George Ratiu, the Chief Economist of Keeping Current Matters (KCM), joined Byron Lazine, Tom Toole, and Lisa Chinatti on last week’s episode of the Knowledge Brokers Podcast for a conversation you’ve got to hear—and you should probably listen more than once.
A single blog could not possibly do this episode justice. So today, we’re focusing on just one part of the conversation, where George addressed top concerns from homeowners and prospective sellers about the current housing market.
This part of the conversation focused on how you can break down the math for consumers:
- What can you tell homeowners who feel stuck in a position where they’re locked into mortgage rates of 5% or lower when today’s rates are just south of 7%?
- What about prospective sellers who want to bridge that mortgage rate gap?
- And what can you say to consumers asking when mortgage rights might start coming down?
How can agents break down the math for consumers?
Byron started off this segment by asking Lisa Chinatti about her team’s strategy for helping consumers understand the tricky math in today’s market—specifically, for sellers with a 2-3% mortgage rate.
One of the big things we’re really encouraging our agents to chat about with their consumers is looking at A.R.M.s and buy-downs as a short-term solution. Because the math is brutal, right? We can look at the difference between an upsize payment is more than doubling for us, and in a market with an average price of $650,000—700,000, doubling a mortgage…it’s a daunting kind of task to think about.
Byron supplied an important stat for agents to keep in mind when having conversations with prospective sellers—that about 83% of mortgaged homes have a rate at or below 5%—before turning it to George for his thoughts.
To be honest, I don’t think there’s a blanket approach that will work for everybody. And maybe that’s the tough answer… If someone is nearing retirement and is in a high-cost market and they want to move somewhere else for a lower cost of living—think of someone moving from Boston, San Francisco, New York to Tennessee, Texas, Florida. Even if they have a 3% mortgage right now, but they’re moving into a market that’s lower cost, they could sell their house, take the equity, and have a variety of options, with a higher down payment. Even with a higher rate, their monthly payment is still not high…I’m saying this to highlight the fact that, for a lot of people, there are options beyond just an A.R.M or a buy-down…It really depends on what your lifestage is and what your particular financial circumstances are.
At the same time, there’s no running away from the fact that you are, maybe, somewhere in your mid-30s, mid-40s, you’ve got the second or third kid, you’re still in a fairly tight three-bedroom, and you want to move up. That math gets a little tighter, especially if you don’t want to leave your market, because now you’re going to look at a bigger home with a bigger price tag—plus a higher interest rate. And again, here, I think the important thing to remember is people’s circumstances are different.
At this point, Byron dropped another important seller stat: “Four out of 10 homeowners, 42%, own their house free and clear.” When looking at this specific “bucket” of consumers, agents can address both the inventory shortage and a top concern among sellers.
When you’re trying to unlock inventory in your market, be aggressive in that bucket—the folks that don’t have a mortgage. So, if you don’t have a mortgage now, and you have a need or a desire to be in a different home, selling that home and moving your cash over is going to make you a lucrative buyer in the negotiation because you’re gonna have cash. And it’s also going to give them one less thing to worry about in putting that home on the market.
Explaining the gap between the 10-year treasury and mortgage rates
From there, the conversation turned to the gap between the 10-year treasury and mortgage rates—and how to explain that gap to consumers. Tom Toole asked the question, bringing up a recent tweet from KCM founder Steve Harney on the difference between the average gap over the last 50 years (1.72 basis points) and the current gap (313 basis points). The latter arguably corresponds to a considerably lower mortgage rate than we now have: 5.29% vs 6.95 (as of May 22, 2023).
Agents and consumers alike are struggling to understand the mismatch. Tom asked the question: “How do you explain that to consumers in a way that’s easy to understand?”
George began by explaining the relationship between the 10-year treasury and mortgage rates (particularly the 30-year fixed) before addressing the question of how to break down the essential details for consumers.
The spread between the 10-year treasury and 30-year fixed mortgage rates is “a measure of risk in some ways,” he stated. The market accounts for long-term risks and short-term risks, such as what’s happening right now in the financial, housing, and job markets.
We have 30-year mortgages, but generally the reason they tend to track the 10-year treasury more often than not is because, in light of the fact that most consumers tend to stay in their homes for about 10 years, that’s the period at which you, as a financial market investor are going to consider the risk of your mortgage-backed security. So, in a sense, what this tells me is that, currently, a lot of the bond market views the risks in the economy and housing as being much, much higher on the downside, which is why you’re seeing that spread wider.
In addition, we’re coming out of a “highly unusual period.” The pandemic—along with the government’s response to put the economy on pause—was unprecedented.
So while it may not be surprising that we’re trying to get our bearings coming out of that period, it can be challenging for agents to have this conversation with consumers. Especially since we know consumers have such low sentiment toward the housing market.
George shared how agents can talk to people about where mortgage rates are—as well as the future outlook:
Number one: Looking at the 10-year treasury is a good indicator, now, that a lot of brokers are keenly aware of what’s happening on a daily basis. Number two: Understand that where we’re seeing mortgage rates right now have been driven there by a combination of factors: #1, inflation… #2, the Fed increasing borrowing rates…
So, my view is, if the Fed is successful in accomplishing its task and subduing inflation back to 2%, we can expect to see mortgage rates begin to trend down in tandem, with a slight lag. Here, my big question is mostly on timing.
For more, watch the full podcast. You’ll want to keep a notebook handy.