“OMG I missed it. I should’ve bought two years ago.”
“Am I too late? Are all the good deals gone?”
“Look at how much cheaper it used to be. I’m priced out now.”
“Isn’t my best bet to wait for a crash?”
Oh my dear friend.
Those sound like remarks made today … right?
Well, they’re not.
Those are the remarks I heard in 2015, even everyone was lamenting how much real estate prices had climbed, relative to 2012.
“Damn I should’ve bought back then! It’s too late now. Everything’s expensive again. I’ll just wait for prices to come down.”
I know, that seems silly in hindsight.
But put yourself in the shoes of an aspiring real estate investor in the year 2015. They had been thinking about buying a rental property for a year or two. But they hadn’t. And while they sat on the sidelines, prices skyrocketed.
The chart above covers January 2010 to December 2015.
In 2015, this was a prospective investors’ experience of the last 5 years. They saw home prices dip slightly from 2010 to 2012, and it scared them — “maybe there will be another crash!!” — so they sat on the sidelines.
Then the market boomed from 2012 to 2015, and by the end of that three-year period, they were kicking themselves to “waiting too long.”
“It’s too late!!!!!”
“The good deals are gone!!”
With the Great Recession in such recent memory, they comforted themselves with the idea that they could just kick back and wait for the next housing crash.
Nearly nine years later, they’re still waiting. And missing out on gains.
Here’s what the market did from January 2016 through May 2023:
Up, up, up, up, up.
Sliiiight dip for a few months in late 2022. Then up again.
The people who lamented that they’d “waited too long” and “it’s too late” psyched themselves out. They sidelined themselves. They missed those returns.
You see, pessimists get to make excuses. Pessimists get to validate themselves.
Pessimists get to be right.
Optimists get to be rich.
“The irony is that by trying to avoid the price, investors end up paying double,” Morgan Housel writes in his book, The Psychology of Money.
In that passage, he’s discussing stock investing, but the principle applies to real estate as well. Those who lament that real estate is too expensive, relative to its previous values, are the same people who eagerly buy an index fund without complaining that it, too, is substantially more expensive than it was a few years ago.
I’ve never heard anyone say: “VTSAX is 50 percent more expensive than it was five years ago! It’s too late to buy. The good deals are gone. I’ll wait for the next crash.”
Yet they’ll say that about real estate.
Sure, people might debate whether the stock market is overvalued. But if you’re a long-term investor, you dollar-cost average into the market.
You understand that a share of VTSAX will cost significantly more today than it did five years ago, because, well, assets appreciate over the long-term. That’s the point.
Ideally, real estate investors would be best-off viewing their properties through the same lens through which an index fund investor views their holdings.
Sometimes you’ll buy high. Other times, you might hold through a decline. But over the long-term, based on historic trends, both asset classes (real estate and index funds) significantly rise in value.
Yet often, would-be real estate investors seem to forget historical trends.
When the topic turns to rental properties, many would-be investors sideline themselves because they’re convinced that “I’m too late” and “the good deals are gone.”
Sure, you can’t blindfold yourself, throw a dart at a list of houses, and find one with an amazing cap rate, like you could in 2012.
Sure, you have to actually, erm, what’s that word … WORK.
Good deals are available for those willing to find them.
Back in 2015, I often heard people lament that they were “too late” because real estate prices had risen so much in the past three years. “I should’ve invested in 2012! The run-up has already happened. I’m too late. I’ll wait for the next crash.”
Nearly nine years later, they’re still waiting.
The question is: are you going to be one of those people who says “it’s too late! the good deals are gone!” and then sit on the sidelines for the next 30+ years? Or are you going to train and compete?
If you choose to leave the sidelines and get into the game —
The first step is to understand: It’s not too late.
The prices that existed five years ago are irrelevant.
The only question that matters: “Is this a good deal today?”
It’s easy to substantiate the belief that you’ve missed out on all the good returns — you can see how much home prices have appreciated over the past three years. You can see all the capital appreciation you could have had, if only you’d gotten started sooner.
Just like if you’d bought a ton of index funds in 2018. Or better yet, March 2009.
Assets appreciate.
Sometimes there’s volatility, and they drop a little bit. But historically, in the U.S., major asset classes — including stocks and real estate — have always risen over time.
We seem to have accepted this reality in the world of stock investing. We don’t reflexively lament *not* buying more index funds at 2012 prices.
We might occasionally joke about it — “awww man I shoulda bought Amazon in 1997!” — but we know that when we buy a stock, we’ve evaluating today’s fundamentals. Past is prologue.
When we evaluate stocks, we ask: “Is this stock a wise purchase at today’s price?” But we forget to ask this question when we’re dealing with a tangible asset class like real estate.
Real estate often fills people with fear:
It’s a single six-figure transaction; a larger dollar amount than an index fund.
You borrow money to get into the deal; leverage increases risk.
You assume you can’t dollar-cost average into real estate, like you can with stocks. (In reality, many rental investors *do* dollar-cost average into real estate by investing in one property per year, or one property every-other-year … some type of periodic pace.)
