With Terry Story, 26-year Veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL
While most people thought the Federal Reserve’s move to raise interest rates was the tipping point—beyond which mortgage rates would begin to climb back up—Terry sheds prescient light on why that is not the case. She says mortgage interest rates have little to do with the Fed’s raising of short-term rates, but more to do with the market’s overall view on where the economy and inflation are headed over the long-term. This expectation is more closely reflected by the interest rate on the 10-year Treasury bond. So with a tame economy and weak inflation (as is currently the case) mortgage interest rates continue to be very attractive.
Moreover, as equity markets sink on fears of domestic and global economic weakness, investors move their money to highly liquid safe havens, such as the U.S. Treasury market. This action drives up Treasury bond prices, which also drives yields down and keeps mortgage rates low. So Terry urges home buyers to not read too much into the Fed’s quarter-percentage point rate increases.
Terry also gives us a heads-up on greater government oversight in the luxury home market, homes that sell for more than $1 million in most parts of the U.S. and for more than $3 million in more expensive housing markets, such as Manhattan. She says the Justice Department’s Financial Crimes Network has initiated a pilot program to find out who’s buying these expensive homes, which could cause high-end home buyers to lose their anonymity. The government is apparently doing this to track “dirty” money and to keep it out of the housing market, which is probably a good thing.
Finally, the short supply of affordable homes has led to a dramatic upswing in property rental prices and is causing multiple families to split the rent in single-family homes. Terry sees high rentals for the near future, but believes things will even out over time.
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Steve Pomeranz: It’s time for Real Estate Roundup. This is the time every single week we get together with noted real estate agent Terry Story. Terry is a 26-year veteran with Coldwell Banker, located in Boca Raton, Florida. Welcome back to the show, Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: A lot of people thought that mortgage rates were going to rise when they heard that the Federal Reserve was going to raise rates by a quarter of a point, but that actually didn’t happen. Why is that?
Terry Story: I mean it’s a real simple answer. It makes sense, you hear that, and you’re like, “Oh, boy.There goes the interest rates,” but in reality, Steve, the Feds don’t control the mortgage rate directly. Mortgage rates respond to, basically the outlook of the economy, and really what they look at is the outlook reflected in the yields of the 10-year Treasury bond.
Steve Pomeranz: Yes.
Terry Story: That’s where the direct correlation is. When rates go up, I mean they do affect other things, but not necessarily the interest that you will be paying for a mortgage.
Steve Pomeranz: Right, so basically what happens, and by the way, you said that the Treasury rate is dependent upon the economy. Yes, but really, it’s dependent upon what the market thinks of future inflation. So, yes, if the economy is strong, there’s a sense that inflation will be higher; if the economy’s weak, it’s the reverse. So inflation is tame, then interest rates stay low; and the idea is that if the Federal Reserve actually raises a quarter of a point, which is just overnight money which will kind of slow businesses down a tiny, tiny bit, then the sense is that inflation will continue to stay tame, and actually interest rates have come down. Now, if I may, I want to point out one other …
Terry Story: Sure.
Steve Pomeranz: … aspect about this. Because of the volatility in the stock market, when stocks go down and large amounts of money move out of stocks, that money has to go somewhere, and the deepest market in the world, the most liquid market in the world, is US Treasuries; so where do these billions of dollars go? There’s no place for them to go. They can’t go into other stocks, they can’t go into corporate bonds, municipal bonds, gold. They can’t do that. There’s not enough liquidity or depth of market, they go into Treasuries. That drives prices up, drives yields down, and then the mortgages are affected. How did I do?
Terry Story: That was an excellent explanation. Even I understood it.
Steve Pomeranz: Maybe I’m in the business, I’m not sure. Okay, so when you see that interest rates, or you hear that interest rates, are going up, don’t freak out. Especially if it’s the Fed that’s controlling them. It doesn’t necessarily mean that mortgage rates will rise. Hey, Terry, let’s change gears here.This is something new and important for luxury buyers of homes and apartments. They’re soon going to lose their anonymity. What is that?
Terry Story: Yeah, there’s a pilot program underway right now in the Miami-Dade County and New York City area. Basically, in the Miami-Dade area homes over a million and in New York area over 3 million, is going to trigger them trying to find who it is behind these homes that are buying them. What happens, Steve, is a lot of people purchase homes, we call them “shell company buyers in upscale real estate.” They’ll purchase it in the name of an LLC, partnerships, or different financial entities, and by doing so it’s not transparent. You really don’t know who’s behind these purchases. The Justice Department, the Treasury Department is wanting to unmask who these people are. For whatever reason, they seem to want to know.
Steve Pomeranz: Yeah, I mean, I guess they figured that some of that money is dirty money, some of that money may be even worse than dirty money, and they want to know who’s behind these large purchases. Because, if you’re going to pay cash for a 10-million-dollar property, it may be to kind of hide that money somewhere, especially if you’re hiding behind some kind of a corporate identity.
Terry Story: That’s right, and when there’s a mortgage involved, everything is known. When it’s a cash deal, there’s really nothing known. Especially if it’s in the name of a corporation or LLC, so you have to dig real deep to figure out who’s behind it all.
Steve Pomeranz: It’s from the director of the Financial Crimes Enforcement Network, it’s from the Justice Department, and you can see what they’re after here. Changing gears once more, there have been some notable rent hikes in the market. It looks like rents are really rising pretty dramatically now.
Terry Story: Yeah, they are, and you see it especially in the single-family homes. Just 3.1% of single-family homes are not occupied that are currently vacant, according to the latest data in the US Postal Service.
The prices have been rising, it creates a lot of stress for everyone involved. What we’re also seeing, Steve, is families having other families move in with them to fill the void, to make up for that additional rent. You’ll find maybe parents helping out, or family moving in their parent’s, to help offset the cost of rent, or they’re having to move into something substantially smaller than what they’re used to, to make up for the difference.
Steve Pomeranz: Yeah, so there’s kind of a squeeze, as there’s more demand for rentals, the prices are going to go higher, and we said a few times that owning homes right now is actually a cheaper, in terms of your monthly mortgage payment and the like, is actually less expensive than doing real estate right now, but a lot of people don’t have the financial wherewithal and are kind of stuck now in this cycle of having to put up with these higher rents.
Terry Story: Right, I mean, the big keyword is affordability. It’s making it more difficult for institutional investors to raise the rent now because there’s a threshold. A family only earns so much, and you can only have so many other family members move into a house, so I think we’re pretty much capped out, because everything’s always based on affordability, and if the average wage earner can’t afford to pay anymore, then rent prices will have to start to subside.
Steve Pomeranz: Well, the market will self-correct.
Terry Story: Correct.
Steve Pomeranz: It takes a lot of time, but as people build up their personal balance sheets and they find that they can afford a home, and if owning a home is less expensive, then it’ll be a mass of people moving in that direction, and then the cycle will correct itself, but in the meantime, for the foreseeable future anyway, it could be quite a squeeze for some people.
Terry Story: That’s right. Right now, the average family’s spending 33% of their income towards rent.
Steve Pomeranz: Yeah. All right, my guest Terry Story, as always, with us every single week to do our Real Estate Roundup. Terry is a 26-year veteran with Coldwell Banker, located in Boca Raton, Florida, and she can be found at Terrystory.com. Thanks, Terry.
Terry Story: Thanks for having me, Steve.