Middle Class Homeowners Take On $7,000Month Payments - Expecting to Refi; Dangerous or Smart

    4 Million Listings in 2007 vs. 600,000 Today

    I spoke at a marketing event yesterday about “why I expect 0% rates in 2024; what that means; and why 2024 could well be a record year.” And when I brought up housing inventory, I was shocked to see how many agents are unaware of the fact that there were FOUR MILLION active listings in 2007, compared to only about 600,000+ right now. This piece of data is so important when it comes to nervous homebuyers thinking today’s market is similar to 2007’s, that I thought I’d repeat it quickly.  ALSO – my talk was well-received, so if any readers would like me to do a similar talk in front of their group or office, I’d love to – as I really enjoy engaging agents in settings like that.  (I would be happy to share my outline first too).

    Loan officer: I’m seeing middle-class homebuyers take on $7,000 [mortgage payments], thinking they can ‘always refinance when rates come down in the future.’

    That was the title of this Fortune article that surfaced on many of our feeds yesterday and this morning. What made it particularly interesting is that the loan officer featured in the article (John Downs) is a close friend of mine and Heejin’s, as we know him well from a coaching group even though he lives in the DC area.

    TLDR: Rates have doubled over the last year, as we all know, and so have payments; And even though this has pushed the number of applicants way down, Mr. Downs is surprised by the number of middle-class homebuyers who have just come to accept today’s far higher payments. 

    Mr. Downs also discussed how rising incomes (“25% to 30% since 2020”) have made higher payments more palatable; how an atmosphere of fear in 2022 turned more positive when stocks and asset prices came back; and how mortgage rate lockdowns are real.

    When the article was posted on Twitter, Mr. Downs was attacked somewhat, as readers thought he was promising that borrowers with high payments now would be able to refinance into lower payments in the future. The author of the article, however, was quick to point out that Mr. Downs was making no such promises; borrowers merely expect to be able to do so. 

    So, the question is, are borrowers smart to always assume that they can refinance? 

    The answer is no, borrowers should never assume they can always refinance into a lower rate.

    The exception to that rule would be today though – depending on who you want to believe.

    Soft Landing

    There are a lot of prominent pundits and business analysts who believe that the Fed pulled off a miracle, by raising rates without causing a recession (the so-called “soft landing”).

    Treasury Secretary and former Fed Chair Janet Yellen is one of those people, Professor Scott Galloway leans in that direction, and Chamath Palihapitiya (famous VC, billionaire, podcast host) is another.

    Chamath stated as much on last Friday’s All-In podcast in fact. He thinks the Fed has a great track record and did a masterful job of stemming inflation.

    He also points out that the economy is still going strong, that the labor market is very strong; that there is still a very high level of savings; and that China will likely come back to life with a stimulus plan.

    He also likes the US stimulus plans, e.g. the CHIPS Act.

    Other analysts like Ed Yardeni think we are in a rolling recession now (from sector to sector) and that we will be fine, with even more reasons for optimism: AI, better battery tech, better windmill tech, supply chains repaired after COVID, etc.

    And – if we truly have a soft landing, we will likely not see rates dip like many of us expect.

    Inflation Too?

    The other concern is resurging inflation – something former Treasury Secretary Larry Summers is concerned about. Summers and others think tight labor markets (with retiring boomers) will keep pushing up wages; commodity shortages, the Ukraine war and reshoring of manufacturing will push prices; that China will revive and increase demand for everything; and that Fed was too slow to raise rates and we are still feeling the results. And, if inflation resurges, the Fed will continue to push up rates.

    Why Chamath Is Wrong

    Jeff Snider of course would say that Chamath is wrong because the labor market is a very inaccurate gage that lags the overall economy (unemployment spikes after a recession starts); that inflation would have fallen anyway because it was mostly a result of COVID-related supply shocks; that the Fed is overtightening; and that the excess savings are now all held by the wealthy – who do not spend as much (the middle class has now spent all of its savings). Snider also loves to point out how wrong the Fed often is, e.g. Fed Chair Bernanke saying the housing market would be fine and that there would be no recession prior to 2008’s meltdown.

    Snider also points out how much inflation has fallen already over the last year – just like he predicted; that the Producer Price Index is nearly flat (portending a much lower CPI), that there are cracks in the labor market now; that inventory is building everywhere; and that the COVID supply shocks are over.

    Other concerns include falling industrial production, falling income tax receipts, falling oil prices over the last year despite 3 OPEC production cuts, a budding commercial real estate crisis, a European recession, a very weak Chinese economy, and potential banking crises.

    Don’t Doubt the Yield Curves!

    And of course there are the mighty inverted yield curves – about which I recently blogged. Every time the 3 Month Treasury Yield has exceeded the 10 Year Treasury Yield since WWII, a recession has followed. 

    I lean heavily towards the Snider camp and away from the Chamath camp because Snider is a data guy who does much deeper dives than Chamath ever has.

    And – I don’t see how we avoid a bad recession in light of all the headwinds and indicators.

    So yes, I think borrowers are smart to  count on refis… this time.  

    In a year or two, not so much.  

    Jay Voorhees
    Founder | JVM Lending
    (855) 855-4491 | DRE# 1197176, NMLS# 310167

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