🏠 Housing Market Shake-Up: Builders Slash Prices — What It Means for YOU!

Good afternoon, everyone. Welcome to this week's Mortgage Minute. My name is Art Alvarez with Mortgage Works, where we have the answers and they're on the house. Sorry for the delay in the start of our show today. We had a few technical issues in terms of getting, getting online here. So glad to see you. And again, welcome to the show.

I like this time of year. We're finishing up the regular baseball season going into the playoffs and frankly, I know everyone's got a different opinion, but I think nothing is better than playoff baseball. So we'll see how that plays out. So there's some pretty good races there. And of course, what's really interesting is Cal Raleigh with the Seattle Mariners. He has, he's up to 60 home runs, which, you know, I almost wonder why that doesn't get more news. I guess it's getting to be sort of commonplace. Of course, we've got Aaron Judge back east close behind. So I guess I can remember when 60 home runs was like an amazing feat oftentimes was considered never to happen again. So I guess it's just something that's getting to be more commonplace. And by the way, you might notice I'm a little red eye. I had a little attacked by my contact lens, so that's why my left eye is looking the way it is. But it all is good and day or two, it'll be fine. So want to go ahead and give you an update on the bond and mortgage market, especially after the Fed meeting last week when everyone in great anticipation was expecting that to once again be the start of a trend downward in mortgage rates. So first we'll pull up our rate grid and what you'll see there is actually, you know, rates are still pretty good, but they did not improve after the Fed meeting. In fact, they are slightly worse. And I say slightly, that's very much the case. So it's not like they've jumped up a great deal. And as you can see on the rate grid, all those rates here that we have right now are pretty darn good. It's funny too, the 30 year fixed, conforming with a good down payment and credit score, we're at 6% with no points. I saw an article here on the business page just a day or two ago where Fannie Mae is predicting, you know, potentially under six in 2020, 2026. And when I opened up the article just to see what the actual number was, they're predicting, well, in reality, Fannie Mae is predicting that we'll be at around six at the end of next year. Well, guess what, we're already there folks. Again you'll hear other media outlets and the business page, CNBC and so forth suggesting that mortgage rates are six and a quarter, 6.3. If you come to Mortgage Works, we can in a lot of cases give you a better deal than that. In fact, I just saw the, you know, Freddie Mac does a weekly release of the average mortgage rate or yield that on loans that they buy from lenders. And I guess this week was the first uptick in that average yield in a few weeks. So again that that is a good indicator of what we've said before and we tried to explain to everyone and of course all of us in the industry try to make this point, which is don't focus so much on the Fed. What was happening is the 10 year treasury bond yield, which not just a couple, two, three, four weeks ago, was bouncing around between 420 and 430. And then of course it started dropping in anticipation of the Fed meeting. Once the Fed announced their rate cut of a quarter percent. Again, buy on rumor, sell on fact, that 10 year bond yield dipped under 4 for about an hour, about 399. And guess what, Jeff's going to pull up the bond yield chart right now. This is a chart for the last five days. And there you go. We're up to almost 418. So that of course means that mortgage rates actually did not improve after last week. They're at about an eighth to slightly more than an eighth higher after the Fed funds rate reduction. So again we saw this a year ago when the Fed lowered the Fed funds rate by half a percent. And within six to eight weeks after that, mortgage rates were 1% higher. So they climbed up quite a bit last year. Now this year, not so much. But you can see that chart here going back to last Friday. We had a little bit of a dip on Wednesday. There's that Wednesday dip that Jeff likes to see. But of course now going into today and toward the end of the day, you can see that it's gone back up to 4, 1 8. So let's talk about briefly what's going on in the market as to why we're seeing these kind of moves in the 10 year bond yield data. Point wise, a fair amount, not a huge amount of data points. The first one I want to go ahead and point out is the U.S. the S&P U.S. services and manufacturing Index. Both of those were released this week and both were slightly higher, not by much, but slightly. Services you can see, or I'm sorry Slightly lower. Services, you can see, dropped to 53.9, was 54.5 the previous period. Manufacturing, same story, very slight dip, 52.7 versus 53 on the previous period. But keep in mind, over 50 still signals expansion. So what this shows is services and manufacturing in the US Is still in expansion mode, albeit at a slower rate but still expanding. So it gets into a little bit of this is a glass half full. Is it? Is the glass half empty? Generally speaking, the economy is still looking pretty good when you look at these numbers. The next thing, of course, I wanted to point out, new home sales got released this week and it was like a barn burner, like new home sales at 800,000 versus 664 in the previous period. That's an over 20% increase in new home sales. And a big part of that reason is builders are, as you can see on the bullet point, they're piling on discounts to sell homes. And we're actually going to, in our discussion phase here of the program, Jeff and I are going to talk about that in more detail. The other interesting thing is existing home sales came out today and they turned out to be flat. Now the predict, the Forecast was for 3.96 million. Well, it came out at 4, even 4 million. The previous period was 4.01 million. So again, existing home sales flat, no big increase like you see in the new home side, you know, over 20%. New home sales, not so much. Again, we're going to talk about that a little bit more in our discussion phase after we finish this, this segment. The next thing that came out, and again, this kind of flies in the face of the more doom and gloom, the labor market softening. Maybe we're getting into a recessionary environment.