Real estate’s tangibility also makes it an inherently emotionally-charged asset class. We can touch it, smell it, see it, hear its creaks and noises.
And when emotions are involved, we rationalize rather than reason.
“Assuming that something ugly will stay ugly is an easy forecast to make,” Housel writes. “And it’s persuasive, because it doesn’t require imagining the world changing.”
Pessimism is tempting, but it’s also limiting — and its intellectually lazy.
It keeps you broke and uncreative.
Optimism, by contrast, keeps you asking “how can I?” — it keeps you solving problems, rather than lamenting them.
“How can I find properties with a solid cap rate and good cash flow located within a two-hour drive?”
“How can I improve my skills as a negotiator?”
“How can I analyze and cross-compare across multiple markets?”
“How can I save for a downpayment?”
“How can I get approved for a mortgage if I’m self-employed / if I don’t earn much?”
Ask “How can I?” rather than lamenting “I can’t because …” and you’ll find your world switch.
And if you want answers to the above questions, you’ll find them in Your First Rental Property, our flagship course.
Our experts answer readers’ home-buying questions and write unbiased product reviews (here’s how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.
Interest rates for the most popular 30-year fixed mortgage averaged around 6.43% in December 2023, according to Zillow data. Rates for 15-year mortgages, which are also relatively popular, were 5.75%.
The average monthly mortgage payment is currently $2,883 for a 30-year fixed mortgage, based on recent home price and mortgage rate data.
Mortgage rates are always changing, and there are a lot of factors that can sway your interest rate. While some of them are personal factors you have control over, and some aren’t, it’s important to know what your interest rate could look like as you start the process of getting a home loan.
Most experts believe that mortgage rates will go down in 2024.
Average mortgage rates today
While average mortgage and refinance rates can give you an idea of where rates are currently at, remember that they’re never a guarantee of the rate a lender will offer you. Mortgage interest rates vary by borrower, based on factors like your credit, loan type, and down payment.
To get the best rate for you, you’ll want to get quotes from multiple lenders.
Average mortgage interest rate by mortgage type
Purchase mortgage
The rates you’ll get on a mortgage used to purchase a home are often better than what you’ll be quoted for a refinance. They generally differ by the loan’s length in years, and whether the interest rate is fixed or adjustable. Two of the most popular types include:
30-year mortgage rates: The most popular type of mortgage, this home loan makes for low monthly payments by spreading the amount over 30 years.
15-year mortgage rates: Interest rates and payments won’t change on this type of loan, but it has higher monthly payments since payments are spread over 15 years. However, it comes with lower rates than a 30-year loan.
Mortgage refinance
Mortgage refinance rates typically differ somewhat from purchase rates, and may be slightly higher — particularly if you’re getting a cash-out refinance, since these are considered riskier.
If you’re considering a refinance, be sure to shop around with the best mortgage refinance lenders and get multiple rate quotes to be sure you’re getting the best deal.
30-year mortgage refinance rates: Refinancing into a 30-year term can lower your monthly payment since you’re spreading out what you owe over a longer period of time.
15-year mortgage refinance rates: Refinancing into a shorter term like a 15-year mortgage will increase your monthly payment, but help you save on interest.
Home equity line of credit (HELOC)
HELOC rates are generally a little higher than rates on first mortgages, but they can still be worth it if you’re looking to tap into your home’s equity without having to take on a new rate on your main mortgage.
As with other types of mortgages, you’ll want to shop around and get multiple rate quotes to find the best HELOC lenders.
Average mortgage interest rate by credit score
National rates aren’t the only thing that can sway your mortgage interest rates — personal information like your credit score also can affect the price you’ll pay to borrow.
See Insider’s picks for the best mortgage lenders »
The higher your score is, the less you’ll pay to borrow money. Generally, 620 is the minimum credit score needed to buy a house, with some exceptions for government-backed loans.
Data from credit scoring company FICO shows that the lower your credit score, the more you’ll pay for credit. Here’s the average interest rate by credit level for a 30-year fixed-rate mortgage of $300,000, as of January 2024:
According to FICO, only people with credit scores above 660 will truly see interest rates around the national average.
Average mortgage interest rate by year
Mortgage rates are constantly in flux, largely affected by what’s happening in the greater economy. Things like inflation, the bond market, overall housing market conditions, and Federal Reserve policy impact mortgage rates.
Here’s how the average mortgage interest rate has changed over time, according to data from Freddie Mac.
Throughout 2020, the average mortgage rate fell drastically due to the economic impact of the coronavirus crisis. Rates throughout 2020 and into 2021 were lower than rates at the depths of the Great Recession. Thirty-year fixed mortgage interest rates hit a low of 2.65% in January 2021, according to Freddie Mac. Rates began to rise again in 2022.
Most major forecasts expect rates to start dropping throughout the next couple of years, and they could ultimately end up somewhere in the 5% range.
Average mortgage interest rate by state
Check the latest rates in your state at the links below.
