rates less volatile
The other reason that home sales volume is increasing in 2024 is because of less volatility in mortgage rates. If mortgage rates stay in the 6s this year, sales are poised to grow. If they climb back into the mid-sevens, this growth trend will stall. We watched that stall last fall in September and October. We can even see it just a little in the last few weeks as mortgage rates climbed from the mid sixes to 6.9%. Any projection I make about growth in home sales this year is predicated on mortgage rates not jumping into the 7s or 8s again.
That projection however does not require mortgage rates to fall either. We can see home buyer demand when rates are stable the 6s. I do not forecast mortgage rates, and while I’m not convinced that anyone can, many of those who attempt to do so are projecting rates in the 5s by the end of the year. I suspect if that happens we’ll see even more demand, with a strong pickup in home sales volume coupled with falling inventory levels, and a return to rising home prices.
Inventory falls slightly
When I say inventory would fall with falling mortgage rates here’s what I mean. There are currently 503,000 single family homes unsold on the market. That’s the active inventory across the country. Inventory fell by six tenths of a percent last week. That’s actually very normal for the last week of January. Most years, inventory levels bounce around the year’s low in the winter months before starting to climb with fresh sellers in February and March. In the last couple years demand has been stronger in the spring, mostly a function of the randomness of mortgage rate fluctuations, so available inventory of unsold homes on the market kept declining well into April.
Home price appreciation trend will continue
If you’ve been paying attention to any of the many home price measures in the headlines, you know that home prices are up over last year. And based on all the leading indicators available in the Altos data, that home price appreciation trend will continue this year. The median price of single family homes in the US is now $424,000. That’s up 1% over last week and continues to be a few percent higher than last year.
We use the Altos active market pricing data as a leading indicator of where home sales prices will complete in a few months. A house is on the market now, it gets an offer in February, it closes in March or April, and you hear about that in the traditional housing data in May. But we can see right now where those prices are. And those prices are up.
Here’s what’s wild. When we look at the price of the homes in contract, this is a very close proxy to the sales that will close in the next month. The median price of the homes in contract is just under $385,000. That’s 6.8% higher than last year at this time. As mortgage rates jumped so dramatically in 2022 purchase demand slowed way down. And that’s when home prices peaked in the second quarter of 2022. As a result by that same period a year later, April May June 2023, home prices showed year over year declines.
It can be hard to communicate this with buyers and sellers. Heck it’s scary for me to talk about here. There are folks on the sidelines waiting for rates to drop so they can swoop in for sudden bargains. But they may not realize how much competition is waiting right along with them.
People need help understanding this fast changing market, and they need to hear it from you.
Mike Simonsen is the president and founder of Altos Research.
Download the free Altos eBook: “How to Use Market Data to Build Your Real Estate Business”
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2024 is not the year to cut corners on staging — here’s why
When it comes to home staging, there are two homeowner camps: those who think it’s a waste of money and don’t want to pay more to make their home more attractive to buyers and those who realize the worth and are willing to make the investment needed.
While most Realtors will die on the hill that staging should never be cut out of the home selling strategy, this year it’s even more important. Recently, The Mortgage Reports even reported that staged homes sell “73% faster, on average, than their non-staged counterparts.”
With prices reaching unprecedented heights and interest rates soaring, the discerning nature of today’s buyers requires all agents to employ every possible advantage.
Simply put, cutting corners on staging is a risky move that risks prolonged market presence. In fact, this year I’d argue we need to take it a step further.
Set the scene with exterior curb appeal
Imagine potential buyers arriving at a home with a well-maintained lawn, fresh bark or rocks enhancing the landscaping and pretty bright flower pots at the entrance — a scene that immediately invites them to step inside.
Now, take that and one-up it. I like to ensure any potential buyers are really looking out for the exterior appeal, like washing the front door and windows and removing screens for a clean look while keeping them handy for the sale. It adds a personal touch that sets the stage for a positive viewing experience and builds confidence in the buyer that the home has been well-maintained the whole time the homeowners were in it. These small details make a substantial impact.
Interior maintenance: the devil in the details
In 2024, buyers are not just seeking a house; they desire a home that has been lovingly maintained. For example, fresh paint, clean baseboards and consistently functioning lightbulbs all contribute to the overall appeal of a well-cared-for property. Addressing deferred maintenance issues becomes extremely important, as neglecting minor fixes can raise questions about the home’s overall condition. I also suggest a professionally cleaned and serviced mechanical system — a detail that speaks volumes about a property’s upkeep and resonates with potential buyers.