The latest estimate for third quarter GDP was released today. And actually the prediction was that the estimate was going to come out at 3.3% growth for the third quarter. Well, guess what, folks, that estimate as released today, it's now at 3.8% growth, which would be better than the second quarter. So again, all these headlines about the softening labor market, the softening economy, gee whiz, we're seeing services, manufacturing are still in expansion Mode and the GDP is now estimated to be almost at 4% for the third quarter. Of course, we'll know that in a couple of weeks. Again, that kind of flies in the face of some of these headlines. And then the other thing I'm gonna put on the slide here is initial claims for unemployment. That's a weekly number. I don't always put it on our slide here, but I wanted to bring it up because the forecast for this week was 235,000. If you remember, it was only two, three weeks ago. That number came out much higher than estimated at about 367, 300 or I'm sorry, 267,000. So of course that was an aha moment by the, by the market observers that there was that first sign that the labor market really is starting to falter. Well, that number as released today wasn't 200, it was 218,000. So initial claims dropped below forecast by about 17,000 and at 218,000 that's a full 50,000 less than what it was just two, three weeks ago. So again we're hearing these headlines about the labor market is softening up. Well, if that was true, you would think the initial claims for unemployment would continue to rise. That's not happening. It looks like that 267,000 initial claims a couple of weeks ago was a little bit of a flash in the pan. And as I recall, part of that was attributed to the Texas floods. So again.

A situation like that can cause a spike that's only temporary. But otherwise things seems to be settling down. In terms of the labor market, the last thing that is going to be this week is tomorrow the personal, the pce, the Personal Consumption Expenditures Index that is the Fed's future favorite inflation target. So that's going to be very interesting. Now it's forecast to be the core PCE that excludes food and energy is actually forecast to be down by a tick to 0.2% from 0.3% previously. Now if that proves to be true, that would be good news I think and it could help us with that bond yield. On the other hand, if it, if that turns out not to come as forecast and ticks up a bit, that could put more pressure on that 10 year bond yield. Because what I would suggest is again you'll notice there's some back and forth as to what the market focuses on when it comes to bond yields and mortgage rates. As Jeff just put up there, I like to say financial markets like to respond with reptilian like minds to stimuli. So again, the markets can kind of react back and forth depending on what the focus is. The last few weeks the focus was labor market. It's softening up. That was bringing the bond yields down. Now more recent data showing, well, maybe the labor market's not so bad, maybe the economy is not slowing down that much. So I wouldn't be surprised that the focus now shifts back to the inflation number. And again, if the PCE comes out as forecast, that could help us with the bond yield. If it comes out worse, we could see that 417, 418, shoot, that could get up back over 420 or more. So for any of those interested, Google that tomorrow 10 year treasury bond yield, look up the chart and let's see what happens. Keep our fingers crossed that it comes in as forecast so that maybe we can see that that bond yield stay where it is right now or maybe improve a little bit and get us back closer to 4% because if that happens then we could get more solidly into a below 6% conforming mortgage rate market. So let's hope that that happens and we'll just see tomorrow. With that we're going to go ahead and bring Jeff on because we're going to talk a little bit about that new home sales number and what does that mean for buyers perspective buyers in this environment. Hey Jeff.

Hey Art. I haven't seen you this excited since the a, since your team was actually leading or maybe one or two games out of lead. That's pretty exciting. All this is great news. I mean it's like, you know, I, I feel like there's been that, that, that town crier about, about, you know, saying the wolf is coming, the wolf is coming and it isn't showing up.

No, I'm probably not. And that, and that's what's so frustrating I'm sure for consumers in particular because you can get so confused with all the headlines and you really have trouble deciphering what's really going on. And of course even the market players, the investors and so forth and the economists and all the folks who focus on this kind of stuff every day, it's amazing how much it can shift back and forth as to what the focus should be or is. And, and it can create some real short term volatility really in some of these numbers and which can make it really, really difficult to just track what's really going on. That's why I always tell people, just watch that bond yield kind of shut out all the other noise because that's going to be your best barometer to kind of track where things are going well.

You know, you've got me hooked on this now. I feel like it, you know, I get 5 o' clock in the morning, 6 o' clock in the morning, I'm immediately checking that bond. You're like, okay, what happened?

Well, that's what I do.

Yeah. And so I, I'm glad to see everything as far as the real data points. Not an opinion, but real data points are really, you know, positively. When you said the, the, the growth from 3.3 was the forecast in this 3.8, that's pretty amazing.