AlabamaAlaskaArizonaArkansasCaliforniaColoradoConnecticutDelawareFloridaGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington Washington, DC West Virginia Wisconsin Wyoming
How are mortgage rates determined?
Multiple factors affect the interest rate you’ll pay on a mortgage. Some are outside of your control. Others you can influence.
For instance, the federal funds rate — the interest rate banks charge when they lend to each other — has an influence on all sorts of other interest rates, including those on mortgages. The Federal Reserve adjusts the federal funds rate as part of its effort to control inflation. Therefore, it’s a factor that is beyond your control.
Key determining factors that you do have control over include:
Your credit score
Debt-to-income ratio
The amount of your down payment
The type of mortgage you get
The amount of time you take to pay off the loan
What to know before getting a mortgage
A mortgage is a type of secured loan used to purchase a home. You pay back the lender over an agreed-upon amount of time, including an additional interest payment, which you can consider the price of borrowing money.
(You can also pay off your mortgage early, but there are both pros and cons to be aware of.)
Because a mortgage is a secured loan, it means you put your property up as collateral. Should you fail to make your payments over time, the lender can foreclose on, or repossess, your property.
Frequently asked questions about average mortgage rates
A mortgage rate, also known as a mortgage interest rate, is the fee charged by your lender for loaning you money. Your principal (payments on the amount of money you borrowed) and interest are rolled into one payment each month.
In December 2023, 30-year mortgage rates averaged 6.43%, and they’ve been trending even lower this month.
Compared to where rates were just a couple of years ago, a 7% mortgage rate is extremely high. But now, many borrowers who got their mortgage in the last year likely have rates of 7% or higher. Fortunately, rates have eased somewhat in recent months, and are now back below this benchmark.
Average mortgage rates nearly reached 8% in October of 2023, but they’ve since come down. However, rates can vary a lot depending on your finances. If you have a lower credit score, you could still get a rate that’s near 8%. Rates are expected to decrease this year, so we likely won’t see average rates reach 8%.
The last time mortgage rates were at 8% was in August 2000, when the average 30-year mortgage rate was 8.04%, according to Freddie Mac.
The better your credit score, the better the rate you’ll get on your mortgage. To access the best mortgage interest rates, aim to have a credit score at least in the 700s.
Mortgage rates fluctuate all the time. The best way to get a good mortgage rate is to get quotes from at least three different mortgage lenders and compare them. That way, you’ll know you’re likely getting a good rate. If you’re having trouble getting a lower rate, you might want to first take some time to work on your credit or pay down debt.
A discount point is a fee you can choose to pay at closing for a lower interest rate on your mortgage. One discount point usually costs 1% of your mortgage, and it reduces your rate by 0.25%. So if your rate on a $200,000 mortgage is 6.5% and you pay $4,000 for two discount points, your new interest rate is 6%.
Because mortgage interest rates are so individual to the borrower, the best way to find the rates available to you is to get quotes from multiple lenders. If you’re early in the homebuying process, apply for prequalification and/or preapproval with several lenders to compare and contrast what they’re offering.
Mortgage interest rates are expected to fall soon, but when and how much depends on the path of inflation; if price growth continues to slow, rates should fall in the coming months. If inflation remains stubborn, we may have to wait a bit longer. But that doesn’t mean you need to put off your homebuying plans — there are plenty of advantages to buying a house when rates are high, such as decreased competition.
MBA’s current president and CEO Bob Broeksmit said in a statement that the real estate finance community was mourning the loss of one of its “great leaders and fiercest advocates.” “Dave Stevens grew up in the mortgage business before serving the industry and its customers both as FHA commissioner during and immediately after the 2008 … [Read more…]
American family finances have weathered the fallout of the dot-com bubble, the Great Recession and a pandemic over the last 30 years. Despite these challenges and more, single-parent households as a whole have actually seen broad financial improvements during this time.
Some households are better insulated to emerge unscathed (and even improved) from economic turmoil. On the other hand, families with one earner and multiple mouths to feed are at a disadvantage compared with those with multiple incomes when there is a job loss, high inflation, unexpected medical expenses or trouble in financial markets, for example. Measuring the financial health of a single-income household against one with two incomes would uncover few surprises. However, examining how the financial well-being of single-parent households has changed, and how it’s changed relative to others over time, tells a story of certain improvements and remaining opportunities for growth.
I am the product of a single-parent household. From the time I was 3 years old in the early 1980s, my mom raised my older brothers and me solo. Later, as an adult, I was the head of a single-parent household, raising my daughter who was born in 2000. Much has changed during that time, both in how I experienced the world through finances personally and within the broader economy. Charting the household finances of single-parent households across decades underscores these changes. Income, net worth and homeownership rates among single-parent households have improved dramatically, but these households still lack insulation from financial shocks, according to data from the Federal Reserve.
Family finances through the decades
The Federal Reserve’s Survey of Consumer Finances is released every three years and is a trove of household financial data. I examined 30 years of the data, from 1992 to the recently released 2022 report, to see how my lived experiences aligned with the national picture and how the financial conditions of households like mine have changed.