The magic of staging in action
Contrary to old-school belief, staging is not a luxury reserved for high-end listings; it’s a game-changer for homes at every price point. Partnering with a professional stager has the potential to elevate a property’s appeal significantly. Picture the power of clean and fresh linens, fluffy towels in bathrooms and a clutter-free kitchen — these personalized touches not only resonate with potential buyers but also add a sense of warmth and livability to the space.
As a listing agent, I pay for both a staging consultation and staging items as needed. I pay for the first month of staging for my clients. That allows time for professional photos of the home with the staging. Additionally, an open house and the majority of showings will be in the first 30 days. After the 30-day mark it’s up to the sellers if they want to keep paying for the staging but typically if the home is priced correctly, it will sell in the first 30 days in most markets.
The positive atmosphere created by thoughtful staging prompts buyers to envision their future in the space, creating a subconscious excitement and positive conversation. Personal anecdotes attest to the fact that buyers often struggle to overcome feelings of unease when faced with cleanliness issues and deferred maintenance in a home; these factors can overshadow an otherwise perfect property. As a listing agent, I believe so strongly in staging homes that it is part of the value of working with a Realtor.
The staging investment: worth every penny
The concern about the costs associated with staging may give some sellers pause, but successful listing agents understand the tangible benefits that staging brings to the table. Even vacant homes need staging: stage the living, dining, primary and exterior space as needed and add in some art and decor.
Staging is an investment that pays dividends, attracting more potential buyers, accelerating the selling process and frequently leading to higher offers. Covering the initial staging costs, as many listing agents do, underscores the commitment to ensuring a successful sale. Consider it not just as an expense, but as a strategic investment in the overall success of the home sale.
Overall, in 2024, cutting corners on staging is a risk that sellers cannot afford to take. Realtors play a pivotal role in educating their clients about the concrete benefits of effective staging. By prioritizing exterior and interior maintenance, collaborating with professional stagers and incorporating personal touches, Realtors can guide their clients toward successful home sales. The investment in staging isn’t just a financial decision — it’s a commitment to delivering a positive and memorable home buying experience for all parties involved.
Jen Routon currently serves as president elect on the Board of Directors for the Denver Metro Association of Realtors.
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Investing in Commercial Real Estate for Beginners
Choosing between commercial and residential real estate is a big decision for investors. If you choose the wrong strategy, you could be in over your head and potentially lose money.
We’ve created an investing in commercial real estate for beginners guide to help you understand what it means to invest in commercial real estate and what it requires.
Understanding Commercial vs. Residential Real Estate
When you think of commercial real estate, you likely think of retail stores, office spaces, and medical facilities. It can also include properties with more than five units, such as apartment complexes and hotels.
Residential real estate refers to properties strictly for living in. This includes any buildings with fewer than five units, such as single-family homes, condos, and duplexes.
Commercial and residential real estate may both earn landlords rent and require property owners to manage and maintain them, but the similarities end there.
Key differences
Knowing the key differences between residential and commercial real estate can help determine which investment strategy is right for you.
Benefits of Investing in Commercial Real Estate
When investing in commercial real estate, it’s important to consider the benefits of choosing it. Like any investment, commercial real estate can be a solid choice when things go well.
Here are some of the benefits investors enjoy:
Risks Associated With Commercial Real Estate
All investments have risks, and the higher the risk, the greater the potential returns. Here are some of the most common risks to be aware of before choosing to invest in commercial real estate for beginners:
Beginner Steps to Get Started With Commercial Real Estate Investing
Investing in commercial real estate for beginners requires several steps to ensure you get started on the right foot.
Market research
Before investing in commercial real estate, market research is essential, as is knowing the economic and employment health of the area. Not all commercial properties will be profitable. It depends on the health of the overall area and the demand for the type of commercial property you’re considering.
Assemble a team of experts
Investing in commercial real estate requires a solid team of experts who are there for you every step of the process. This team includes real estate agents, lenders, accountants, property managers, contractors, and lawyers. The right team will oversee purchasing and managing commercial real estate to help you earn profits.
Financial analysis and budgeting
A property financial analysis is the key to ensuring you make a solid commercial real estate investment. Like residential real estate, consider the rent history, property management expenses, taxes, and insurance. But you must also consider the number of units, vacancy history, zoning regulations, the property’s net operating income, and cash flow.
You must also determine your personal budget and if you’ll qualify for financing. This requires an extensive down payment and the ongoing funds to operate and manage the property.
