Fed Cuts Rates, Mortgage Applications Jump 30% Overnight

Henry:The real estate market never stops moving, and this week’s data really matters for homeowners and investors alike. What’s going on everybody? I am Henry Washington and I’m sitting in for Dave Meyer this week. I’m also joined by Kathy Fettke and James Dainard. We are unpacking all the latest headlines, including the most recent rate cut data and breaking down what they mean for prices, supply and your investment portfolio. This is on the market. Let’s get into it. We’ll start with the article that I brought because it’s talking about the thing that everybody’s talking about this week

Kathy:And everybody’s been waiting for, right?

Henry:Everybody’s been waiting for in my articles from MPA, the Mortgage Professionals of America, and it talks about how the 30 year fixed rate mortgage rate has recently dropped to 6.39%, which is obviously the lowest since October 24. But in reaction to that, drop mortgage applications have surged up 30% week over week, which is seasonally adjusted because we’re going into the slow season, but without adjustment, it’s up 43%, but 60% of those applications were for refinance applications. So people who probably bought last year or the year before sitting around 8% if you’re a homeowner and 9% plus if you’re an investor, are looking to refinance these properties, taking advantage of the burden in the hand that they have now of a lower interest rate purchase applications. It says were also up, but just modestly about 3% week over week and up 20% versus last year. And of those refinance applications, a good percentage of them around 12.9 or 13% were for adjustable rate mortgages, meaning that people were signing up for arm loans, but they’re not the same arm loans from 2008.The arm loans have changed quite a bit since then. So the adjustable rate mortgage right now, what that means is you sign up for a fixed rate for a short period of time, so you can refinance your home, you can get a fixed for three or five years, and then that rate will adjust after that three or five year period based on what the current rate is at that time, or you can refinance that loan again at that date. So nowhere near as dangerous as the arm rates. That scared everybody away in the dreaded 2008. But this is something that I’m doing right now. I’ve got several properties that I bought mostly in 2024 and late 2023 that have above 8% interest rates, and I literally started to go through them last week and highlight them on my spreadsheet so that as soon as this rate dropped started to kick in, I could start looking at the refinances and it looks like I’m not the only one that’s doing that.

Kathy:What

Henry:Are your guys’ thoughts about that?

Kathy:I mean, this is the whole date, the rate marry, the house scenario that people have been talking about for years is just get a good deal. Don’t worry about the interest rate and refi later. The problem is that people think rates are going to continue to go down. Now the Fed has said probably they’ll be cutting rates a couple more times and probably next year, but that may not be the scenario for mortgage rates. So I think a lot of people ran into that problem last year thinking, I’m not going to refi while it’s just six and a quarter percent. I’m going to wait for it to go lower, and then it went back up to seven and that could happen again. So I’m glad to see people jumping in and getting it this time.

James:So much of this business, depending on what asset class you’re in, it’s so much consumer mental fear. And I will say over the last six months, the market has been pretty flat lease up in the Pacific Northwest. I know in SoCal, wherever I’ve seemed to float, it seems to be pretty flat right now, but there were so many buyers before the tariffs and stuff came out. There were so many bodies. And so I do think that this could have a really good impact in the spring, especially for flippers developers in your dispo. I don’t know if it’s going to help any more towards the end of the year, but in this business timing is everything. And so I know with my staff, I’m like, we are getting everything on market. January 30 to March, we had that month where we are going to pump. I don’t care if I’m paying more on the construction, I don’t care if I’m paying more to get things done. I’m dumping my houses right into that market and we could still have that pullback. And so for all those short-term investors, get your stuff done and get it into the right market.

Henry:Okay, so you’re saying January is the time to get properties listed. You’re trying to take advantage of the spring seasonality along with the lower interest rates.

James:The Pacific Northwest, it always starts heating up like February 1st or right after the Super Bowl, and then February, March are our strongest months, and April usually has that last kick. So yeah, I mean regardless, it’s already a market where it’s already busier, even if the market’s flat, little bit of rate cut and then also people get fomo. They have seen pricing come down. You can start to call their bluff a little bit and they jump right back in the market.

Henry:Kathy, you said something that I want to talk about. You mentioned that the Fed may not lower rates again, and I also said when I was talking about my article that people are taking advantage of the bird in the hand that they have because we know we have one rate drop, but along with this rate drop news, everybody kept saying the words they were using, the Fed is signaling two more weight drops. So what does it mean that the Fed is signaling two more rate drops versus how likely it is that that may or may not happen?