Roughly 30 years ago, in 1992, I was 14 years old, living with my mother and one older brother, while my eldest brother was in college. During childhood, my mom received child support, but we still qualified for the free lunch program at school, a common proxy for household poverty. She had the good fortune of always having a steady job and put herself through college while raising us.
My experience as a parent — beginning in 2000 — was different in that I didn’t receive support payments from another parent but did qualify for broader public assistance. When my daughter was an infant, I received EBT benefits or “food stamps,” public housing and Aid to Dependent Children, commonly referred to as “welfare.” I, too, put myself through college and held down a job from the time she was born. Despite beginning my journey as a single mother at a deficit from where my mother began hers — quite a bit younger and with only one source of income — I was able to climb more quickly, perhaps because I only had one additional mouth to feed or because government and social supports of the era made it easier to do so.
Over the past 30 years, the median annual income of single-parent households has grown just over 45%, after adjusting for inflation, to $43,000, slightly faster than any other household type. Across all households, typical incomes grew about 27% during that period.
Note: The Survey of Consumer Finances defines single-parent households as those with children but not married or living with a partner.
A higher real income means a higher standard of living — your money can go further toward paying for the things you need. And my personal experience as a child and a parent aligns with this data — later in my daughter’s childhood, I was better able to afford things my mother would have considered luxuries when I was young.
I want to make it very clear that it’s little more than a neat coincidence that my personal life reflects the Federal Reserve data. Much is hidden in national aggregates, and many people have their own anecdotes that would run contrary to the data. In the case of “median income,” for example, we know that half of single-parent households earned less than $43,000 in 2022, and many likely earned much less. On the other hand, half earned more than that median amount. And though the national median grew during this 30-year period, some households surely experienced periods of declining income. Big aggregates allow us to examine broad trends, but they also sacrifice some details.
Net worth nearly triples; homes and retirement assets climb
Your net worth is the amount of your assets (the things you own of value) minus your liabilities, or debts. And single-parent households saw significant increases in net worth from 1992 to 2022. While households overall saw inflation-adjusted net worth climb 87% during this period, those headed by a single parent rose 189%.
A higher net worth represents greater insulation from financial difficulties. When you have more savings, equity in a home or lower debt, for example, you’re better able to accommodate unexpected expenses and better able to plan for long-term financial goals.
At least some of this growth in net worth is due to the rise of homeownership among single parents. The percentage of single-parent households who own their primary residence grew from 43% in 1992 to 50% in 2022, an increase of 17%, and the most dramatic increase among all family types during the period.
I was raised in rentals; my mother hasn’t owned a house since she had to sell the family home after my parents’ divorce. However, I purchased my first home when my daughter was 7 years old, thanks in part to the more accommodating standards of an FHA mortgage, down payment assistance and when I bought — it was 2007, and home loans were being passed out like candy.
Another important asset, retirement accounts, are now held by 37% of single-parent households, compared with 24% in 1992. While a marked improvement, there is still room for growth here. Among all households, 54% have retirement accounts.
So what can account for these improvements? It’s likely a combination of factors, starting with a “catch-up” period. Moms make up 80% of the heads of single-parent households, according to the U.S. Census, and women were afforded the right to apply for credit and loans such as mortgages only in 1974. The full implications of this change could certainly take decades to work their way into household personal finances and the economy at large. Further, the share of single mothers who work and the share of women going to college has increased over the past several decades, contributing to increased earning power. And finally, while a 2022 Pew Research Center survey found that the stigma of single motherhood is on the rise again, it’s likely still at a better place than 30 or 50 years ago, when legal protections against discrimination were lacking.
Where single-parent households can still gain ground
The share of single-parent households that save money actually fell over the 30-year period examined, from 45% to 41%. In fact, it fell across most household types during this period, though it fell the furthest for single parents. Without savings, you’re more likely to depend on debt when emergency expenses arise and less likely to be able to keep up with monthly bills.
Single-parent households are also the most common household type to revolve credit card debt, or carry it from one month to the next. More than half (52%) of these households carry a balance on their card from month to month, compared with 44% of all households, according to the data. Further, single-parent households saw the greatest change in this metric among all household types during the two-year period capturing the COVID-19 recession — from 2019 to 2022, that share rose 15%.
Carrying credit card debt increases monthly payment obligations, and household payment-to-income ratios reflect this. In any given month, roughly 11% of single-parent households have monthly debt payments exceeding 40% of their monthly income. This 40% threshold is considered a measure of financial vulnerability, and a greater share of single-parent households find themselves on the wrong side of this line than any other household type. Further, while the share of households over this 40% mark has decreased in the last 30 years, it’s fallen the least in single-parent homes.
Keys to continued improvements
Overall, typical household finances have improved over the last 30 years, and by some measures they’ve improved most dramatically for single-parent households. But going it alone as a parent, whether by choice or by chance, still presents some greater financial challenges. Namely, households like mine often lack the additional safety valves afforded households with two potential earners, making them more vulnerable and more likely to have to turn to debt in periods of financial stress.
