[00:00:02] Speaker A: Welcome back to the real estate and more show. Thanks so much for listening. I'm your host, Michael Hatfield, and this segment is called the housing market ant jar. And how's the market now? A few weeks back, my housing report identified as red ants, potential home sellers, and as black ants, potential home buyers. We talked about how each of them has different interests and how both had been getting along in a state of equilibrium altogether in the same Mason jar. Although we've just begun the new year, an election year, mind you. Let's look at that mason jar that may be showing signs of being shaken up and see what's changed since 2023 in hopes of helping people who may wish to buy or to sell. Welcome to the show.
Let's preface this first subject on mortgage rates by saying rates move up, rates move down. They are a seesaw. Looking at their graph over time, we find that the biggest number was 7.72. As an average. As an average over the last several years 50 year history. I do believe, like housing markets, they go up. Sometimes they go down. In the Bay Area, housing markets mostly go up over time.
Let's do a review of 2023, starting with rates, then talk about silly red ants and black ants, then the basket of rocks analogy. No, I haven't necessarily lost my mind just yet, but maybe the 2023 national housing market was interesting as generally home values across the United States creeped upward. The San Francisco Bay Area markets were vibrant until around May. Then the Federal Reserve's constant Fed rate increases changed things. Recall, the Fed rate is the rate the Federal Reserve charges its best banks and clients. It's not the mortgage interest rate, but it's associated with it. The Fed rate has been stairstepped higher each time the group met since April of 2022. Thus, mortgage interest rates as associated rates have moved up as well.
Rising mortgage rates to 8% got into black ants our buyers minds and dampened their enthusiasm to purchase, either because of the perception of higher interest rates being a bad deal in the buyer's mind, or in a buyer's being unable to qualify and afford a higher monthly payment. I have to share again. The first home I bought was a twelve and a half percent interest, refinanced it a few years later, and lived happily ever after. Well, I'm not too sure about the happily ever after part, but I did refinance it and dropped the rate considerably, thus the monthly payment successfully in 2023, home sellers the red ants just hung out and did much of nothing as they were uninspired to move somewhere else, pay a higher price for a replacement home and perhaps pay more for any loan at an 8% interest rate. You can't blame them. But these potential sellers, the red ants, could move with cash from selling their home in California to another state and buy a lesser expensive home with cash. It's their choice. Here. I should draw attention to an additional overarching factor in regards to our national housing market that also affects our local markets. It is that of movement from one house to another. In the US, it's been slowing for some four decades. Back in 1986, 20% of Americans moved annually, of which 12% of that were relocations within their immediate county. The percentage of homeowners who move annually now is down to 8.5%. That's right, 8.5%. Movement from one home to another has declined progressively in percentage from 20% to only 8.5% over the last 40 years. We could dive into this further as to where most have moved in lieu of just considering the national number, but that's for another date.
Home values in 2023, home values could have declined in the US, but they did not decline all that much at all. Nor did they fall off the table despite inhibited buyer enthusiasm. A pal of mine asked the other day, why did we not have a housing crash the way we did in 2008? Well, this one's easy. Basically, in 2008 we had an overabundance of homes available for sale for a limited number of buyers. Today we have little housing inventory for sale and buyers with lukewarm enthusiasm to buy due to interest rates. Generally speaking, the red ants, the home sellers, held tight and did not offer up their homes for sale at a traditional number.
Recall, these home sellers in the Bay Area are folks who are primarily of retirement age, people that, if they have not already sold, enjoy their home that may be paid off or they have a low interest rate. They say, why move? And then possibly have to pay today's prices for a replacement home and pay on a loan that has a higher mortgage payment.
The black ants or the buyers recall that the largest percentage of our homebuyers are a group consisting of 27 to 42 year old professionals. New families desiring great schools and neighborhood 8% interest rates affected their enthusiasm, although in my view they may have been best served if they would have purchased their home in the latter half of 2023. In the red ants and Black Ants Housing report that aired December 16, my silly but descriptive bag of rocks analogy to be summed up more important factors involved in a home purchase than the interest rate.
However, in 2023 we've had equilibrium.
In essence, the second half of our Bay Area housing market in 2023 could be described like stock traders like to say, as trading sideways. It was equilibrium enough for some buyers to pay a seller's price, but not so many of buyers who brought as to heavily compete on homes and drive home prices upward dramatically.