Kathy:Well, all the Fed can do is base their information on the past, and that’s why it’s really difficult to be a data analyst because you’re looking backwards, not necessarily forwards. And so based on the data that they’re seeing, if it continues, then they would continue to cut. But what if doesn’t that data changes then so does their plan. And so we as investors have to be a little bit more focused on what we see coming, what’s happened. I think Wayne Gretzky said something about that, right? Watch where the puck is going. So will we see jobs come around and start to see job growth? Will we see more inflation? I think the Fed is really focused on jobs, so that’s going to be the key because inflation isn’t horrible right now, but there is more fear around jobs. Are we going to lose more jobs? Is there going to be less job creation or the opposite? That’s where everybody needs to be focused and that’s what will determine rates in the future. But like I said, what the Fed does doesn’t necessarily affect mortgages and the housing market. It does affect commercial real estate. We have seen the fed cut rates and then mortgages go up, right? So don’t get too comfortable.

Henry:Yeah, I totally agree with you Kathy. That’s why I’m working on these refinances right now. Sure there’s signaling of future rate drops, but I’m going to take what I have now. I’m completing a refi and we close on Tuesday next week. This is a rental property and it’s always been a rental property. I’ve never lived in it and I’m getting 6, 8, 7, 5. So if I can get my nines down to something with a six in front of it, I’m in.

Kathy:Yeah, I mean my message would be to people who think I’m going to wait till home prices go down, I’m going to wait till mortgages go down further. Just be careful because the deals you don’t do sometimes can be the best thing you did or the worst thing. So again, it just depends. But right now, right now we have higher inventory and lower rates that is good for buyers, that’s fantastic for buyers and that could change because if rates go down, there’s going to be more competition in the market and prices could go up or things could happen, inflation could happen where mortgage rates go up. So just to me, this is a great opportunity. If you find something that pencils, go for it, go for it.

James:I mean for investors, we don’t want to be speculative, we want to lock it. If you can improve your cashflow, lock that in. If you have a commercial loan that is expiring or you only have a couple years, right, lock it in. That’s a dangerous thing to not have secured. I don’t think the rates are going to be in the fives in the beginning of the year if you hear a lot of chatter about that. I don’t see that happening, but at least where we are, I don’t think it matters. It’s a mental game. Everyone’s waiting for a deal and then you wait too long and you’re paying a little bit too much. So the buyers are coming around and we’ve already seen it actually the last couple of weeks. We’ve had so much more buyer activity even before this announcement. I think this will start to open this up a little bit more.

Henry:Alright, thanks everybody for that feedback. It is time for a quick break, but when we come back, our panel is going to dive even deeper into these headlines shaping the housing market and what they mean for you. So stay with us. Welcome back to On The Market. We’re here with our panel breaking down the housing market headlines that you need to know. Well, moving on to our next article. We have Kathy who’s going to talk to us about how we should all be receiving inheritances.

Kathy:Scott, Kathy, well, I didn’t get one. I don’t know about you guys

Henry:Meet,

Kathy:But we’re going to talk about that here. This is a realtor.com article and the title is Americans are Counting on an Inheritance instead of Saving, but Family Homes could be a complication. So to sum up this article, it starts with the idea of this great wealth transfer, which we talked about on a show a couple weeks ago. And this article even says it’s bigger that economists project that more than 100, $100 trillion of wealth will pass from the baby boomer generation to their children over the next 25 years and their children being primarily the millennial generation. So with that, the article goes on to say that a lot of these millennials are thinking, well, since that money’s coming, I’m not going to worry about my future so much and I’m going to just worry about today. And there’s plenty to worry about today. There’s a lot of expenses, especially if you’re a millennial, you’ve got kids, you’ve got daycare.I mean you’ve got inflation, high prices, high home costs. I mean, yes, there’s a lot to spend your money on, not to mention a thousand dollars tickets to concerts. I mean you got to spend your money on that and travel and so forth. So bottom line is this article says, you better be careful because the average American expects to inherit $335,000 from their parents while 8% expect sums of $1 million or more. However, the piece of the puzzle that I’m actually starting to see from young people who were doing this, I could tell they were kind of not working that hard knowing that they’re probably going to inherit something pretty big. And now they’re seeing that the elderly person who holds all that wealth is living longer and to live longer is expensive. Care is extremely expensive. And so a lot of people, senior citizens are maybe getting reverse mortgages where they kind of use their home as a bank account.So all that equity in the home that might be passed on to their youth is actually being spent on their care through the reverse mortgage and they’re so expensive. High fees, there’s better ways to tap that equity, trust me. But a lot of people are doing it. They get sold on it and the fees are super high. What that means is oftentimes the person thinking they’re going to inherit all this equity is actually instead inheriting a ton of debt because with a reverse mortgage, the loan actually increases every time the retiree is taking a thousand dollars or whatever out of the house to pay for their monthly bills. That increases the loan. And the inheritance is a big mortgage and a big debt versus equity. So line never rely on inheritance. It’s costing more to be old. If you’re going to rely on inheritance, you might find out you’re 50 years old with nothing,

Henry:Really do what you’re supposed to be doing, which is saving and investing, which is why we’re here.

