If Home Prices Are Falling, Why Is My Offer Still Getting Outbid?

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Why this show ran on a Monday

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux and I am the Mortgage Mom. We actually went live a little earlier today — we didn't send out a text message, we didn't let anybody know. It wasn't an actual show, it was some filming we were doing for the featured listings we put up on YouTube. So we figured, we're here, we're in the studio, let's do it. Instead of doing it on Wednesday, let's get it all done in one day and give ourselves a break.

I've got Heather with me today — she's my in-house real estate agent, licensed here in California. I like to bring her on when we do market update shows, because she's got her finger more on the real estate side and I'm more on the mortgage side. She sees a lot of the announcements I wouldn't.

Mortgage Mom Radio does not usually go on at 4:30 in the afternoon on a Monday, but it was a good conversation and it knocks everything out in one sitting. So this is me doing the show on Monday the 19th. You can all fact check me on Saturday and Sunday when this show goes out on radio.

The headlines — and the contradiction

There has been so much happening. News articles, people talking, Bitcoin falling. FedEx having its worst day on record last week. The stock market is down. The builders are slowing down, their inventory is slowing down, their new builds are slowing down. So what does all of this mean to you?

And then, on the other side, I've got these poor clients — first-time home buyers, writing offer after offer at a very reasonable sales price — and every single time they submit an offer, one or two other offers come in within hours. Which again goes back to: we don't have enough inventory. So why is this house selling with multiple offers when the one across the street has been sitting for two months and can't sell, and might even be better priced? That's what we thought would make a great show today.

What to expect from the Fed

The Federal Reserve is slated to make its announcement on the 21st — they meet on the 20th and 21st — about whether they're going to increase rates again. We are anticipating that they will raise the Federal Reserve prime rate again. This is something we've been telling you show after show; we started warning about it back in 2021.

What a lot of people don't realize is that the Federal Reserve prime rate is not directly connected to mortgage rates. Mortgage rates are affected by the news and by the changes, and we do see increases happening because of the overall trend in the economy — what's pushing the 10-year Treasury notes and the 30-year notes that mortgage bonds are securitized against. We're not directly connected, but we feel the pain.

So what is directly connected? Student loans, car loans, credit card rates. Any loan tied to it. If you have an equity line of credit and you owe money on it, the minimum monthly payment goes up when that rate increases — if you've had that line a while, you've already felt it, and you're going to keep feeling it. Read your truth-in-lending statement; it tells you that you're tied to the Federal Reserve prime rate. Same with credit cards and short-term loans.

Go look at your own statement

Many of you don't even realize how much the interest on your credit cards has increased, because you just get the bill, you might pay the minimum, it might be auto-debited, and you never open the statement and look at the rate. It might be a very good exercise to pull an older statement — look at what you were paying in June of 2021, compare it to June of 2022, then look at the September bill that just came, and look again in October. You'll see a pretty big change.

And what does that do to the economy? Everybody gets tighter. Affordability is getting out of hand. We were just reading about buy-now-pay-later: instead of people using it for the handbags and the expensive jackets like they were this time last year, they're using it for gas and groceries. People tell me, I make good money and I can afford my home, but I can't afford the rest of it, so I'm putting it on the credit card. And you think you have a great rate on that card — you really need to check, because the interest starts accumulating, the balances get higher, and that affects your credit and makes the balances harder to pay off.

How big a hike?

They've alluded to raising by at least three quarters of a point. Some people think it could be a full point. You'll hear that as 75 basis points or 100 basis points depending on who you're talking to — at the end of the day it's three quarters of a percent or one percent.

Do I think there's a chance they come out and say they're not raising it? No. I don't think there's a chance. The half-point-per-meeting pace they talked about back in 2021 is not what's been happening. The first one was a quarter, lower than everybody anticipated, and since then it's been three quarters and three quarters. So if the Mortgage Mom had to guess, I'd say three quarters of a point is what we hear on Wednesday. Heather's guess was the same — maybe a one-in-four chance of a full point.

Buyers: talk to your lender before you write

If you're out searching for a home and you're pre-approved and you've been looking for a while, you have to check in with your lender. Ask where rates are today and what rate you should expect — especially before you make an offer.