It is. Now of course it's still a forecast because we're not quite done with the third quarter. Third quarter is over next Wednesday, October 1st. And then, you know, that number for GDP third quarter will be out probably a couple weeks after that. But you know, that's a, you know, those kind of forecasts are certainly pretty educated guesses, right? I mean it's, you know, professionals who look at this stuff every day and try to make these predictions, these forecasts that a lot of investors and market players rely on. It's fairly unusual for them to be, you know, way, you know, well, far off I can remember second quarter, the Atlanta Fed was predicting a 3.8. Didn't quite get, there was about 3.3. In fact, I think it was actually 3. 2. And then it got revised to 3 3. And so we could have that happen again where with this forecast of 3.8, could it come up short and be back to the low threes? Perhaps, but gee whiz, 3% growth rate is really good, especially when you look at the first and the first quarter when it was like below two, was it or actually maybe negative a little bit. So the point is a 3% growth rate, should that bear out, is tremendously good news. That's a pretty strong growth rate for the economy. If we could sustain that, then I would argue, yeah, things are not that bad and that labor market's going to hold up pretty well.

Well, I think it's exciting that, you know, we, we hear about all the negative news, the tariff and we've talked about this many times about, you know, Chairman Powell. It will be. Well, he's, he's just baking in his decisions not to do anything on the rates because of the tariff and, and the inflation and the job market. And yet all of these things are like not, not happening. How, how could someone at that level, and again I'm, it's just conjecture, but how can someone at that level be missing these points so, so dramatically?

Well, I think there's, you know, when he, as he always does after the two day meetings where they make the announcement on a rate cut or a rate increase depending on the situation and when it, when it's happening, you know, he does a press conference where he's going to, you know, get questions and explain what they did and why they did it. And at that last press conference with this latest reduction, you know, he continued to hang on to the notion that they're going to maintain a relatively, or at least a modest, modest restrictive policy. And the, you know, the translation there is, we're not quite ready to say, yeah, things are definitely softening. We're going to commit to a certain number of rate cuts. There's still some uncertainty about are we going to have two more rate cuts this year. And of course he had suggested that it may not be more than one next year. So, so, and that's part of why when the announcement of the rate cut occurred, that bond yield briefly went down to 399. And but then when the press conference occurred, by the end of the day it was back to 408. And in large part that was because of his comments about, yeah, we think there's some signs of the labor market softening, but it's still strong is what he said. It's still relatively strong. So it's like, oh, well then maybe you're not going to lower it, you know, as much and as frequently as we were hoping going forward. And so that's what the market reacted to is simply his comments and after the decision was announced. And so what will happen here is if you see, if we see this, you know, with this 3.8% and that bears out, and of course with that initial claims of unemployment dropping below forecast and 50,000 less than it was a couple weeks ago, that starts to say, well, maybe the labor market's not so bad. Which as we've talked about, unfortunately in the mortgage business as it relates to mortgage rates, bad news is generally good news. So if the labor market bad news that we've been hearing isn't as bad as we thought, that starts to cause those bond yields to go back up. And then what happens? Oh well, the labor market's not so bad. Let's go back and look at inflation. And inflation is, yeah, we're getting close to two. We've made a lot of progress. But if this like tomorrow the PCE ticks up a tick or a couple of ticks, oh my gosh, I wouldn't be surprised if that, that ten year bond yield gets up to four and a quarter.

Wow.

Because now the Fed or the market players are all focusing on inflation because the more recent data on the labor market isn't as bad as we thought. So boy, it's really hard to kind of keep track of all this.

It certainly is like Balancing plates and, you know, on sticks. You know, it's like, which one, which one do you go to next? Well, all right. Well, that's, that's great stuff. I want to talk about today, some of the stuff you brought up of, of the, the home market sales. When I read this this morning, I'm like, oh, my gosh, I had to have a second cup of coffee to make sure I'd read it correctly. It's pretty exciting stuff that Lennar sales increases, incentives, temporary buy downs. Oh, excuse me, buy downs. And somebody say buy downs. That's, that's an art in ism. And, you know, I just want to talk about some things that, like, what does this mean for your average customers who are, you know, thinking about buying a home? Maybe they're refinancing. Maybe they're looking at doing home equity line of credit. What does all this mean?

Well, yeah, that Lennar announcement. Well, let me back up a second. The new home sale number this week that came out.