Secure financing
Securing financing for commercial properties differs from residential investment financing. As mentioned, you’ll need a larger down payment, but you must also show you have the experience and knowledge to manage a profitable commercial real estate investment.
In addition to standard financial documents required for residential real estate investments, you must prove you have the experience necessary to run a commercial real estate investment with documented proof, such as profit & loss statements.
Due diligence
Research is the key to successfully investing in commercial real estate. Consider the property’s cap rate, cash-on-cash return, and net operating income. Compare these numbers to your overall investment plan to see how they fit.
Common Strategies for Investing in Commercial Real Estate
Investing in commercial real estate for beginners offers many options, from direct investment to crowdfunding; there are opportunities at every income level.
Direct investment
Most people think of direct investment when investing in commercial real estate. This means purchasing a commercial property and renting it to tenants. This requires large down payments, qualifying for financing, and understanding how to manage the property for the duration of ownership.
REITs
Real estate investment trusts (REITs) are real estate holding companies that purchase commercial real estate properties and sell shares of their companies to investors. The investors become real estate investors by default and earn a prorated amount of the portfolio’s return. This is a hands-off approach to real estate investing.
Real estate syndication
If investing in commercial real estate alone seems overwhelming, you can join a real estate syndication, a group of real estate investors who pool their assets and resources to invest in real estate properties. This gives you more power than investing in REITs and decreases the capital required and your overall risk. The profits, appreciation, and ownership percentages directly correlate to the size of your investment.
Crowdfunding platforms
Crowdfunding real estate platforms make commercial real estate investing possible for more investors. Some crowdfunding platforms have low investment requirements—as low as $100. This commercial real estate investment strategy is 100% passive, meaning you don’t have to do any work to manage the property. You invest money and collect your portion of the profits as they occur.
Managing Your Commercial Real Estate Investment
A major component of investing in commercial real estate is managing it. Consider these factors when deciding if commercial real estate investments are right for you.
Property management
When investing in commercial real estate, you must determine whether to manage the property yourself or hire a professional property manager.
Property management includes running the day-to-day operations of owning commercial real estate, managing the property’s maintenance plan, tenant management, handling vacancies, collecting rent, and budgeting and reporting.
Hiring a property management company increases your expenses but decreases the time and effort you must use to manage the property.
Improving and upgrading properties
Improvements and upgrades can help you save money in the long run and earn higher rents. Tenants are always looking for upgraded spaces with the latest amenities. Upgrading commercial spaces also decreases repair costs and makes the property last longer.
Handling tenant relations
The most significant part of commercial real estate investing is developing tenant relationships. You’ll negotiate lease and lease renewals, collect rent, discuss rent increases as allowed in the lease agreement, and handle any tenant needs within the lease agreement.
Legal & Tax Considerations
Taxes and legal considerations are significant in commercial or residential real estate investing.
Generally, residential real estate properties have lower property tax rates than commercial, but commercial real estate properties have shorter depreciation periods than residential properties (27.5 years versus 39 years).
It’s vital to have a powerful real estate team to ensure you understand your legal and tax requirements, both before choosing a real estate investment and while owning it.
Final Thoughts
Investing in commercial real estate for beginners requires a strategic plan, due diligence, and a solid real estate team. With the right people by your side and adequate research, you can diversify your real estate investment portfolio to include residential and commercial real estate investments.
2024 Live Virtual Summit
Struggling to invest or feeling unsure about the 2024 real estate market? Our first-ever BiggerPockets Live Virtual Summit was created just for you! Led by your favorite experts, dive into four mind-blowing nights of pure real estate inspiration and make 2024 your year for real estate success.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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Housing demand rises as inventory falls
Housing demand is up and it’s time to track the spring housing data and see what the selling season will bring. As I always stress, we are working from the lowest bar ever with demand, so let’s add historical context to the data. But, even with mortgage rates higher this year than last year, demand is rising.
Purchase application data
As we get closer to the end of the first month of 2024, forward-looking purchase application data looks good. Once I make some holiday adjustments, we have eight weeks of a positive trend since mortgage rates fell from the 8% high, and as of now, the slightly higher rates we’ve seen recently haven’t impacted the data just yet. Historically, higher rates negatively impact the weekly purchase application data, and I will look for this over the next few weeks . But it’s very early in the seasonal demand timeframe for housing, so we will take it one week at a time. Purchase apps were up 8% week to week and still down 18% year over year. Last year at this time we got a boost in demand with rates heading toward 6%.