For me, a single parent raised by a single parent, money decisions were always about caution and resourcefulness, being careful and conscientious about every dime spent and being a scrappy problem-solver when money was too tight to cover all of the expenses. Honestly, I was resentful of this as a child. But I was grateful for the foundation when I became a parent. Early in my daughter’s life, these lessons were crucial for keeping the lights on, quite literally. And now that I’m financially secure, these lessons still underpin how I think about money and how I talk about it in my work.
The average finances of single-parent households have improved over the years, but individual household finances can hit setbacks along the long-term climb. The path to financial security is rarely linear. Incrementally building an emergency fund, using debt strategically and knowing where to turn when things get tough can make it easier to rebound and get back on an upward track.
This week’s Afford Anything blog post is a well-balanced diet:
Robert Kiyosaki predicts a massive crash — [philosophical]
Sobering stats about the housing market — [analytical]
Secret strategies to save on seasonal shopping — [practical]
The Robert Who Cried Wolf
Famed investor Robert Kiyosaki, author of Rich Dad, Poor Dad, recently caused an internet stir by predicting “the start of the biggest crash in history.”
Of course he did.
Kiyosaki is constantly crying wolf. It’s good for (his) business.
Bad news travels faster than good news.
People who prioritize attention over truth will use that to their advantage. Kiyosaki is a shrewd businessman. He understands the profit potential in strategic pessimism.
But that’s bad news for his followers. Per the law of large numbers, it’s reasonable that some people have kept their cash on the sidelines, rather than investing in the markets, after heeding his warnings. And that has massive lifelong ramifications on their wealth and retirement.
Lesson: Beware of anyone who peddles *negativity bias* in order to stay relevant.
These economic fear-mongerers don’t hold accountability for their track record of wrong predictions.
Their followers are the ones who suffer.
This is why it’s critical to choose your mentors carefully — and it’s precisely why you should never blindly enroll in an online class that’s taught by some random person whose ideas you haven’t vetted.
If you’re curious how often Kiyosaki has made the wrong call, note that Stanford-trained data scientist Nick Maggiulli, our guest on Episode 375 of the Afford Anything podcast, shared this illustration on X:
Pessimism has a visceral appeal. It’s evolutionarily advantageous to be hyper-aware of threats.
Our ancestors didn’t survive the jungle or savanna by appreciating the beautiful flowers. They survived by staying hyper-vigiliant of danger. This explains why negativity bias is so innate, so intrinsic. It’s a survival mechanism.
But in the modern developed world, pessimism keeps us overly conservative. We choose the “safe” major. We take the “steady” job. We tilt too heavily into conservative investments when we’re young, and we panic when our 401k’s start to decline. We avoid real estate investing and starting side businesses because these seem too risky.
Pessimism stifles innovation, entrepreneurship, and creativity. It locks us into mundane careers and middling investments as we muddle through risk-averse lives. In the end, we haven’t endured huge losses, but neither have we *embraced a shot* of winning.
As Episode 284 podcast guest Morgan Housel eloquently said:
“Pessimists get to be right. Optimists get to be rich.”
No, The Fed Lowering Interest Rates by 25 Basis Points Is Not Going to Flood the Market with New Housing Inventory 🙄
A little history lesson:
Once upon a time, in 2008, there was a Great Recession. It scared many investors and homebuilders, and they stopped making new homes.
In the decade that followed the Great Recession, new construction reached its lowest point since the 1960’s.
By 2019, the housing shortage amounted to 3.8 million units. This means there were 3.8 million more families and individuals who wanted a place to live — either to rent or buy — than there were homes available.
Then the pandemic struck. The prices of copper, lumber and other construction items shot through the roof (no pun intended). Builders had to raise home sale prices due to higher materials costs. Prices soared.
In 2020 and 2021, people across the internet cried, “Why are they charging so much more than the home is worth?!” — not realizing that “worth” is a function of the cost of labor + the cost of materials + the premium of scarcity.
And when supply is curtailed — as it was by 3.8 million units as of 2019 — there’s an ample scarcity premium.
Then inflation climbed. The Federal Reserve raised interest rates 11 times during their 2022-2023 cycle, resulting in a rapid escalation of mortgage rates.
This created a “lock-in effect” among existing homeowners. Nobody wants to trade a mortgage with a 3 percent fixed interest rate for an alternate mortgage with a 7 percent rate.
Existing homeowners with a mortgage have a huge incentive to hold.
Sellers who *need* to get rid of their property — for example, because they’re moving to another country — list their homes on the market. But homeowners who simply *want* to upsize or downsize are, for the most part, staying put.
This has created even more housing supply pressure.
Meanwhile, homebuilders — who must borrow money to finance their operations — are seeing the cost of capital skyrocket. Many have curtailed new construction, putting further pressure on the supply pipeline.
So we have a long-running confluence of factors that, piece by piece, keep exacerbating the housing supply crunch.
And this leads to today’s takeaway:
No, this problem will not magically solve itself the moment that the Fed reduces interest rates.