You know, Lennar is a very good case study as to what went on there. You know, it's like the stock market, you know, like the Dow 30. You know, they'll talk about on CNBC about if the stock market's up or down. A lot of times they'll attribute it to a certain handful of companies that are driving the market either up or down. In this case, Lennar is a very good, I think, benchmark or barometer on the new home sales segment of the economy. Lennar is a big national home builder. They build to the mass market. Right. They're not the luxury home builder like Toll Brothers or something like that, or on the Toll Brothers side, you know, if you're building two, three million dollar homes, you're going to be a little bit more sticky in terms of, you know, conceding on your prices or offering buy downs or other incentives because, you know, the wealthier folks out there are a little less price sensitive and you can kind of hang on until you, you, you know, reel in that buyer. Lennar is different. They're a mass market builder. And so they've, they've got to be much more dialed into. What does that prospective buyer want? Well, they want a couple of things. They want lower prices and they want lower rates. And so Lennar really, really is dialed into that. And so what was so interesting about this release to 800,000 again, more than 20% higher than the previous period. And of course, Lennar, in Lennar's case, they went ahead and announced that they are now they're they're basically their median price of the homes are selling is, as the bullet point shows here, below 2019 levels. That's a, that's a big wow number because in 2022, they were at 25% above 2019 levels. So they've gone all the way back down to below 2019. That's a signal that Lennar basically read the tea leaves and realized we're a mass market builder. We're building a lot of homes. In fact, their sales were up. Right. But at the, that that was achieved by basically adjusting prices and in particular offering more incentives as it relates to buy downs, both temporary and permanent buy downs. And it's kind of not unlike the tariff story where they did a combination of both those things. So what ends up happening is that that's attracting the home buyer, and that should be a clue. You know, with other markets like existing home sales, there is very good price elasticity when it comes to home prices and mortgage rates. So Lennar is providing a very good example. If you focus on that, if you're a seller of homes, you're going to see a response in terms of higher sales. And that's what's happened. And so what that does is I think it tells a prospective home buyer out there. They are basically conceding to that prospective home buyer their negotiating power. You know, Lennar's basically saying, look, you can come at us and try to negotiate with us, but we're going to do that for you. We're going to kind of negotiate the other way and say, look, we're going to cry uncle. We need to move some inventory. So we're going to go ahead and, you know, sharpen our pencil on price. We're going to really sharpen our pencil on concessions because most of you are going to need financing to buy our homes. You're not cash buyers. And what is the biggest thing you're complaining about? Mortgage rates are too high. So we're going to take care of that and give you something, frankly, an offer you can't refuse. And I think that's what's happened.

Well, you know, we've talked so many times in the past what the, you know, the average, let's say a home price is that's on the market and what actually sold for. And that 3 to 5% seems to be a very solid number. But according to Lennar, the incentives are averaging over 14% per cell. So, you know, again, that message being sent out, what, what does that do for the people down the street that maybe are outside those developments. But they're trying to sell their home or they're wanting to buy a home. What should you tell them? What could you tell them?

Well, see, that's the thing, and that's something I've been talking about for quite a long time, is that when you realize, and there was a whole article written about this about Lennar Homes and what they're doing.

You know, Lennar, like any home builder, what they're going to do is, you know, they're going to budget their, their subdivision and they're going to go through process to decide what prices are they going to list these for or offer the homes for. And in doing that, they bake into their initial prices what they're going to offer in incentives. I mean, they, they basically they'll, you know, go through the gyrations and figure out, okay, we got to sell this home for, you know, 599. But they also realize we got to do some things to generate buyer demand and response. So they'll figure out what they're going to do in incentives, whether it's closing costs, credits, temporary or permanent buy down credits, and then what they'll do is they'll determine the cost of that and then add that to the price. Now, more recently, as we just talked about, they're doing that, but they're deciding to cut their price and then add back to that the concessions. And so as a result, as you just pointed out, those sales that they've been booking, you know, 20% higher than the previous period. Yeah. Baked into those prices is this 14% worth of concessions, Right? Yeah. If you're a seller of an existing home, you gotta realize that that's your competition. Because in the existing home market, and I'm hearing it all the time still from realtors, sellers of existing homes continue to be stubborn about adjusting their prices or about what level to initiate their asking price. They continue to like, not accept what's going on out there. And they're kind of living in this la la land that they, they don't need to worry about Lennar. They think their home is a castle and they're going to ask for a premium price just because. But then what you hear as a result is there's quite a few listing agents, certainly in this market here in the Coachella Valley and in other markets too, where some of these homes are starting to sit on the market for a good amount of time. So I think the lesson here for a prospective home buyer is the builders are conceded conceding to you that you have the negotiating power. Again, as I said, they've already baked in the negotiation for you and giving you this offer you can't refuse. So if you're a prospective homebuyer, I hate to say it, you darn well probably better look at new homes as an option if you're ready to buy, because they do a better job of addressing your biggest complaint, mortgage rates, what your payment's going to be, not just the price of the home. Although again, we, we keep talking about, they did adjust their prices too, you know, so for the buyer of the looking to buy, you can't discount a new home as a consideration. Now, I hate saying that because especially if you go to Lennar, they're in the mortgage business, so you go buy a home in Lennar. Me and most of the people who do what I do aren't going to get a shot at providing those loans. But what's really kind of frustrating is sellers, those who own existing homes and are going to list their home for sale, I think they got to embrace the fact that folks like Lennar are their competition. And I'd like to see a couple of things. You know, when a listing agent is getting a listing, you know, they're going to have go through a similar process and talk to that seller about, we got to figure out what we're going to ask for this home, what we're going to list it for. I would argue that conversation should be expanded to include, hey, Mr. Seller, let's talk about, should we offer some incentives when we initially list the home? Because that's what home builders do, right? Yeah, let's, let's do that. Let's figure out some incentives and maybe we market the home at a particular price. Now you've just, let's decide on our price and again, maybe we decide we're going to list for 599. Well, we'll tell you what, why don't we try something. Let's list for six and a quarter. But in there we're going to say, look, we'll market the home with full price offer. We'll offer, you know, an interest rate buy now, now, you can't get too specific about the rate and all that because you get into disclosure rules and APR and all that. But that to me, I think is a conversation an agent who's trying to get a listing with a seller ought to consider and, or if they don't do that, at least have a conversation that if they list the home at a particular price, they want. If they don't get any action after 30 days, 45 days, and they're contemplating having to make an adjustment, most likely in the price. Before you do that, talk to somebody like us and at least share with us. What are you contemplating in terms of concession? Let us show you how you can offer that concession in a more effective way toward financing so that you're going to attract more buyers. Because you're, again, you're addressing one of, if not their biggest concern, and that is high rate and a payment that's too high as well.