2023 housing inventory still short on homes available for sale in the second half of 2023, there was and continues to be a limited number of these homes for people to look at, to touch, to want to live and to buy. I admit a low level of housing inventory is expected to continue, and that's okay as long as a limited number of homebuyers come to buy. Buyers have been reluctant due to increasing interest rates. So we have that equilibrium. But now buyers are feeling a little more comfortable. The ant jar is starting to shake a little bit, and it will be interesting going deeper into year 2024. Bay Area ants and housing markets could roar in 2024.
Since middecember, mortgage interest rates have receded from just under 8% to just above 6%, the single largest rate drop at one time in a couple of decades. This is interesting as the Federal Reserve did not drop the Fed rate on December 13. They've only stood pat thinking ahead. If they do decrease that fed rate, it could interpolate into a sizable mortgage rate drop. We shall see. Blank ants could roar in 2024, there's a sizable difference in monthly payment on a 30 year loan with a rate of 6% as compared to a monthly payment on a rate of 8%. For example, on a $1 million loan, the difference in payment would be about one $300 each month. Buyers who were reluctant at 8% have to be more inclined to join the herd and start stampeding towards the still limited number of homes for sale. As rates have declined to just above the 6% point, the jar full of red ants and black ants is beginning to shake. What do you think will happen if rates continue to decrease? It is incentive for buyers to buy. For sure, sellers are still likely to hold tight. The seller market continues.
What really does matter? Let's get back to what really does matter in a home. Buy or sell. All right. We have analyzed mortgage interest rates as though it is the heaviest rock in the basket, even though it is not. Let's prioritize what really matters. What historically has mattered the most housing market wise in the Bay Area.
We're going to have a go at my basket of rocks analogy for that. Recall from an earlier episode, the larger the rock, the higher we prioritize it on the scale of what matters the most.
Valuing your home rock. Number one, the largest rock in the basket goes to the huge benefits a home has to offer an owner and his family. In lieu of paying rent. You no longer pay that rent payment. You pay a mortgage payment, but now you own. You have a house to come home to from work, a home to grow your family in, schools, neighbors, and so on.
The second largest rock of importance, especially in our San Francisco Bay Area markets, is a homeowner's hope for value increase due to home appreciation over time. Home appreciation, or the increase in a home's value over time. Thus, a hope for increase in owner equity has historically been the most rewarding financial contributor to owning a home in the Bay Area. Unranked as a rock. Most folks who have been renting do not realize the money that they have been paying for rent will become an offset to the new mortgage payment. For a simple example, let's assume a new homeowner's mortgage payment is $4,500 per month. The rent the owner had been paying was $3,500 per month. The difference in this example would be just $1,000 per month at an 8% loan. Now, if the mortgage payment there at 6.2%, as opposed to the 8% loan rate, the difference between paying rent at 3500 and a mortgage payment at 4500 might not exist as the payment would be lower.
The third largest rock is actually three factors all bound up together. I have to say here, folks, check with your CPA on any and all tax points before you take action. I'm illustrating a point here. The third largest rock in our imaginary basket is due to the tax benefits of owning a home. Many buyers fail to consider the size of this stone in the basket. Let's talk about the three factors of the I call it the tax rock. The first factor of the third largest rock, the tax rock, is that the mortgage interest deduction is a rule that allows one to deduct what they pay in interest on their mortgage loan from their taxable income on their tax return up to a limit. Tax factor number two of the tax rock is depreciation on your home structure. Depreciation means our government gives the homeowner a lesser tax burden. Here is an example. If your home structure is valued at $500,000, you are able to reduce your taxable income by a 27 and a half year schedule of depreciation. So in this case, structure at 550,000. Divide that by 27.5 years means that you can deduct $18,180 each year from your tax return.
The third factor of the tax rock is the tax benefit one can receive down the road when they sell the home. Married folks, when they sell, can reduce their taxable gain by $500,000 before they have to pay tax on a gain. Single folks who sell can reduce their taxable gain by $250,000 when they sell.