I'm seeing a lot of properties go back on the market, and many of those are buyers who got pre-approved, went looking for a while, got into escrow, and only then contacted their lender. It should be the other way around: call the lender and say, I found this house, I love it, what does it look like — before you write the offer. But you get excited, you make the offer, it gets accepted, and then you find out the rate is higher than you expected and so is the payment. Either it's outside your comfort zone even though you qualify, or you don't qualify anymore. That is the majority of the back-on-market activity we're seeing.

Heather put it this way: when I used to sell real estate, people would say they wanted to look $50,000 over their price range, and I'd tell them not to — you'll fall in love with something you can't afford. Get in your price range first. Somebody who qualified in July or August at a slightly lower rate finds their dream home two or three months later, gets into escrow, goes to lock, and the payment has moved. Check in every couple of weeks, at least once a month.

Q&A: fixed rates and the Fed

Lori asks: “If it's a fixed rate, how does the Fed affect our rates?”

Great question, and with every question there's somebody else thinking the same thing who's too shy to ask. If you have a fixed rate, your rate is fixed. What you're doing is guarding yourself, shielding yourself, protecting yourself against future rate hikes.

When people ask what my favorite loan program is, I always say a fixed rate. Equity loans have their place depending on the rate you already have and how much cash you need, and I like them because they're not adjustable like a line of credit. But 30-year fixed rate mortgages are my favorite. It's a rate — and really a monthly payment — that you can count on and budget for. You're hedging yourself against inflation by locking something in now that stays with you for the term of the loan. Whether it's a 15, a 20, or a 30, that rate is not changing, so it doesn't matter what they do with future hikes; your payment won't move.

There are plenty of good reasons someone might want an adjustable. Everyone's scenario is different, and if that's the right direction for you, we'll help you get it. At the end of the day it's about getting to the goal.

“What if rates go down — can't I just refinance?”

Heather raised this because she gets it a lot: what if I buy now at six or six and a half percent and rates come down? Yes, you can absolutely refinance. People seem to think a 30-year fixed means you're stuck with that rate for 30 years. You're not. If rates drop enough that it makes sense, refinance it.

What you don't have is the ability to go backwards. You can't call in two, three, four years and ask for June of 2020's interest rate. You've got to get it while it's there.

I expect the Fed to keep raising through the rest of this year and probably into about the middle of 2023, based on what I'm reading. Heather sees the same — roughly every six weeks they meet, rates keep going up, and then things calm down by mid-2023. Could they come back down after that? Sure. Immediately? Probably not. Rates usually need to settle, and then something else has to happen before they start coming back down.

Remember it's never overnight. It's slow up and it's slow down. And keep some perspective: I think it was 2011 when we last saw a 30-year fixed get down to around three and a quarter, and then we didn't see that again until a pandemic. I don't foresee three percent rates coming back. Heather's view, which I share, is that a more normal range — somewhere in the high fours to mid fives — is what we'd see once all of this plays out.

Q&A: using equity to clear credit card debt

Kim asks: “With this information, does it make sense to take a loan against the equity in your home to pay off credit cards, especially if you have a couple of cards with balances?”

Yes, absolutely — depending on how much you owe. We want to look at everything you've got going on: how much equity is in the home, how much cash you could pull out, how much debt you have, and what the rates are on that debt.

I'll tell you that the majority of the credit cards I see come through have rates in the 23, 24, 25 range. Very, very high. Student loans, I've seen nine and ten percent on many of them. Personal loans, anywhere from 12 to 20. So depending on what kind of debt you have, how much you owe on your first mortgage, your current rate on that first, and how much cash you need and can get, we'd determine whether you're looking at a new home equity loan that leaves your first mortgage alone, or a complete refinance.

The math doesn't lie. It's not up to us to tell you which way is better — it's our job to show you the numbers so you can decide. If you ask our opinion we're happy to give it, but at the end of the day it comes down to what you feel is best.

Heather added something worth hearing: a lot of us haven't had to make student loan payments in a long time, and those are coming back in the next couple of months while gas and groceries are already expensive. If credit card debt is eating away at your monthly income, it may be worth clearing that out now so you're prepared when the student loan bill lands. And don't assume your student loan rate is automatically the good one — they move too, and nine or ten percent is a lot higher than where we are on a mortgage.