Yeah, I think, I think back when, you know, you go to buy a car and they very rarely sell you on what the car costs, it's like, what are my monthly payments? And if it's affordable, I can afford it. Then if it becomes not affordable, you ask a nice question of like, well, what's the interest rate you're charging me? And that's an opportunity. Well, as you've shown out here, Lennar is already on top of that. And they basically say, hey, we've already put that opportunity in our sales pitch. We're ready for it. But the average home, seller of a resale home, and you stop me from wrong, but the average agent is not, they're not.

And, you know, I don't mean to be too critical about that because frankly, historically, an agent, any good agent, will say, well, look, the financing, that's, that's not, that's not something we get involved in. That's between the buyer and whoever their lender is. But again, I argue, well, times have changed. We just been beat into us about prices are too high, rates are too high. If you're going to sell a home, if you're going to list and sell a home, I think the agent and the seller need to have a, you know, a frank discussion about, first of all, accepting that that's reality, that's what's going on out there in the marketplace, and then deciding do they want to do anything about it strategically to make their listing stand out among all the others that are out there where they're just asking for a premium price and then hoping for the best and then having to make adjustments, usually by just dropping the price after 30, 45 days and not really addressing the buyer's main objective. And it holds true on the other side, too. If you're a buyer's agent, time and again, you're going to get with a buyer, you're going to have them sign an agreement where you're going to represent them. You're looking at listings, and right off the Bat you're deciding I want to offer less than list price. As we've said before. Don't jump into that. If you're considering offering below list price, talk to whoever that agent's preferred lender is. If you don't have one, call us. Call me. Tell me what you're thinking in terms of your offer price. Let me show you what else you can do to get that concession in a better way to improve the rate and the payment on the financing. And I've had a couple more doing that here in just the last couple of weeks. And once I gave them the opportunity to show them what the numbers can be if they take that concession through a way other than a lower price, but through a seller credit in dollars.

Every time I do this now, they usually accept. That's a better way to go. And guess what? They're getting offers accepted by doing that.

Wow. So it's just. It's really just a matter of they need, I guess, the. It's just like a new car nars or excuse me, the new home sales people, they've known, they've done this forever. Like, you've been in the business over four decades. This is not the first time you've seen concessions used to sell homes. Right?

Right. No, no. We were doing this 40 years ago.

Yeah. So it's. This is not a new thing. So if you're hearing this for the first time, I think, oh, this is new. It's not new. It may be new to you because it's never been talked about because they haven't had the pressure of the new home sales versus the existing home sales, and they have to be more competitive. And quite frankly, it looks like Lennar is kind of. Is kind of winning. I have up here, you know, who wins when it's builder versus existing home sales. And, you know, it's like, who wins? Well, I guess it depends on how you're negotiating and setting up. And I like what you're saying is make sure you get with somebody like Art and say, why don't we structure it a little differently? Don't just go for, I'm going to lower my price. Because as you've said, you know, what are we talking about with. For every thousand dollars lowered equals how much?

Six bucks a month.

You know, for most of us, it's like, hey, okay, you're going to put $10,000 lower. That's $60. That's not a game changer.

Right? Well, good. Good example was one of the ones I just alluded to. I pre Qualified a buyer three weeks ago. She initially was saying, oh, you know, single lady teacher, makes good money. I want to buy something, you know, I don't want to be married to a payment. I want to, you know, look at something 400, 450. Well, of course she goes out and I pre qualified her, let her know she could qualify for a lot more than that. She gets out there with an agent, well, guess what, starts looking at homes, realizes 400, 450. I don't like the homes at that level. She finds one at 580. And they were gonna ask for 25, 000 concession in price. I said, wait a minute, give me a chance here. So I showed him some alternatives. They're in escrow now.