The fourth largest rock, or the smallest rock in the basket, in my view, represents mortgage interest rates. Many homebuyer black ants are very sensitive to this factor, even though, considering all the benefits, this rock is the smallest size rock in the basket. Why? When you add up all the financial benefits in dollars and enjoyment of estimated home equity appreciation and the three factors of tax benefits of owning your home, that amount will likely exceed any extra amount you would be paying each month due to a higher interest rate. Mortgage refinance when you can, but buy, but buy when the market is most favorable.
We're going to take a short break. We'll be right back.
[00:14:44] Speaker B: Welcome to the real estate minute with remax expert Michael Hatfield. What does an agent do to get a home sold?
[00:14:50] Speaker C: Typically, an agent will prepare a comparative market analysis so he knows the home's value, then creates a marketing plan tailored just for your home. With these plans, he promotes the home globally and locally in social media, publications, open houses, all for the purpose of getting your home front and center with prospective buyers.
[00:15:09] Speaker B: As an agent, how do you get it sold?
[00:15:11] Speaker C: Michael we do each and every item in the plan, negotiate vigorously on the client's behalf, on inspection, repairs, staging and importantly, the deal itself. We do everything we can to get the deal done and closed.
[00:15:25] Speaker B: Call 925-32-2775 now to schedule an appointment or complimentary home analysis for excellence in real estate. Call the Michael Hatfield Remax team at 925-32-2775 or go to michaelhatfieldhomes.com.
[00:15:42] Speaker A: Now back to our show.
More on the housing market. Anchor and house the market now closing out 2023. We have to know that 2024 is an election year and it is possible mortgage rates could dip down into the fives. And if rates continue to decline, many buyers altogether will join the herd and compete for the same number of homes available for sale. We are seeing some shaking of that ant jar now, which means more buyers for the same number of homes for sale. If so, home prices will have to go higher. Simple economics. I would not wait for the mortgage rate to decline. Pick my buying point. Deal with a refinance down the road if need be.
Home sellers the red ants potential home sellers can see that home values remain at high levels after the value run up over the last three years. For sellers, it becomes a question of when to sell the asset and where to take that pot of cash and buy. What are the top ten reasons a seller may sell and relocate? One, family ties. Two. Need a larger space. Three, love the rate but not the house. Four, upgrade the neighborhood. Five. Want a vacation home. Six, lots of equity, thus lots of choice.
Seven, legacy real estate. Eight, time to downsize, retire. Nine, out of area location and ten, change of work, change of life. There may be other considerations to take into account. I would welcome an opportunity to talk with you about those considerations if you would like.
Now it's time to dive into the 2024 new year. If our review is correct and our scenario happens as I believe it will, many potential homebuyers may be left out in the cold and be forced to scurry around buying with many other homebuyers for a limited number of homes available on the market. This is like having a home that you buy for the interest rate. If you wait for those interest rates and you buy, you might find yourself in a home you really don't care that much for because of that interest rate. Buy the home, work with a rate layer. Also, if this happens, the scenario you're going to see much more of the multiple offer biding and we've already have it now, have had it in many markets in the Bay Area throughout 2023, it's been a seller's market.
So crystal ball on rates for 2024, my imaginary crystal ball Telegraphs that is likely that the Federal Reserve will reduce the fed rate in the first quarter, maybe the second quarter too.
If so, mortgage rates will in turn decline at a higher beta. If and when this happens, our black ants will flock to the great housing supermarket to purchase what remains to be a relatively small number of available loaves of bread available for sale. So a buyer's heartbeat is going to change. If suddenly, hey, they want to buy, it's going to change rapidly and the tempo is going to pick up with much more beats per minute. If the rates come down, they start looking around and they find that there's not a lot out there to be bought. We could have a big buyer roar in 2024.
Another subject people like to think about is how much should they put down? Well, when we start working with buyers, we ensure that they're connected with a really great lender, a lender that can help them, advise them in the specialty field that it is so let's talk just briefly for a moment. It's always preferable to put down at least 20% of the purchase price. Why? So you don't have to pay PMI insurance premium, which would be tacked onto your monthly payment. PMI is insurance designed to protect a lender in the event that you default on your loan. On any conventional loan, PMI is required anytime a buyer makes a down payment less than 20% of the purchase price. The premium for PMI is tacked on to your mortgage payment each month. Once you have private mortgage insurance, or PMI as a result of making less than that 20% down payment, you can get rid of it in four different ways. You can one, make payments until your PMI automatically cancels. Number two, you can ask for removal when equity is 20% or higher. Number three, make a large principal reduction to reduce loan balance to 80% and then ask for removal. And four, get a new appraisal if your home has increased in value.