Weekly housing inventory data
Here is a look at last week:
Last week, we saw active inventory fall slightly week to week. This is common in January. We have had some positive purchase application data recently, and the pending home sales report came in as a beat last week. So, inventory falling looks normal. However, I would like to see the inventory bottom very soon and have a more traditional seasonal increase, rather than having a bottom in March or April.
New listings data
One of the more positive stories about housing inventory recently is that we found a bottom in new listings data last year, and we have been starting to grow new listings data for some time now on a year-over-year basis. It isn’t anything significant, but I will take it after what we have been through the last few years. This is something I talked about on CNBC recently.
Weekly new listing data:
Price cut percentage
Every year, one-third of all homes take a price cut before selling — nothing abnormal about that. However, this data line accelerates higher when mortgage rates rise, and demand gets hit harder. A perfect example was in 2022: when housing inventory rose faster, the percentage of price cuts rose faster as home sales crashed. That increase matched the slope of the inventory increase, and people needed to cut prices to sell their homes.
Toward the end of 2022, that marketplace changed as home sales stopped crashing and the market stabilized. So far this year, the price cut percentage data is still on pace to break below the lows we saw in 2023 in the spring. This data line is very seasonal, so what is occurring now is very normal.
This is the price-cut percentage for the same week over the last few years:
Mortgage rates and the 10-year yield
The 10-year yield is the key for housing in 2024. In my 2024 forecast, I have the 10-year yield range between 3.21%-4.25%, with a critical line in the sand at 3.37%. If the economic data stays firm, we shouldn’t break below 3.21%, but if the labor data gets weaker, that line in the sand — which I call the Gandalf line, as in “you shall not pass” — will be tested.
This 10-year yield range means mortgage rates between 5.75%-7.25%, but this assumes spreads are still bad. The spreads have been improving this year so much that if we hit 4.25% on the 10-year yield, we won’t see 7.25% in mortgage rates.
Last week, we got great news on inflation data, and we have been saying the inflation growth rate has slowed. However, in the economic game of rock-paper-scissors, it’s labor over inflation data, and the jobless claims data are too low, so the Fed hasn’t pivoted yet. Monday’s podcast will go over this topic more clearly.
The 10-year yield started last week at 4.14% and ended the week there. Mortgage rates ranged between 6.875% and 6.95%, ending the week at 6.90%. There is not much movement with the 10-year yield and mortgage rates. It’s wild to think that three to six month PCE inflation data is running below 2%, and mortgage rates are still this high. Remember, the Fed hasn’t pivoted and is still very restrictive.
The week ahead: Jobs, the Fed and home prices
It’s jobs week! So we will get the four labor reports: Job openings, ADP, jobless claims and the BLS jobs report. The Federal Reserve meets this week: we won’t see a rate cut this time but the key is the language they use in this meeting after the recent inflation data we saw. Also, the question and answers should be very interesting. We also have some home price data, which of course is a bit lagging from what is happening currently, but we will get those reports as well.
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The reverse mortgage lenders with the most consumer complaints in 2023
There were a total of 361 consumer complaints submitted to the Consumer Financial Protection Bureau (CFPB) related to the reverse mortgage industry during the calendar year 2023, according to a consumer complaint database maintained by the Bureau.
Of those complaints, 167 had to do with “trouble during the payment process,” while other topics included payment issues (80), closing issues (63) and application problems (49).
Breaking down 2023 complaint data
The total complaint figure is down from 425 recorded reverse mortgage complaints in 2022 and 386 in 2021, but is higher than the 2020 figure of 247. These are customer-submitted complaints and only indicate that dissatisfaction of some kind has taken place.
The overwhelming majority of the 2023 complaints saw complainants receive a timely response from the company (355) and were closed with an explanation (353). Sixty of the complaints received responses from the companies to both the consumer and the CFPB that the company elected not to share publicly.
Unsurprisingly, the highest concentration of reverse mortgage complaints came from California, the state that has long been at the top of origination rankings in the industry. There were 56 complaints from California, followed by Florida (49), New York (25), Maryland (21) and Texas (19).
Among the companies receiving the most complaints, 114 were sent by customers of Ocwen Financial Corp., the parent company of Liberty Reverse Mortgage/PHH. A total of 55 complaints were sent to Peer Advisors, LLC, which in 2013 acquired reverse mortgage servicing company Celink. Finance of America Companies (FOA) received 26 complaints, while American Advisors Group (AAG) — which was acquired by FOA last year — received 17 complaints.