Wow.

At 580 she was only putting 10% down.

She's getting an FHA loan. Note rate is five and a half with a three, two, one buy down. So her first year rate is going to be at two and a half percent.

That's insane.

Second year, three and a half, third year, four and a half. There's your three year window for rates to improve. In the meantime, she's well, well below market. And it allowed her to buy a much nicer bigger home that she wouldn't have otherwise pursued because of her focus on payment and not wanting to be overextended on payment. And even at the 580 note rate at five and a half, she's very well qualified. So that's a good example of what I think should happen in most cases now because the market has shifted, there is more leverage with the buyers now versus the sellers previously. And I just feel like a lot of buyers simply are not fully taking advantage of that because they're not getting these alternative ideas when they're first looking around and getting with an agent, it's always that old school. Well, I just try to get a better price and then, you know, feel good about that. You did that without realizing there's a much better way.

You know, I'm gonna, I'm gonna put this out there. We weren't prepared for this. But I think what I'm gonna do is you have a short, I think it's like 18 minute webinar on what is a buy down, how does that work? And we have a link for that. And what I'll do is I' in the comments. So if you're interested in that, you can kind of get an idea because it may be one of those things where you're with your agent and your agent is really not in tune or aware of what a buy down is. And it may be up to you as a buyer to say, hey, what if we tried this? Are you open to this? And when they ask, well, I'm not sure. Or they say, yeah, we can do it, but I'm not 100% sure. That's where you get art involved. But it gives you an idea, kind of pre educates you before you get out there. Are you okay with me putting that out there?

Well, very much so. Because one of the things I'd like to see is if a prospective buyer is finally going to get out there and try to buy a home. And when they are looking for an agent to represent them or they have one that is going to represent them, I think the prospective buyer ought to drive this process. In other words, they should be telling to their agent who they're going to execute a contract with to represent them, let the agent know, look, here's the, here's the kind of homes I want. Here's the price level. I've been pre qualified. And by the way, to the extent we think there's an opportunity to get some concessions, let their agent know I am interested in not just lowering the price. I'm interested in how can I get concessions and dollars to help with my loan, because that's what I got to pay every month. And if I want to find out, is there a better way to get that concession not in price, but toward my loan, so I have a much more comfortable payment. I think buyers, prospective buyers need to drive that discussion to their agent, not just wait for their agent to come to them with that idea.

I'll make sure to put that link in there. This last point, which I think we've already talked about, but I think I want to just kind of wrap it up by pointing this out that margins are shrinking and this is with Lennar's information. And Lennar's margins have dropped from nearly 30% in 2022 are to 17 and a half percent today. Now, let's face it, 79% is still a nice margin, but that's a massive cut. Does this signal more room for negotiation and better deals for buyers and for homeowners who this could this spill this pressure over to people, whether it's refinancing or equity to the equity market?

Well, a couple things about that, yes. That was part of what Lennar discussed in their numbers as part of this 800,000.

That in order to achieve what they did in terms of an increase in sales, they had to accept much lower margins in that respect, it's kind of analogous to what we've been hearing about tariffs. Right. When the tariffs thing first came out, it was like, oh, my gosh, that's going to increase prices to everybody. That's going to be inflationary. That's what the Fed was over focused on. Well, guess what's happened. Well, corporations ended up essentially absorbing a lot of those tariffs, not passing it on to the customer. And so in that respect, that's what Lennar has been doing. They have been trying to keep sales up, you know, supported, and they've increased sales, but with the trade off of accepting lower margins. And to me, the fact that they were willing to do that tells the buyers out there, you may have a little bit more leverage to maybe go a little bit further in those concessions, because Lennar already accepted much less in terms of margins than what they were receiving in 2022. Now, that being said, I said earlier, a lot of buyers who are looking to buy certainly should not dismiss new homes as an option. But there's a limited amount of new homes out there. And so that being the case, you know, you can't just ignore the existing home market. You've got to look at those as well. But if you're a homeowner and you're listing, I think you've got to take that same lesson into account and realize that, yeah, maybe you think you got $300,000 of equity that you're going to capitalize on when you sell the home. Well, you know what, Maybe you ought to not be so greedy and, you know, take 275 and be willing to concede that 25 grand to help that buyer. And potentially, if you market it up front like we talked about earlier, then you're going to expand your, your potential market of new, of new buyers who will look at your home. If you're going to, you know, strategically offer that up front so you can set your listing apart from everybody else in the neighborhood. So to me, that's something that has got to be done for those existing home sellers who are kind of moaning and groaning about, gee whiz, there's a lot more inventory on the existing home side. And suddenly the days on market isn't 25 or 30, it's 45, it's 50, it's 55. You gotta, you gotta, you gotta address that head on and realize that you can deal with that, but you gotta, like, lower your margin a little bit. Don't, don't be so greedy, because otherwise you're Gonna end up with a stale listing and then the worst thing could happen, you may just take it off the market and then decide not to sell at all. So I think that process, that thought process needs to happen to help with the existing home side.

