A Market Update: Financial forecast for the coming year and loan options for investors
Our speaker this month was Libby Kyros, a mortgage broker with Guaranteed Rate and Shant Banosian, the #1 mortgage broker in the country. Libby is a powerhouse and I highly recommend you connect with her to see what product could work for you. You can learn more about what she has to offer here.
At our meeting, Libby walked us through how interest rates are intertwined with the Fed and what to expect this coming year, along with some great loan products she is currently offering! Here are some key takeaways (as always, this is my recap and I am human, so please connect with her directly to truly understand the topic).
In order to truly understand interest rates and news headlines, we must understand the federal funds rate. When you hear about the Fed increasing or decreasing rates, this is what they are talking about. The federal funds rate is the interest rate at which banks lend each other money overnight. This is a benchmark rate, from which banks then determine their own interest rates (this includes shorter term consumer loans, credit cards, etc.). The difference between the banks rate and the Fed rate is the banks spread (profit). (pg 5 of slides, right hand slide)
As of today, the federal funds rate is 5.33%. While interest rates and the federal funds rate are connected, they are not the same thing. A change in the federal funds rate does not equate to an automatic change in interest rates. The 10 year treasury and interest rates tend to follow each other, so that is a great reference if you’d like to watch the trends. Currently the 10 year treasury is sitting at 4.28% and mortgage rates are currently between 6-7.5% (the difference between the two is the bank’s current spread).
There are three things that impact interest rates:
Health of the Economy (what are the costs of goods, how is the job market, etc.)
Demand for Mortgages (aka mortgage backed securities)
During the pandemic, the government’s stimulation package included the purchasing of mortgage backed securities. This drove rates down and kept them down. Since the government has slowed with buying mortgage backed securities the market has been flooded with supply ready for investors to purchase. Flash forward to 2024, these securities need to be worthy enough to be purchased by institutions.
Factors Institutions Consider
Budget: How much cash does the institution have to invest in mortgage backed securities?
Return On Investment: Once they purchase the mortgage backed securities what are the odds borrowers refinance? How long will consumers within the mortgage backed securities continue to make payments?
A little rate history: rates were low in the middle of COVID (2-3%), then hit their high at 8% in October. They are currently sitting around 6-7% and are remaining pretty flat with not a lot of movement. With that in mind, how do interest rates impact affordability?
Every time rates go up 1%, 5M households are removed from the market
23M have been forced out since 2021
At 3%, 50M homes are qualified, at 7% only 25M are qualified. At todays rate, 22M households are qualified.
So what does this all mean for 2024? Quarterly, the Fed looks at what is happening in the economy and adjusts the federal funds rate accordingly. Last fall, we heard a lot from the media saying the Fed will cut rates this year and interest rates will fall this spring. Most recently, the Fed (whose notes are public), indicated that they will not be making changes to the federal funds rate at the next meeting in March, with a change unlikely “until it has gained greater confidence that inflation is moving sustainability toward 2%” (it’s at about 3.1% now). So while rates may increase later in the year, spring buyers should not expect a significant change.
Having said all that, buy now, or wait? I loved Libby’s answer to this; she had two great points that everyone should consider:
The net worth of a homeowner is 40X greater than that of a renter.
When buying a home, you are purchasing an asset worth hundreds of thousands of dollars for only a small percentage of the total worth. For example, if someone gave you $500K of stock for $30K (aka your downpayment), it would seem like a no brainer, right?
Loan Products for Investors:
DSCR loans (debt service coverage ratio):
DSCR is a formula used to determine a ratio by which the income of the property covers the debt (note: it does not factor in expenses to this ratio, just the PITI).
DSCR loans look at the investment and the cash flow, not so much the specific borrowers financials (and you can use short term rental income).
Ratios can be 100% (so the income would need to be the same as the PITI), but you get better rates with 1.15 or 1.25 DSCR.
Can use equity lines of credit for the down payment.
The biggest downside to a DSCR loan is that it is a higher interest rate (it’s a riskier loan so the borrower pays a premium).
Bank statement loans:
This loan uses business bank statements to qualify, not income taxes. This is especially advantageous for those who are self-employed and may have a lot of deductions on their taxes, which reduce their net income on paper.
They typically look at either 12 months or 24 months, primarily at deposits and withdrawals.
Libby’s company has exclusive partnerships with Goldman Sachs, JP Morgan, and others, which helps to be competitive with rates.
Rates vary depending on down payment.
Can use for new construction.
Physician loans:
There is a long list of medical professionals that qualify for this loan. The idea is that these professionals have high levels of job security and income, but also may have student loans, etc. which impact credit score and debt to income ratios, which can make borrowing difficult. Those who have gone through med school, making very little money, may also not have a significant down payment saved, even though they now make a high income.
These loans are 0% down up to $1M, 5% down up to $1.25M, and 10% down up to $2M.
Lock & Shop:
This is not a specific loan, but a great option offered by Libby’s brokerage - if borrowers are concerned about interest rates rising, they can lock their rate for 90 days while shopping for a house. This is especially advantageous for new construction or other homes that may have delayed closings.