James:Well, and for the non-millennials, not waiting for the inheritance with people with anxiety like us that are always out doing more things though, that is the beautiful thing about real estate though there’s a bunch of wealth transfer cost living, especially for your parents is going through the roof. I know causes a lot of financial burden for people, but if you start planning early, you can create a plan that can offset those costs. And about 10 years ago, I went on a plan with my mom who didn’t have a whole lot of cash around and we started flipping some houses, doing some private money loan. We were growing her income and it got us into a place to where now she can live in a unit for free. And that was the goal, was to just earn it to get to free housing or really reduce housing because the housing costs really eat things up, which then gives you more money to pay for assisted living. But that is the beautiful thing about doing burrs or doing value add and keeping property no matter what the market cycle is, just keep buying. If your parents maybe have issues in 10, 20 years, you can start now and really just chisel away and get in a position to where it is not a financial burden and the parents have a good quality place to live. So Henry did, rich and Kathy, did you get notification that we got written into their will yet?

Henry:You know what? I looked the other day and I was not there, and so I just thought maybe they hadn’t have gotten around to it yet. But maybe if you got yours, let me know.

Kathy:I’m so glad you brought that up because a will is still a problem. A will is a problem. You need a trust and part of the article here, just go out and read it A realtor.com article, Americans are counting on inheritance instead of savings. This is the time to have family meetings to talk about it, to know what’s planned, how to take care of each other and your assets if you should be so lucky as to inherit them. So a trust must be in place or a lot of the money is going to go to probate. A will is not enough. Everybody please know that. Get a good attorney for asset protection and for inheritance.

Henry:That’s great advice. Alright, we’re pausing for one more quick break, but when we return we’re going to hear about how land prices may be declining and our expert panel will share some key strategies to navigate the market. Alright, we’re back on the market. Let’s jump back into this discussion. Mr. James, tell us about land and what’s going on there.

James:Alright, so John Burns published an article about how land prices are set to decline. To be honest, I already think they’re declining, but what they talk about is the demand is so low right now and there’s this standoff between sellers and builders and there’s just not a whole lot of transactions sticking on dirt, on tear downs and pricing is adjusting only 28% of land brokers say that demand is strong, which is down 76%. We sell a lot of land too, and the guys I’m talking to across the board that also move a lot of dirt, the feeling is real. It’s not like, oh, my business is slow. No, there’s not a whole lot of buyers. And really what this is coming into is the land’s just too expensive and new home prices, I think nationally fell about 1% this year, which in other markets like the more expensive markets, they said anywhere between four and 6%.And the reason land is really, really slowed down on the transactions is it’s really hard to make money. It takes longer to get permits, entitlements take a lot longer. Cost to build has gone up and now the predictability of sale is taking a lot longer including the debt cost that has risen dramatically over the last couple years. Back when you were building new construction before rates jumped, you were getting loans in the 7%, seven to 8% if you had good financing set in play. Now you’re eight and a half to 10 and so things are taking longer, bill costs is more, entitlements are longer and sale prices are dropping. So yes, land should be coming down, but what we’ve seen, I know on my side I’ve seen a lot of sellers going, because land was such a hot commodity and it was so these lamb brokers are very aggressive in their marketing and sellers were just getting offers for years and it was just like offer, offer, offer, offer.And after a while if someone tells you you’re pretty long enough, you really think you’re pretty, everything’s kind of locked up and so the transactions are low, but it’s been like this now for a year and I think this is where the land’s starting to break and for I think a lot of listeners out there, it’s like, okay, well what do you do with land anyways? That’s rich guy real estate to go just buy dirt, sit on it. And that is increasing right now I don’t buy that way if it can’t bring me in any income. I don’t want sit on dead inventory. But what I have seen is a tremendous amount of opportunity on single family houses with bigger lots because when we were looking for the bur properties or looking for good holes, the key to building your portfolio and get massive growth is to buy stuff and path of progress.They can get a jolt, dirt can do that. If all of a sudden the population that increases, you’re timing it well, there’s more demand. Your dirt will go up two to three x really fast when that wave starts coming down. And we’ve done really well cutting up dirt over time on rental properties, selling it off 10 31 out our rentals. And so there’s a lot of opportunity right now and I think people are overlooking at because they’re looking at rates, they’re going, well, they’re kind of high, they don’t cashflow, who cares? The last couple properties that we bought with good developable dirt, we paid about 20% less than people were paying two years ago. That’s what you want to focus on. When you can’t find cashflow, where’s the opportunity? If no one wants dirt, then let’s go searching for properties. You go look what no one else wants because there’s some really hidden gems there. And I know Henry, you’ve done fairly well in this the last 12 months.