Most other top 10 lenders recorded 10 complaints or fewer, including Longbridge Financial, Mutual of Omaha Mortgage and Fairway Independent Mortgage Corp.
Reverse Mortgage Investment Trust (RMIT), the parent company of Reverse Mortgage Funding (RMF), recorded five complaints in 2023 despite filing for bankruptcy at the end of 2022.
Compared to broader mortgage complaints, the reverse mortgage industry comprised less than 2% of the total 22,753 mortgage complaints the CFPB received in 2023.
Recent trends
In mid-2023, the CFPB released a report detailing its receipt of a higher average share of monthly reverse mortgage complaints between 2020 and 2022 when compared to prior years. At the time, the Bureau said this could be attributed to changes on the servicing side of the reverse mortgage business.
“In their complaints about reverse mortgages, consumers often express frustration in either getting statements or a payoff amount from their lender, or state that they are having difficulties making a payment or paying off a mortgage,” the Bureau said in its 2023 report. “In their responses, companies will sometimes apologize for the delay and provide the requested information. In other responses, companies will request follow up information from consumers.”
One encouraging attribute of reverse mortgage complaints to the CFPB is that they often close with explanations, according to Dan Hultquist, author of the educational book Understanding Reverse.
“The one thing unique about the reverse data is that nearly every one of them was closed with an explanation,” he said last summer. “That’s typical of our industry because we often deal with heirs who don’t understand what the product is or how it’s used. That’s the first thing I picked up on because I’m in the education world. It’s very important for people to understand, so I find this encouraging that [so many] of them were closed with an explanation.”
So far in 2024, the reverse mortgage industry has been the subject of 14 complaints received by the CFPB as of Jan. 26, compared to 719 total mortgage complaints in the same period.
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8 Reasons to Add Turnkey Real Estate to Your Portfolio in 2024—And 3 Red Flags to Consider
This article is presented by REI Nation. Read our editorial guidelines for more information.
Are you searching for your next big wealth-building strategy? Looking for ways to strengthen your portfolio? If so, it may be time to add passive investments to your portfolio if you haven’t already, specifically through turnkey.
Turnkey real estate is an increasingly popular option with a range of benefits, making it an appealing choice for individuals seeking passive income and long-term wealth accumulation. Typically speaking, a turnkey property is fully renovated and ready for immediate rental or occupancy, often managed by a property management company, either affiliated with your turnkey partner or a trusted third-party vendor.
Compelling Reasons to Go All-In on Turnkey Real Estate
Produce income faster
Turnkey real estate provides investors with the advantage of immediate income. Since the property is already renovated and typically has residents, you’ll start earning rental income on day one.
This is particularly appealing for investors looking for a steady stream of passive income without the delays associated with buying, renovating, and marketing a property. When you already have residents, there’s no interim where you’re without rental income.
Time efficiency
Turnkey investments save investors significant amounts of time and effort. The biggest time saver is the fact that many of the intricacies that you must learn in order to be an active real estate investor require time and commitment.
With turnkey real estate, finding, purchasing, and renovating a property, which are each of the most time-consuming aspects of real estate, are handled for you, so you bypass the stress. Additionally, investors won’t have to do so much heavy lifting on the front end. Your provider has already hand-selected rental properties for their market.
Professional management
Turnkey real estate investments often come with the added benefit of professional property management services. Property managers handle day-to-day operations, such as resident relations, maintenance, and rent collection. This relieves investors of the burden of managing the property—making it as passive as possible!
We can’t stress enough just how valuable skilled property managers are. They keep things running smoothly so you can focus on the big picture. Since no passive investment is ever 100% passive, your biggest responsibility here is managing the relationship with your property manager. As an investor, holding a management company accountable is your top priority.
Mitigated risk
The risks associated with turnkey investments are generally lower than those of traditional real estate ventures. The property has already undergone renovation, reducing the likelihood of unexpected repairs or maintenance issues. Additionally, having residents in place at the time of purchase or, at a minimum, the property on the publicly available list minimizes the risk of extended vacancy periods. As you acquire more properties and diversify the income in your portfolio, this risk diminishes further.
Diversification
As an asset class, real estate has a low correlation with traditional financial instruments, such as stocks and bonds. That makes it a choice addition to your portfolio if you’ve relied on more conventional options. For investors, the addition of turnkey real estate—easily the most passive strategy involving full ownership of a property—hedges against inflation, generates passive income and grows in value over time. When done right, turnkey real estate is a phenomenally low-risk strategy to diversify your total portfolio.