The Fed is meeting today and tomorrow. They’re widely expected to hold rates steady. (They’ll make an official announcement at 2 pm on Wednesday.)
There’s rampant speculation that the Fed will lower interest rates in Q1 or Q2 of next year.
— And —
There seems to be a pervasive myth that once interest rates decline, those “locked-in” homeowners will rush to list their homes for sale, flooding the market with new inventory.
The supply-demand imbalance will tilt in the buyer’s favor, home prices will plummet, and housing will become affordable once again.
Yet that is pure fantasy, disconnected from the data.
Imagine 10 people. Nine of them have mortgage rates that are less than 6 percent. The stat is 91.8 percent of mortgaged homeowners, to be precise.
Wait.
Imagine those same 9 people, the 9 out of 10 who have a sub-6 percent interest rate. Here’s how they break down:
One has an interest rate between 5 to 6 percent.
Two have an interest rate between 4 to 5 percent.
Six have an interest rate below 4 percent. The exact stat is 62 percent.
Let me say that again:
Six out of 10 mortgaged homeowners have an interest rate that’s below 4 percent.
Meanwhile:
One-half of mortgaged homeowners (49 percent) say they’d consider listing their home only if interest rates fell below 4 percent, according to a Redfin survey conducted by Qualtrics.
So this myth that if the Fed lowers interest rates, the market will get flooded with new inventory? — That scenario isn’t likely to happen for a long, long, looooong time.
As of Dec 12, 2023, the current average 30-year fixed rate for a buyer with a 740-760 credit score is 7.4 percent. Multiple reductions in interest rates won’t begin to approach the sub-4 percent rates of yesteryear.
The “lock-in effect” will last for longer than you might expect.
Lesson:Don’t wait to buy a home based on speculation about the market. If you have both the money and desire to buy a home, DO IT NOW. Homes are likely going to get more expensive in the future, not less.
How to Not Flush AS MUCH Money Down the Toilet This Holiday Season
Yeah, I know.
The holiday season is custom-built for parting with your money. Every store is promoting sales, discounts, offers. Limited time only.
It’s scarcity on steroids.
Holiday deals tap into the part of our brain that says — “this deal is only available now; I should snag it while I still can.”
Our FOMO creates jobs and drives the economy.
Since holiday spending is human nature, let’s forgo the guilting, shaming and finger-wagging that’s so endemic to the personal finance and FIRE community.
It’s counterproductive. Guilt and shame over holiday spending doesn’t change human behavior, it merely robs the joy from it.
It’s like chowing down a piece of chocolate cake while simultaneously fretting about the sugar.
You’re eating the cake regardless. You may as well enjoy it.
Instead, let’s accept that some degree of holiday spending is normal, and let’s focus on how to find the best deal possible.
Here are four pointers. (If you have more to add, please share these with the Afford Anything community) —
#1: If you’re buying an item at a mid-size company’s website (i.e., a merchant that’s bigger than a mom-and-pop shop, but not a big box retailer like Target or Amazon) — move your cursor near the “back” arrow on the browser.
This is called “exit intent,” and it often triggers pop-ups with discount codes.
#2: For online purchases: Create an account, put an item in your cart, and then leave the website.
This is called “abandoned cart,” and often triggers an automation in which the company emails you a limited-time-offer discount code.
#3: If you’re buying something expensive (over $500 – $1,000 or more), track the price for a few weeks, especially around the holidays. On sites like Wayfair, I’ve seen prices fluctuate daily.
#4: The least useful savings tip: Googling discount / promo codes or pulling these codes from mass aggregator websites.
You may get lucky, but typically 9/10 are expired or don’t work; they just yield a bunch of extra open tabs on your browser.
There’s an enormous selection of third-party websites and browser extensions that claim to help with this, with varying degrees of efficacy.
I’m not going to recommend any specific tools; recommendations are both dynamic and better crowdsourced. Please share your experience with the community.
When most people talk about money management, they discuss tactics. Occasionally, you’ll encounter someone who elevates the discussion to strategy, rather than simply scattershot tactics.
But what’s missing from both conversations — both tactics and strategy — is a wider-lens look at how to become a better thinker; how to become a crisp, clear decision-maker.
How to think from first principles. How to better your brain. How to cultivate the wisdom to know the next move.
This series is an attempt to bring first principles thinking into the conversation around money. Welcome to the inaugural post.
Welcome back to First Principles, my series with an alternate definition of FIRE — Financial Psychology, Investing, Real Estate and Entrepreneurship.
Today we’ll dive right in with the question on everyone’s mind: is a recession looming?
Financial Psychology
Are we in a recession?
Short answer: Possibly. I may even go as far as to say “probably.”
A recession is defined as two consecutive quarters of negative economic growth, as measured by GDP. (Notice that recessions reflect the state of the economy, not the stock market. We’ll come back to that in a moment.)
By definition, a recession is only visible in hindsight, after two negative-growth quarters have passed. This means it’s possible we’re already in a recession. It’s also possible that one may be looming.