How long do the hikes last?

Back to the Federal Reserve prime rate: it's going up, and it'll probably keep going up until about the middle of 2023 in my guess. Some people think it'll run all the way through 2023 — that would be a lot, and I hope not. What I hope is that at that point things calm down, the economy improves, and rates fluctuate a bit and come back down from wherever they land.

But don't hear that as: we'll have these rates until a date, and then it goes back to where it was. Just like they go up, they come down, and it's never overnight. It would probably take quite some time to get to lower rates.

Why “I'll only be here three years” worries me

Here's one I keep hearing: I'm only planning to stay three or four years, then I'll sell and buy something else, and I'll have more equity by then. And in that situation people say, so I think I should get an adjustable, because the rate is lower and I'll pay less interest while I have the loan, and then I'll sell or refinance into a fixed.

I don't want you thinking that's a safe plan. I don't see rates two or three years from today being a whole lot lower — if lower at all — than where we are now. It scares me when I hear that philosophy. That was a philosophy in 2020 and 2021: my property's going to go up in value, I'll have the equity I need to go buy another one, I'm only staying a couple of years. That is not the world we're in today.

Buy for security. If you don't own one, buy your first home; if you do, look at an investment property. Buy something you expect to stay in for five to seven years, through a normal cycle. If that was your plan, come have the one-on-one conversation with me or with Heather — let's talk about the scenarios that could actually happen and make decisions from there.

Heather's point on the values side: yes, when rates go up, home prices generally come down. The question is how high rates go and how much that moves prices. They will correct somewhat. But we still have a shortage, so it's not a straight line — people can't afford as much as they could last month, which changes the dynamic without erasing the inventory problem.

Rents go up, and what to do about it

This show is not Doom and Gloom. It's about what you can do for yourself in this market. Number one: get the credit cards, personal loans, and student loans paid off, under control, or refinanced into something at a lower rate than you're paying today.

Number two: even if property values stop, drop, or fall, rents always go up. They get higher. So you want to lock yourself into a payment you can afford, and buying a home does that — a loan you can count on and a monthly payment you can count on. Not counting on an increase in value to give you equity down the road. What I'd be telling you to do is secure your financial future.

Investment property as the long game

One thing we were talking about is investment property. You're buying at today's price and today's rate — and where will prices and rates be in 5, 10, 15, 20 years? A lot of people put money into college funds and retirement accounts. Think about buying a home today, putting a renter in it who makes the payment, so it doesn't really cost you anything beyond the down payment and closing costs. You maintain it, and hopefully the rent covers those expenses. Then when your kid is ready for college in five, ten, or fifteen years — when buying may no longer be affordable for them — could you give them that home? Refinance it, pull cash out, or sell it to pay for the education?

Right now is when we need to start making chess moves — figuring out the best moves to set us up for long-term gains. If you're in a home with a great rate and you've been thinking you'd like something bigger, go look. If you can afford it, keep the one you've got, rent it out, and hold on to it. Over time that can be a much bigger nest egg to pass on than what you'd get out of a standard retirement account. It's not all doom and gloom; it's about re-strategizing and putting your money to work in a different way.

Q&A: have loan-to-values changed?

Mary asks: “Have loan-to-values changed in the new lending environment?”

We have not seen loan-to-values change drastically on the normal FHA and conventional conforming side. Every year we get increased lending limits, and they're expecting the conventional limit to move up from around $647,000 to roughly $715,000 — I've heard it could possibly go as high as $743,000. That would help a lot of people avoid jumbo territory, where financing is harder to get.

Where we are seeing loan-to-value come down is in the jumbo arena, so you may need more money down depending on the loan type. Interest-only, and the non-QM products — a bank statement loan, or a debt-service loan where the investment property carries itself — are also asking for a bit more down or allowing a bit less cash out. Those riskier products are where the changes are showing up.

But your FHA is still three and a half percent down, conventional is still three or five percent down, down payment assistance is still there, and USDA is still zero. On the standard, fully documented, full-income loans, we're not seeing those changes yet.

Q&A: getting an accurate value on your home

Kim asks: “Where do we go to get an accurate property value of our home?”

Truly the best idea you can get is to call a local real estate agent in your area and have them do a CMA — a comparative market analysis.