Henry:Yeah, absolutely. I mean I love that strategy. I have been purposefully targeting buying homes that have large lots that I know I can split or come with the lot next door. In other words, the owner owns the house and the lot next door, I buy it all up and then I sell or flip the house next door and that leaves me with the lot free and clear. I’ve sitting on about six or seven of those across my portfolio and we’re building on two of ’em this year. New construction for me, it’s a great way to cut my teeth in building because I’m not in for anything on the land cost. The other thing that it does for me is it allows me to get a loan for the build without having to throw a bunch of money down because I have so much equity in the land, I’m able to sometimes leverage that as the down payment. So it’s a great strategy in the right situation, but you’re right, land prices are extremely expensive and I’m about to close on 20 acres and now James tells me I shouldn’t do it. So

Kathy:James, I love what you said. Get the stuff nobody wants that nobody wants right now,But that has intrinsic value. I mean this is how I started syndicating in 2009 is the markets were flooded with foreclosed homes. So what did that do to land and new builds? There was zero demand. We were able to get land prices as low as 10% of their former value. We were able to tie up, I know this is a bigger deal, it’s a syndication type deal, but we were able to tie up 4,200 lots north of Tampa in 2012 for $12 million and the former value had been like 120 million. So we were able to get it for so cheap. That was a big project today, it’s the marada development. I’ve talked about it before. It’s taken 10 years to develop that many lots, but this is the time to negotiate on land, but it has to be good land. There’s land that will never be valuable.You don’t want that land. You want the land. Where again, another deal we did was in Reno when same thing, nobody was buying land and a group had bought some land, went through the entire entitlement process, but they made the huge mistake of getting hard money. Don’t get hard money on land, please don’t do that. They did that and because their loan was due and because by the time they had it entitled, there was no buyer guess who came in as the buyer and we were able to pick up that land for what they paid for it when it was raw land. So their years and years of work and paying this hard money loan and all the interest on that and doing all the work. We got the property for what they paid before. So this again is the time to go for it if you know what to do with it.

Henry:Tell the audience why hard money is a bad idea for land.

Kathy:I have another neighbor who bought a lot for a million dollars with hard money and this is in Malibu where I live where you can’t get anything done for 10 years. I mean you’re lucky if you can’t. And so paying interest, he ended up paying two or $3 million technically for that piece of land, never could get it built and just ended up selling it at a massive loss. So hard money, you guys could talk all day about the value of hard money on a flip and you could be in and out but not on something that doesn’t cashflow.

James:No, it’ll suffocate your deal. Debt kills deals. You can’t sit there. And that’s why I’m not a person that goes out and buys land to sit on it. I think there is a lot opportunities Kathy’s talking about where there are planned and permanent sites and the builder doesn’t want to take it through. But that’s the good thing about that is they’re permanent. You can start within 30, 60 days, right?Don’t sit on your money like that. I mean that’s why right now, even if you do buy finished lots, the margins are still a little bit tight right now and they will come down. But the opportunity is builders are just gotten, they don’t want to be stuck in these deals so long because the margins are compressed. And that’s where I’m seeing single family houses larger lots or even areas that have cooled off that where the dirt got expensive for a minute that’s contracting back and you can really focus on those houses on corners with alleys that you can cut up. These are the things you want to throw in your portfolio bank for a 10 year plan. If you hit the right land deal in 10 years, you can explode your portfolio and the opportunities now because things don’t cash flow. Homeowners don’t want to put money into these houses and builders don’t want to build. So it’s a no man’s land. Go to no man’s land and you will hit gold.

Henry:I think the key with land is if you’re going to do larger land deals, in other words buying large plots of land and then subdividing them and selling them off either one lot at a time or to a developer, you have to have some high level of understanding of that market and where the path of progress is because you could end up spending a lot of money and the path of progress does not move your direction and then your land doesn’t go up or infill lots. Infill lots is always a safer way to start because now you’re buying lots in communities where you can see that developers are building. And so that’s an easier way to kind of get started in the land game. You can go and find out what these developers are paying for lots in the areas where they’re building and then you can start and market and look for owners who have additional lots and then you just make sure that you’re buying it at lower than the price point that the developers are buying it for. And that helps you kind of be able to have value on day one that you can offload to somebody else. But it’s a whole lot less risky doing infill. But I think land is a more experienced game. But that’s just my personal opinion.