I totally agree. Well, I think we've got a good picture of what's going on there in the new home market. But I want to talk also before we let you go today is what about those people that the Fed fund rate, when it dropped, it does impact some mortgage loans. What kind of loans are those?

Equity loans. Equity loans right now rates are actually quite good. And of course when we talk about equity loans, there's two types. Home equ. Line of credit and as well as what we call a helo, a traditional fixed rate loan. 10, 15, 20, 30 year term.

As we mentioned I think last week, the reduction in the fed funds rate does directly benefit the home equity line of credit. Equity loan, the reason being it's tied to prime usually and prime is directly correlated to the fed funds rate. So anyone who had an equity loan that was a HELOC should be seeing a quarter percent reduction in their rate on their next monthly statement. And if we have a couple more reductions late in the year as still on the table possible, if you have a heloc, you're going to benefit some more. Could be a quarter, two more times. I don't think they'll go to a half each time. So from last week, next couple of reductions, if they happen this year, you could have a 3/4 of a percent reduction in your HELOC rate between now and the end of the year. That's pretty substantial. And so in that circumstance, you know that's going to be a benefit. Of course in that case you probably already have a heloc. You may have already spent the money, but to me the opportunity is for those who doesn't decide they're not gonna, they're not gonna sell.

For whatever reason, but they have some issues with the home they own. It's not big enough, they need more square footage, they need another bedroom, something like that. Yeah. Our ADU versus a Room edition. I would say given what should be happening with the fed funds rate in the near future, now is a perfect time to look at an equity loan in particular at heloc because at least you'll have a pretty good idea that you're going to see improvement in the payment and the rate if the Fed follows through what's currently being predicted.

Well, I thought I saw at the beginning on the rate Grid that your, your home equity lines of credit and heloans were under, were they under six?

Not under six, but excuse me, under seven.

Under seven.

Under seven. Yes, yes, yes. Right. And that's an example of what we've seen an improvement in the equity loans. They're smaller loans, they tend to be shorter term. And of course the fed funds rate is a short term rate, the prime rate is a short term rate. So that's where you see the relative benefit of what the Fed is doing. Not on first mortgages for purchase loans, but on these home equity loans. And so then you get into a scenario where, gee whiz, you know, maybe we don't really want to move. We got a ton of equity, we still have that 2 and a half, 3% mortgage on it on our home. But our home needs some attention because it's not fully meeting our needs anymore. And that's why, as you have in the bulletproof bullet point there, ADU versus room addition. So you can look at getting an equity loan to build an ADU or you're a two bedroom home, you bought it two years ago, now it's too small already, maybe you have a baby on the way.

You want to add a third bedroom. So those are the opportunities right now where what the Fed did is a benefit and can address exactly those kind of needs. For those who decide, I'm not going to sell, I'm going to stay put, but I got to do something with the home I have because it's not meeting my needs as much as as it did in the past.

Well, are there pros and cons to this as an example? I mean, if I'm a homeowner and I'm thinking, okay, should I do a room addition or should I actually create an adu? Is there a pro or con about that as far as extra space? And also does one give you more value than the other? When you know, and I'm not asking you to be an appraiser, but you are pretty knowledgeable about this as which one has more bang for my buck?

Well, of course the answer is it depends.

Because think of it this way, I mean like a room addition, depending on what you're going to do, that can probably generally be less costly. But at the same time, all you're doing is expanding your initial your existing footprint. You're not building a separate building that can be a standalone individual living unit separate from your main residence. So a room addition can be less expensive. And depending on the market, it is probably a more popular choice like you know, in the Midwest and so forth, ADUs are not as big of a deal as they are for example, in Southern California, you know, I heard a number not long ago, San Diego, two years ago, 20, 23 in San Diego, they had more ADU new permits than single family home new permits. Oh my gosh. But what that tells you is again, it depends on where ADU is going to cost more. But in California, in particular Southern California, where we have these very high home prices, you know, at the car meeting, the median price in California is 900,000. It's like half, it's like double what it is most other parts of the country with some exceptions. So in a market like Southern California, ADU tends to be the more popular option. It costs more, but then you've got that individual fully contained living unit that includes a kitchen. So you can either have, you know, additional multi generational housing you got, or call it a granny flat, or you've got a unit that you can fully rent out for additional income. That's not going to happen with a room addition. So it really depends on, you know, where you're at in terms of market, what the local market's needs are in terms of more housing. That's going to basically have the most bearing on which is a better choice, ADU or Room Edition.