That said, if you're asking so you can figure out what's available for a refinance, someone like me or Heather or any of the loan officers on the team can give you a very good idea. We pull comps from the title company, see what the last home in your area closed for, look for a model match, and then check the listing sites. We can pull the most recent closings, compare square footage, whether it had a pool and yours doesn't, whether it was updated. Then we can give you a fairly accurate number for what an appraiser would likely bring back.

Heather's addition: the more we know about your house, the better. Original plumbing? What's the roof like? That tells us what a buyer is going to expect walking in. And keep the purpose straight — you'll usually get a higher number from an agent marketing it for sale than from an appraiser on a refinance. If you want to know what you could sell for, that's an agent. If you want to know what an appraisal will say, that's us.

And if you don't want the pressure of somebody following up to try to get your house listed, we work with great agents all over the country who will pull it as a favor without hounding you.

Why buyers are still getting outbid

So here's the thing I started the show with. Rates are going up, the Fed is going to keep raising them, a rate today is better than what you'll get next week — all of that is true. And you hear everybody saying property values are dropping. Yet I've got this couple who have made multiple offers over the last two weeks and been outbid every time. We're on the radio telling everybody this is a buyer's market, and here's a couple who can't get an offer accepted. It feels like twelve months ago.

Heather's explanation is affordability and price range. This couple is in about the $650,000 range — which here in Southern California is a starting price range. That means they're competing against condo move-up buyers, townhome move-up buyers, first-time buyers, and empty nesters who sold the big house and want to downsize. It is the most aggressive band in the market.

Add rates to that. Somebody who qualified at $750,000 a year ago is now in that $650,000 range. Maybe they weren't a first-time buyer at all — maybe they were a move-up buyer who waited, or got outbid a dozen times last year, and now higher rates have kicked them down a bracket. If you were at $700,000 or $750,000 or even $800,000, you're now shopping lower, looking at homes that were less desirable a year ago.

So when we say things aren't selling — certain things are selling. Yes, it's slowed down. But the house that's fixed up and remodeled still has a much better chance of going into escrow quickly than the one that's dated. A lot of buyers don't have the funds to go in and renovate, but they do have the funds to pay a bit more for the one already done. Two identical homes, and the more dated one sits even at a better price.

And builders are not filling the gap. They're feeling it as much as any other seller, permit applications for new tracts are slowing, and they're selling through the inventory they have rather than bringing new inventory to market. Resale sellers who are competing with new construction are dropping prices to do it, which is a healthy little correction — but the shortage is still the shortage.

Sellers: price it right the first time

I hope sellers are hearing what Heather is saying. If the last home sold at $700,000, you cannot come on at $730,000 and expect to sell at $730,000. What happens is your agent comes to you and says, we listed high, we haven't had activity, let's go to $720,000 or $715,000. That's your first price adjustment. You're still not selling, because buyers are savvy — they're searching online and they can see the last sale was $700,000, so why would they pay $715,000? Now you take a second adjustment. You've been on the market 30 to 60 days, and you're finally down to where the last sale was — but in those 30 to 60 days somebody else came on and sold at $690,000. So now you're above the market again and you're chasing it down.

Price it right. That's number one. Number two: if your home is fixed up and improved, it sells much faster.

And buyers — get off the fence. Part of what happened to these clients is that they went out and looked over the weekend, they loved the property, and then they sat and talked it through. They wrote the offer today, and the seller had accepted another offer two hours earlier. They missed the house by two hours. If you see the house you want, the seller did the work, and it's affordable, get it.

One last idea for sellers who are stuck. The best return you can get is paint — light colors, not dark. If you can't afford to do it, offer the buyer a credit through escrow instead. Say it'll take four or five thousand dollars to paint, and offer that as a credit. The buyer gets the house, picks their own colors, and does it with the seller's money instead of their own.

Wrap-up

If you need more information or have more questions, please reach out — that's 844-935-3634, 844-WE-LEND-4. We're calling people back even on Saturday and Sunday. If you'd like to know when we go live and be part of the show, text the word MOM to that same number: one text message a week, a link to jump on and follow along, and no spam. Everything else is at mortgagemomradio.com. I hope you all have a fantastic rest of your week — we'll talk to you real soon.