Predictable returns
The stability of turnkey investments stems from the predictable returns associated with rental income. With a property management team in place, investors can anticipate a consistent flow of income without being directly involved in day-to-day operations. This predictability can be especially attractive for those seeking reliable long-term returns.
Market access
Turnkey real estate investments offer investors the opportunity to participate in real estate markets that may be geographically distant. This is particularly advantageous for individuals who want to invest in markets with strong rental demand or potential for appreciation without the need to be physically present. Your local conditions may or may not be conducive to successful rental investing; however, if you choose to partner with a turnkey provider, they will unlock market access with conditions better suited for immediate and lasting success.
Hassle-free entry into real estate
For individuals new to real estate investing, turnkey properties provide an excellent entry point. Professionals handle the complexities of property acquisition, renovation, and resident management, allowing novice investors to participate in real estate without the steep learning curve. You can reap the immediate benefits and take the time to acclimate to real estate investing without being left to make novice mistakes.
Red Flags to Consider
At the same time, investors should consider these red flags when investing in turnkey real estate.
What does “turnkey” even mean?
The biggest tripping point for many investors is defining and understanding what they are getting into when purchasing a turnkey property. Two decades ago, there was one definition, and only a handful of companies offered the service. Today, it is the Wild West when it comes to using the word “turnkey” for marketing, and there are as many variations to what turnkey means as there are companies. There is even a cottage industry that has developed involving turnkey promoters.
In other words, the word “turnkey” has evolved into a marketing term, meaning many different things to many different people. This means it pays to do your homework and exercise patience. As with any real estate transaction, there is no need to rush as you are learning and gathering information. It’s important to make sure you are speaking with a company that owns the properties they are selling and not simply marketing the strategy with a lesser definition than the full service you expect.
In-house vs. third-party management
When we first started marketing our company and used the phrase “turnkey real estate” in 2007, having in-house management was a value-added proposition. The point of having in-house management managing a home purchased and renovated by the seller was to prevent the typical finger-pointing that occurs when different companies handle different parts of the transaction.
What is the motivation of a sales company to assist with an underperforming property six to 12 months after the transaction? Often, there is none. The same goes for a management company that inherits a poorly renovated or overpriced property that can’t possibly meet the expectations set by the sales company. What motivation do they have to improve the situation?
I am adamant that the best approach for an investor is to work with companies that keep all the services and responsibilities under one roof. Over the past two decades, about the only thing
One thing I can say with 100% certainty about real estate is that property management is the single most important element to your future success.
Am I prepared to be passive?
I love meeting with other investors, especially those who like to share and discuss all things real estate. As a property manager with a $2 billion portfolio under management, I have had quite a number of these conversations, and I am always amazed at how quickly I can turn an investor away from buying turnkey.
I know that sounds backward, but I see it as my job to attract ideal clients—not clients who are never going to be able to be passive. If you love the day-to-day hunt for new properties, meeting with contractors, or even swinging a hammer or slapping paint, then you must ask yourself the serious question: Will you be able to give up all those decisions to someone else?
The color to paint the walls has already been decided. The flooring has already been picked out, and the resident has already been qualified and signed the lease. There is nothing left for you to do but connect with your management company each month and make the deposits match.
It is not much, but it is important, and I have met two kinds of investors who don’t match up well: those who think that there is not enough decision-making for them and those who don’t understand why they need to manage the manager. If you can accept the limited but important role, then turnkey, passive investments may be a great route to take in building and diversifying your portfolio.
Final Thoughts
While no investment is entirely without risk, turnkey properties provide a relatively headache-free way for investors to benefit from real estate investment. As with any investment decision, thorough research and due diligence are essential to ensure that the chosen turnkey property aligns with your financial goals and risk tolerance.
This article is presented by REI Nation
Ready to add turnkey real estate to your portfolio in 2024? If so, now’s the time to invest with REI Nation. Where you invest, and they handle the rest.
Discover stress-free real estate investing with the largest family-owned turnkey investment company, REI Nation. Whether you’re a seasoned investor or just starting, they are dedicated to helping you achieve your financial goals in the world of real estate investing. Visit our website to start your turnkey real estate journey, where your success is their commitment.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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TD Bank launches three-year plan to invest $10B in affordable homeownership
New Jersey-based TD Bank has decided to invest $10 billion in affordable homeownership initiatives by 2027, including providing loans and liquidity to the residential lending market.