Why now?
What’s behind this (potential) recession? In a word: inflation.
As I’m sure you know, the Federal Reserve has been raising interest rates. (There have already been 5 rate hikes so far in 2022!)
The Fed is tasked with a “dual mandate” to control both inflation and the risk of recession; this “dual mandate” exists because controlling inflation necessarily carries a recessionary risk.
But why?
To control inflation, the Fed must make money more expensive to access. When borrowing becomes more expensive, people and companies do less of it, which slows spending and growth. This could lead to a couple of consecutive negative-growth quarters, which is, by definition, a recession.
What does this mean for you?
Recessions vary along three dimensions:
(1) severity
(2) duration
(3) frequency
It’s tempting to think that a recession will impact us in the same ways as the Great Recession of 2008.
This is due to a few cognitive biases, including:
Recency bias — our tendency to overestimate that an event that occurred recently will re-occur again, or to assign greater importance to things that have happened most recently.
Salience bias — our tendency to focus on events and facts that are remarkable (the headline-grabbers), rather than events and facts that are mundane.
Availability bias — our tendency to think that examples that most easily come to mind are more important or significant than they actually are.
The Great Recession of 2008 was (1) recent; (2) remarkable; and (3) easy to recall.
Its remarkability and ease-of-recall stems from the fact that the Great Recession was both high-severity AND long-duration. It felt personal; millions lost their jobs and homes, which meant that this recession impacted us in the most visceral, tangible ways possible.
For all those reasons, it’s easy to assume that every recession will look, feel and behave similarly to the Great Recession.
But will it?
Let’s turn our attention to 2022, and look at the many factors that are different this time around, including:
(1) Unemployment is at a record low. Despite the occasional warning headline (e.g. Tesla will be reducing its salaried headcount by 10 percent), the unemployment rate remains 3.6 percent as of May 2022, according to the U.S. Bureau of Labor Statistics.
(2) Housing prices continue to rise, despite higher interest rates, due to imbalances in supply-demand fundamentals. The cost of materials (such as lumber) remains high, which increases construction costs and therefore home values.
(3) Consumer spending remains strong, particularly in discretionary areas such as travel and dining. Despite higher fuel prices, airlines are seeing strong demand for flights.
What does this mean?
We may or may not already be in a recession, or enter one in the near future.
But if we do, there’s a chance this might be experienced as an “on-paper” recession, in which the daily lives of the average middle-class worker isn’t strongly affected.
If unemployment remains low, consumer spending stays strong, and inflation gets roped into check, there’s a chance that this recession will be forgotten. It might be long-duration, but low-severity.
Of course, this is one of a range of possibilities, and as you know, I’m not in the business of prognostication.
But it’s worth making the point that we shouldn’t let our cognitive biases lead us astray. Don’t assume that the next recession will resemble the conditions of 2008.
SPOTLIGHT ON…
Have you been interested in real estate investing for years, sitting on the sidelines watching the market go up and wishing you’d gotten in sooner?
I have a secret for you: it’s not too late to find good deals.
Even though parts of the US market are crazy, there are still good deals to be found; you just have to know where to look.
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Want to get notified when we open the doors? Join the VIP list.
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Investing
Recessions reflect the economy, not the stock market.
Let’s return to the definition of a recession: two consecutive quarters of negative economic growth, as measured by GDP. This definition doesn’t directly relate to stock prices.
But investors react in varied ways.
There are two popular styles of investing: growth and value.
Growth investors tend to sell (or not buy) during recessions. When companies expect lower profits, growth investors are usually unwilling to pay a high price for a share of that company, so stocks can fall.
But this is counterbalanced by value investors who pick up shares of the ‘winners,’ the companies and stocks that they believe have been maligned by the market and that will emerge strong during the recovery.
Hence, the volatility.
So let’s zoom out and look at what’s happening now:
Everything (except real estate) is falling.
Stocks are volatile. Crypto is depressed. Bonds are unattractive.
And that’s not surprising, given the liquidity patterns of the past two years.
At the start of the pandemic, $10 trillion in liquidity got pumped into the monetary system. Investors used that liquidity to buy all types of assets — stocks, bonds, crypto, housing — triggering a massive spike in the value of all asset classes across the board. (It’s no surprise that “meme stocks” like GameStop and AMC Theaters became a thing at the exact moment when millions received “stimmy” checks.)
Two years ago, people were already asking the question, “what should I invest in when everything is expensive?”
Last year, that question only became louder and more pronounced.
It’s reasonable that today, as liquidity is getting removed from the system and capital becomes harder to access, the values of these assets will gyrate for awhile, then stabilize at a “new normal,” with valuations that reflect market fundamentals such as earnings and expectations.
What does that mean for you?
Expect that the rest of 2022, perhaps 2023, could be volatile. Stocks, crypto and bonds may swing for awhile as investors try to figure out the “new normal.”
But these types of events are how the market cleans itself.
The poorly-run companies run out of money and fold. Better companies take their place. And the broad market, over the long-term, reflects the growth of the winners.
