What 8% mortgage rates would mean for the housing market

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Let’s be clear: When I say mortgage rates above 7% are good for the housing market, I’m talking about the long term. For the housing market to heal, we need more inventory, and high rates are the healthiest way for that to happen.

I know that the next few quarters will be tough for sellers and first-time homebuyers. However, it’s worth pointing out that lower rates would just cause home prices to continue to climb—and a market with higher home prices is arguably harder to buy in than a market with high rates.

Last week, I had this discussion with Dustin Rosenberg and Jonathan Yoo of Convoy Homes. We dove into what high mortgage rates mean for the housing market, especially if they continue to increase. As of today, the average 30-year fixed mortgage rate has ticked up to 7.39%.

To achieve a “normal” housing market, we need the number of active listings to pretty much double. Supply can not come in fast enough, so I think the only way to get there is to squash demand. If we continue to allow home prices to continue to climb and let demand outpace supply, we will never catch up. 

I also chatted with Matt Gouge, Ty Leon-Guerrero, and Patrick Kim on Monday about what a world with 8% rates would mean for the market. 

If we go back to 8% rates and go below 4 existing million transactions, inventory will build and days on the market will build. But in our bifurcated housing market, inventory build-up will be concentrated above the median.

For flippers, the next few months with high rates will be painful. The best thing they can do is to try and get flipping projects completed and sold as soon as possible, especially if these properties are above the median. All it will take is a small dip in the stock market or rates ticking up to 8% (or even 7.75%) for projects like these to go really wrong for flippers, who will have to eat monthly payments of vacant properties. 

To investors, I want to remind you that a slow housing market is good for buyers and bad for sellers. When there’s not a lot of inventory for sale, buyers can act irrationally. They release contingencies, they bid above the asking price, etc. When rates go up, that irrationality is seen on the seller side—that’s good news for investors and buyers who are prepared to leverage a better deal. 

Blackstone thinks the commercial real estate crash is over?

Last week, Blackstone said it would acquire AIR Communities, a real estate investment trust for $10 billion in cash. As a big player in the real estate investment space, Blackstone’s message is clear: the commercial real estate market has bottomed out. 

Are they right?

Anna "REI Mom" Kelley and I discussed Blackstone’s purchase last week and what it should signify to investors. 

While we don’t know if commercial real estate has officially bottomed out, we do know it is probably at least close to that point. I think Blackstone may be acting a bit early so that they have less competition over the properties with the best investment potential. 

In the context of returns of investment, what really matters is trajectory. You don’t have to get the exact top and the exact bottom right. In our chat, Anna points says there are some oversupplied cities where you can buy office buildings for less than the land value—I’d say that means we are pretty close to the bottom.

Until now, Blackstone has been waiting on the sideline with cash in hand. Now that interest rates and office vacancy levels are high, and prices are artificially below replacement costs, it makes sense why investors are making their move.

ResiClub chart of the week

On Friday, ResiClub delivered a cost breakdown for constructing a single-family home using data from the National Association of Home Builders.  The NAHB provided ResiClub with the national averages for itemized costs in each stage of construction for a new 2,561-square-foot single-family home in 2022.

The pie chart below breaks out those costs for the “average” home. The NAHB broke down the costs of the eight major stages of construction (see the 8 color groups in the pie chart below), which are made up of 36 total subcategories.

Number of the week: $1.5 million

A recent study by Northwestern Mutual found that Americans now think they need $1.5 million to retire. This is up 50% in four years and 15% from last year. 

Many people are focused on hitting a certain “net worth” threshold, but when it comes to retirement, I don’t think net worth is what you should worry about. Instead, track cash flow. Ask yourself, how much cash do I have coming in that I don’t acquire by selling one hour at a time?

For me, cash flow comes from my real estate investments, which I've built up over 22 years, as well as passive income from my books, YouTube channel, and courses. Trust me: $20,000 of passive income a month is better for retirement than a $1.5 million net worth.

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