The investment represents half of the bank’s three-year Community Impact Plan announced Wednesday, which will direct $20 billion to lending, philanthropy, and banking access, among other initiatives, for the benefit of diverse and underserved communities.
In the mortgage space, TD Bank was a top-35 U.S. lender in the nine first months of 2023, originating $6.5 billion in loans, down 25% year over year, according to Inside Mortgage Finance estimates.
The bank has presence in 15 states and Washington, D.C. However, the billions of dollars in investment in affordable homeownership will focus on first-time homebuyers and home equity loans for LMI and minority borrowers, especially in the Boston, Baltimore, D.C., New York, Miami and Philadelphia markets.
Borrowers will have access to the bank’s Special Purpose Credit Program (SPCP), known as TD Home Access, and other products with low down payment and customer-friendly terms.
TD Bank’s plan also includes $7.5 billion in community development loans and other investments, including affordable housing projects. An example of these initiatives is special rental housing for veterans or LGBTQ seniors.
“One of our primary objectives as a purpose-driven bank is to help power economic opportunities that help low- and moderate-income (LMI), diverse and underserved communities achieve their financial goals,” Leo Salom, president and CEO at TD Bank, said in a statement.
The bank’s plan also includes $2.8 billion in credit to small businesses (with less than $1 million in annual revenue.) The bank will create a SPCP for minority business, women-owned or veteran-owned enterprises.
TD Bank also announced it will open about 15 locations in LMI or majority-minority markets (subject to regulatory approvals.) The plan is to create additional community-centered stores, with dedicated spaces for financial education workshops and nonprofit meetings.
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DataDigest: Fannie Mae’s market view gets rosier, but traders get more skeptical
Last month, DataDigest explored market experts’ expectations for 2024, with the consensus calling for a moderately better housing market than 2023.
But a meeting of the Federal Open Market Committee the following week set off a market frenzy over expectations of interest rate cuts, moving mortgage rates down well ahead of experts’ forecasts and prompting a subsequent DataDigest that asked whether the picture for 2024 had changed.
On Jan. 18, Fannie Mae weighed in: yes.
Fannie Mae’s latest monthly forecast for the housing market predicts much lower mortgage rates than its December forecast — and thus more home sales and mortgage originations.
Mortgage rates, which dropped precipitously the week of the FOMC meeting, are key to Fannie Mae’s rosier view of the road ahead in 2024. Fannie Mae’s quarterly rate forecasts this month were far lower than last month’s and were its lowest forecasts in at least six months.
“Following the Fed ‘pivot’ in December, an anticipation of more dovish policy, and the recent decline in interest rates, our mortgage rate forecast has been revised meaningfully lower this month,” Fannie Mae wrote in its forecast release.
Mortgage rates have hovered around 6.7% — Fannie Mae’s December forecast for 2024’s average — since mid-December, and the company’s forecast for 2024’s average is now 6.1% with rates dropping below 6% by year end. This should prompt a “gradual recovery” in home sales and single-family mortgage origination, according to Fannie Mae Senior Vice President and Chief Economist Doug Duncan.
“Inflation’s decline and the resultant Fed pivot to signaling future rate cuts lead us to believe that home sales and mortgage originations likely bottomed out in the second half of 2023 and that a gradual improvement is now underway,” he said in a statement.
“We expect mortgage rates to dip below 6 percent by year-end 2024 and for homebuilders to continue to add new supply, both of which should aid affordability. Additionally, the decline in mortgage rates is likely to push refinancing volumes upward, along with some pickup in purchase financing.”
The company’s quarterly forecasts for existing and new homes are up significantly from its forecasts from recent months.
Its forecasts for single-family purchase and refinance originations are also above its recent forecasts, although not as dramatically higher as with home sales.
Although Fannie Mae’s outlook for 2024 is up, Duncan warned against getting too carried away.
“However, even at less than 6 percent, we think rates will still have a significant way to go in order to meaningfully reduce the ‘lock-in effect’ experienced by homeowners who refinanced or bought during the pandemic,” he said.
Traders disagree
The yield on 10-year U.S. Treasury notes — a major factor in setting mortgage rates — opened December at 4.2%. On the heels of mid-month FOMC meeting, the rate fell to a low of 3.8% on Dec. 27.
That drop has been completely erased already in 2024, with the latest rate above 4.1%.
The steep rebound was fueled in part by comments Federal Reserve Governor Christopher Waller made at a virtual event hosted by the Brookings Institution on Jan. 16. Waller said rates should be cut “methodically and carefully” and added, “I see no reason to move as quickly or cut as rapidly as in the past.”