So if you say buy with a 5% down payment, then when the home appreciates some to where your loan balance drops to 80% of the new value, then you can achieve a monthly payment reduction by asking for the PMI to be removed.
Now, since we've been talking about PMI private mortgage insurance, let's think about the down payment and how much we should put down when we buy a home.
Statistics indicate that on average it takes eight years for a person to save up to 20% down payment. And over that eight year period, the purchase price could have increased by some unknown percentage. Let's just say, for example, 30% example is 20% down of a $1 million purchase would be $200,000 down payment in eight years, if a purchase price has grown 30% to 1.3 million, your $200,000 20% down payment would now be $260,000 $60,000 more down payment would be required to make the purchase at 20%. Kind of like when you reach down to pick up a football and it gets kicked right out from under you right on down the field. Off one goes, scurrying it after it. Thus, and deal with the interest rate and PMI later. Get in at today's purchase price with a 5% down. Then, as the home appreciates, as it is likely, historically speaking, the PMI drops away, making your payment more affordable. Enjoy the home. Enjoy homeowner tax benefits. But of course, make sure you can make the payments with the private mortgage insurance premium tacked on. Also check the tax points with your CPA before taking action the PMI. The above example is with conventional loans only on an FHA loan. The PMI is called MIP and it works differently. The premiums are a little more costly and you cannot remove the like product to the PMI, but you can refinance out of that loan and alleviate the MIP premiums when your home appreciates to provide you with that equity on VA loans. Interestingly, there is an exemption to PMI and no PMI premiums need to be paid.
Our conclusion to this episode is that we are now into year 2024 and mortgage rates dropped middecember 2023 to a little above 6%. We expect rates to come down even more when don't know, but it is an election year. If and when rates do decline further, many black ant potential homebuyers will form into the herd and come galloping towards a home buy, picking from a limited number of homes available for sale. Considering all the benefits of owning a home in the Bay Area, the longer you wait for the rate, I like that. Wait for the rate, the more the Blackhands will likely pay for that home. So, to recap our episode today, we've done a 2023 rate review. We've looked at the sellers and where they are the buyers, the black hats, where they are the equilibrium that resulted during the 2023 second half. We've talked about the housing inventory, how it still remains slim. We've talked about the mid December rate drop that has changed mortgage interest rates simply by the Fed reserve staying pat on their Fed rate. We've talked about the rocks in a basket analogy and what really matters the most, tax benefits included. We talked about the reason that people will move, and then we talked about the crystal ball on rates moving forward along with PMI and how much down payment you should make on a home purchase. Thank you so much for listening to the housing market, Anchar and house the market episode of the Real Estate and more show. I'm your host Michael Hatfield. We talk about interesting topics, great people and of course, real estate. You can listen to archived real estate and more
[email protected]. Slash Radio that's michaelhatfieldhomes.com Slash radio. The real estate and more show is now podcast and available on demand on Spotify, iHeart, Amazon, Apple, Pandora and all major podcast directories as well. I hope you tune in next week, but until then, have a blessed week.
[00:26:44] Speaker D: The views and opinions expressed are based on current economic and market conditions and are subject to change. Information on the show provided for illustrator purposes only and does not constitute professional or legal advice. Information from sources deemed reliable, but accuracy and completeness not guaranteed. Michael Hatfield and the Michael Hatfield remax team have no liability for information discussed on the show. Consult with qualified professionals prior to taking action.
[00:27:13] Speaker E: We at the Michael Hatfield remax team enjoy representing our valued clients. If you or someone you know is interested in buying or selling and wishes to schedule a complimentary appointment with the Michael Hatfield remax team, call us at 925-32-2775 that's 925-32-2775 or go to our website, michaelhatfieldhomes.com.
[00:27:37] Speaker A: I'm Michael Hatfield. Thank you for listening today. Join us next Saturday for the next real estate and more when we again sharpen our focus on house the market.
[00:27:47] Speaker E: Join us next Saturday and have a wonderful week. Best wishes and blessings to you.
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