Kathy:Oh yeah,

James:A hundred percent. Yeah, there’s a lot of learning curve and if you want to take something through development, I mean Kathy’s done a lot of this. It is painful. It’s better to buy it finish lot or I don’t even like taking it through. I like to cut it off. I’ve spun the last two lots that I’ve took in off a house. We just ConEd them off. They’re daddy lots, everybody wants to buy. I’m like, well shoot, I’ll just sell it done,

Kathy:Right? Yeah, cash in pocket.

James:We just finished one where all the profit was in the land on this deal. We sold the condo lot for three 50 grand. We basically flipped the house for free. We lost about 40 grand on the house, but by just flopping that lot off, we’re making good return. And now I just got another one. And it doesn’t take that long to do that. The build can be a lot more painful, a lot more risky. And so just because you have the dirt doesn’t mean you need to build it, just make it profitable.

Henry:Is that the truth? I’m doing my first two new developments this year, but I’ve been buying lots like this for a while. I’ve literally sold every one of them. Some I’ve sold as they sit, some I’ve entitled them to be ready to build and sold them. But I’ve never actually gone through with the build because I’m like James, I’m like, if I can sell this thing off, make 10, 20, 30 grand real quick for doing nothing. It’s just so hard to not take that versus to go and build, I’m going to build this new construction house. I may net 60 70 grand on the sale of that new construction house, but if I can get 30 for flipping the dirt, it’s hard to want to go through a year long build process.

Kathy:On our Reno deal, I mentioned where the people had spent all the time and effort getting it entitled. It was literally ready to be built by the time they had to let go of it, they couldn’t even take that upside profit. So because we got the land for so cheap and because it was worth so much more, we were able to sell half of the lots. So I think it was 200 lots. We were able to sell a hundred of the lots for the price. We paid for all of it. That’s a killer deal. So we were sitting all those hundred remaining lots at zero basis. So this is the time you can do stuff like that.

James:And one thing to watch out for too, especially for investors in the metro areas, you’ll see a lot of land being marketed. And my business partner got a really buy like 18 months ago where someone sat on apartment purchase. It was for a permanent to knock down that apartment, build about a hundred units, apartments, they got it through Cedar. It takes three years to be at that in Seattle, three to four years they’re paying debt, they’re trying to sell this property, market it as a planned and permitted apartment building. Nobody wanted it. You can’t make the numbers make sense because the guy had to get out of it, he could not build it. And so we ended up just buying his apartment building and then we permitted 18 town homes in the parking lot. And people weren’t looking at it that way. They were only going, I don’t want to buy this. But there was an apartment building there, they just weren’t marketing it that way. And so it really paid for all the debt costs. And so look for mis marketed land, there’s a lot of value in that. If there’s a structure you can bring in money, look at it as a house, don’t look at whatever they’re marketing doesn’t matter. It’s what can you do with it today.

Henry:And there is also a way you can monetize land that a lot of people don’t think about. You can sell timber and you can lease land for people to run cattle and things. So it depends on where you are. But if you’re sitting on land, you may have to get creative on how you can monetize those things

Kathy:And how you buy it. I mean that’s the thing is you can do a seller financing deal with a desperate dollars. That’s

Henry:How buy and buy

Kathy:Exactly. They’re desperate. You can give them a small down payment. They seller finance and like I said, in our case, we could just turn around and sell half of it. You could maybe carve it up, sell it off for what your seller financed for and keep the rest. Is that what you did Henry?

Henry:No, I’m seller financing it and then I’m going to build my personal residence on it. Oh,

Kathy:Nice.

Henry:But my play is to sell or finance it and then leverage the land so that I can get the construction loan without having to put money down because I have so much equity in the land because I’m buying it for such a good deal so that I can build the house and then when I build the house, I’m building income units on the property to pay the mortgage while I’m living there. So I’m trying to love

Kathy:That.

Henry:I’m trying to hack it all. I don’t want to pay nothing. I don’t want to pay nothing.

Kathy:How’s heck for life, man? Never stopping.

Henry:That’s it. Alright folks, well thank you so much James and Kathy. Those are our stories. Hopefully you got some good value from this. Make sure you please follow on the market wherever you get your podcasts and subscribe to our YouTube channel because we do have some exclusive content and analysis out on YouTube. Once again, I am Henry Washington standing in for Dave Meyer. Thank you for listening and we’ll see you next time.