But the main point is right now, the cost to do something like that, meaning the rates that people are going to pay to extract their equity to do one or the other, or quite frankly maybe both, is really good.

Yes, yes, very much so, yeah. I mean, it wasn't long ago that a fixed rate equity loan, for example, was well into the sevens and eights and they've come down quite a bit. And I also argue that a lot of times when you're talking about do I get a HELOC or do I get a fixed rate second, you know, a helo, in my mind, a lot of that should have to do with what are you using the money for. If it's a specific project, either a room addition or redoing your kitchen or redoing your bathroom or adding a bathroom or if it's you want to build an adu, well, I think future draws are maybe not that important. It might be better off to take that heloan because you have a specific need, you have a specific amount of money you need, get that loan, get the money all at once and get built what you want to build. Now that flies in the face what I also just said, where with the heloc you have the potential of lowering that rate further. If the Fed lowers the fed funds rate. With a heloan, you're getting a fixed rate second. So there's no adjustments, there's no reduction in the rate when the Fed lowers the fed funds rate. But right now a lot of heloans, at least initially, are offering a better rate than a heloc, even with the reduction we had last week. So it could take another two or three reductions in fed funds before HELOC rate is as good as, or better than a heloc. So that, that's where you have to sort of kind of be a, you know, future teller and decide what do you think the future holds in terms of where rates are going. But I think a helo is, heloans actually have gotten much more popular than they have in the past for the reasons I just described.

Well, it reminds me of that old saying, a bird in the hand is worth more than two in the bush. And you know, if you're, if you're doing a heloc, not that I'm opposed to that. If you're doing a heloc, you're hoping the rate will continue to go down versus hey, I locked it in and it's good, it's great right now, if I'm not mistaken, I was thinking back around January, weren't those rates up around nine?

Well, yeah, well remember that back then the.

The prime rate was seven and a half, which again directly tied to prime or to fed funds. And so with the reductions we've had now it's, you know, six and three quarters. So with that you start to see there's the, the benefit with what the Fed's done, but again, on equity loans, not on first rate, first trustees. Right.

And just lastly, I want to kind of get an idea, hey, what does this do for people that are possibly thinking about reverse mortgages? Because I remember you did several shows on this. I think it's so important that 71% of people that are thinking about retirement are really unclear of, in fact they're, they're saying, hey, I maybe outlive my money. I'm concerned about that. So is, is this making it better, worse or staying the same with the.

Fed rate a little better? Actually, you know, again, the most popular reverse mortgage product, the one that's done mostly most overall other products in the U.S. is the FHA HECM. And the most popular Hecam FHA HECM choice is the, the, the monthly CMT life cap of 5%. Well, again, when you're talking about an Adjustable rate loan that's tied to a short term index like the constant maturity treasury index, that's a relatively short term index. And therefore what we've seen in terms of reductions in the Fed fund rate is helping the rates on these type of reverse mortgages slide down a little bit. So I think for that reason it can be a very good option for somebody who's been on the fence because to the extent you draw any money out, the rates are a little bit better than they were before. And to the extent you don't need all the money at once and you set up the rest as a line of credit, that line of credit is going to grow over time based on the rate that you can now get. So in my mind, timing is as good, if not better, to look at a reverse mortgage if you've been on the fence about them up till now.

One last question I'll let you go is.

As a person who does a reverse mortgage and they have a large amount of equity.

Do they have that same opportunity to say, hey, I want to build an ADU out there that becomes an income producing product for them? Are they limited to where they can spend that money?

No, they're not limited at all. I mean, you can pretty much use the proceeds any way you like. So absolutely. I mean, that could be a very good scenario for a senior homeowner. They own a home free and clear. If they've got a property that's large enough that would support an adu. Gee whiz, you can get a reverse mortgage, not have to make payments on that loan unless you want to always stress that you can make payments on it if you want to, even a little bit. Don't have to cover all the interest part of it. If you want to just keep the loan balance from not growing too much, but then the access of cash that provides you, you can then use that to build that adu. Now you could end up using it for a family member and maybe try to negotiate getting them to pay rent. Good luck on that. Or you can go ahead and rent it out for additional income that you wouldn't have otherwise had because you weren't tapping in your equity to put it. To put that equity to work by creating that income stream. So that's a really good option that I think a lot of senior homeowners don't think about.

Well, Art, I know this has been a little bit of a different type of show. I was, I was much more involved today. I really appreciate just answering some of those questions. That kind of came up and that we get from our viewers. And I really appreciate you taking the time and feeling these today. That was great stuff. So with that, I'll, I'll turn it back over to you.

Okay. Thanks, Jeff.

Okay. Well, thank you, everyone, for watching and listening to this week's Mortgage Minute. My name is Art Alvarez with Mortgage Works, where we have the answers and they're on the house. Have a good weekend, and then we'll look forward to seeing you next week on the next edition of the Mortgage Minute. So long. Take care.