Equity traders, too, have been skittish regarding interest-rate-sensitive stocks — the same stocks that fueled a late December stock market rally. Traders sold off stocks of real estate investment trusts and speculative tech companies last week, but share prices have rebounded so far this week.
The pullbacks signal bond and equity traders are becoming less optimistic about a March rate cut. We’ll have to wait until February’s forecast to see if Fannie Mae’s optimism holds or if traders’ skepticism spreads.
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Consumer protection is what title insurance is all about
Limited housing supply and a continuation of high home prices in many markets nationwide in 2023 restricted many first-time homebuyers from entering the housing market and finding their dream homes. But there appears to be a light at the end of the tunnel as mortgage rates are expected to steadily decrease, allowing homeownership to be within reach for more Americans.
Even as home prices began to decrease last year, mortgage rates remained high, leading both buyers and sellers to stay out of the housing market. Existing home sales fell to their lowest point in nearly 30 years in 2023, while the median price of a home reached a record high, according to the National Association of Realtors (NAR). Additionally, the market experienced fewer refinance transactions given that the roughly 80% of homeowners with a mortgage rate of 5% or less were not interested in exchanging their low rates for a higher one.
However, the Federal Reserve is expected to slacken its monetary policy this year, lowering the high interest rates they imposed to counter inflation. Lower interest rates will not only improve the market for buyers, but it will also encourage more refinancing, particularly for recent homebuyers who stretched their budgets on higher rate loans. The Mortgage Bankers Association predicts that the average rate on 30-year mortgages could be 6.1% by the end of 2024.
With a wave of new home purchases and refinance transactions expected, as an industry, we’re expecting many new questions about how buyers and owners can best protect their property rights. In fact, for many new buyers entering the market this year, this will be the first time they ever hear the words “title insurance.” Against this backdrop, it is critical that new homebuyers and homeowners alike understand what title insurance is, its benefits and the importance of asking about discounts available to them.
What is title insurance?
Title insurance is a comprehensively regulated insurance product that has been trusted to protect property rights for over a century. It differs from other insurance products in that it is a one-time payment during closing that not only provides comprehensive coverage if a problem arises, but it also works to ensure clear property ownership rights before closing day. Title insurance companies have lower claims rates than other types of insurance because title professionals work to resolve potential issues before they develop into claims. The most common causes for loss are mortgages, judgments, liens and mechanic’ liens. Additionally, about a third of all claims result from issues that can’t be found in the public record.
In the event someone comes forward with a title claim, such as an undisclosed heir to a property or an outstanding repair payment, title insurance also protects the homeowner’s property rights and will cover any financial burdens of settling a dispute.
There are two forms of title insurance: an owner’s policy and a lender’s policy. Given a lender’s policy only protects a lender’s investment against any title issues that arise, homeowners should always purchase an owner’s policy to protect themselves.
What does title insurance cost?
According to a recent study, title and settlement charges typically make up less than 1% of a borrower’s total life-of-loan costs. Additionally, as rates of other forms of insurance have continuously increased, the cost of title insurance has actually decreased by 7.8% nationally since 2004, according to an analysis of industry financial statements.
The majority of states nationwide are “seller pay” states, in which a homebuyer only needs to pay for a lender’s policy because the seller customarily pays for the homebuyer’s owner’s policy. Additionally, when an owner’s policy and lender’s policy are issued simultaneously, many companies offer a reduced price for these policies. Homebuyers should explore all these potential cost savings when purchasing their home. Consumers are encouraged to shop around for title insurance and can find a title company to work with in their market at homeclosing101.org.
Why is title insurance important in a refinancing transaction?
Even when refinancing, homeowners still need to purchase a new lender’s policy. That is because title insurance is attached to the loan. Between the time that a new loan is originated and refinanced, new title defects may have arisen. For example, a homeowner might have a judgment on their house due to unpaid taxes, homeowner association dues or child support.
Luckily, many title companies offer discounts on refinance transactions and discounts if the same lender from your original loan is used. We encourage those looking to refinance their mortgage to reach out to their title company and see if they offer these types of discounts.
Title insurance protects the consumer
As an industry, we are committed to helping homebuyers and homeowners understand how title insurance can protect their property rights from unimaginable threats. Buying a home is the largest purchase most Americans will make in their lifetime. Having title insurance is critical to protect that asset. With homeownership expected to become more accessible in 2024, title insurance professionals are ready to help homebuyers navigate the process.
Diane Tomb is CEO of the American Land Title Association.
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