Many fantastic companies started during the Great Recession; many new companies will be created during the next one.
Real Estate
We created a massive, multi-day email series to deep-dive into recession and inflation in 2022 — and specifically, to talk about how it could impact the housing market.
It’s waaayyyy too detailed to summarize into this post, so I’d suggest signing up to get this multi-day email series.
If you’re even thinking about buying real estate, either as an investor or as an owner-occupant, you’ll find a ton of value in this free email series.
Get the free email series
Entrepreneurship
One of the most interesting stats to watch in coming months relates to the unemployment rate.
Right now, many entrepreneurs are struggling to hire talent. The labor market is tight. Small businesses are having a tough time competing with the salary and benefits packages offered by major corporations.
Many real estate investors (which is a specific subset of entrepreneurship) have spent years lamenting how hard it is to hire contractors — because many contractors are booked, busy, and in high demand.
Given the record-low unemployment, that’s not surprising.
If the labor market loosens, it might become easier to hire. And that will be a blessing for small business owners and real estate investors who are trying to find top talent, especially 1099 contractor talent.
Again, this is why many great companies tend to be launched during recessions:
One of the best times to create a business is when skilled talent is looking for work.
Hope you enjoyed this issue of First Principles.
I’ll see you in the next issue. Until then!
Click here if you want future posts like this straight to your inbox with more thoughts, ideas and insights on a new take on FIRE.
The 2023 housing market faced one of the same roadblocks we saw in 2022: mortgage rates were too high for home sales growth. Now that we’re in 2024, the Federal Reserve‘s rate hike cycle is over, so let’s look at what that means for housing demand and home prices. However, a yearly forecast has limitations and in this crazy housing and economic cycle, if people give you a yearly forecast without guidance as variables change, you’ll be dealing with stale data. Every Saturday I publish a weekly housing market tracker with forward-looking data and insights so you can adjust quickly to market conditions.
Here’s my forecast for 2024:
10-year yield and mortgage rates
For 2024, the 10-year yield range will be similar to 2023, but with a few different variables to watch.
10-year yield range: 4.25%-3.21%
Mortgage rates: between 7.25%-5.75%
A key level to watch for the 10-year yield is 3.37%. To go below this level last year, labor would need to break, so I borrowed Gandalf the Grey’s catchphrase: “You shall not pass.” And the 10-year yield did not pass that level in 2023!
However, if the labor or economic data gets weaker, we can break through that Gandalf line, which means 2.72% on the 10-year yield is in play for 2024. This could mean sub-5% mortgage rates if the spreads get better — a win for the housing market.. If the spreads are still bad, mortgage rates will be between 5%-6%. If the 10-year yield gets above 4.25%, the U.S. economy has outperformed again, as it did in Q3 when it grew at 5% and jobless claims fell.
Here is a chart of the 10-year yield with the inflation growth rate data tied to it for 2023:
Now let’s talk about mortgage rates!
The spread between the 10-year yield and mortgage rates can get better in 2024, which means mortgage rates could be 0.625% to 1% lower next year. For example, mortgage rates would be under 6% today if the spreads were normal. Instead, they closed 2023 at 6.67%. If the spreads get anywhere back to normal and the 10-year yield gets to the lower end of the range in 2024, we can have sub-5 % mortgage rates in 2024.
With the Fed no longer in hiking mode, any economic weakness on the labor side is a better backdrop to send mortgage rates lower. Unlike 2023, this year there are more positive variables that could send mortgage rates lower rather than higher.
Home prices
If everything stays constant, 2024 home-price growth levels will repeat what happened in 2023: low single-digit national home-price gains.
What could make home prices grow faster than low single digits? If I am wrong and mortgage rates go lower for longer and we don’t get more new listings in 2024, then home prices can grow faster in 2024 because we will have the same issue as before: too many people chasing too few homes.
What could make home prices decline? This would happen if we saw a surge of stressed inventory and mortgage rates didn’t go low enough to handle that much new supply into the market. We had mortgage rates in a solid range between 3.75% and 4.75% for most of the previous decade, but that hasn’t been the case recently. So, this is something to consider only if we see an increase in stressed inventory.
To give an example of what I am talking about, from 2008 to 2011, new listings data ran between 250,000 and 400,000 each week, with the peak seasonal data at 370,000 and 400,000. We haven’t had new listings data break over 90,000 in the peak seasons of 2021, 2022 or 2023. So if we do see a push in stressed new listings we have to be on it right away and see how the supply and demand equilibrium works.
However, we won’t have this conversation until we see it in the weekly data. In this episode of the HousingWire Daily podcast I explain how fast the housing dynamics shifted after Nov. 9, 2022, with prices returning to all-time highs in months. This is why weekly data is important!
Existing home sales
When we saw mortgage rates fall from 7.375% to 5.99% early in 2023, we got one of the most significant existing home sales prints ever, going from 4 million to 4.55 million. We need lower rates to get more consistent sales growth and to have one or two monthly existing home sales prints of 4.72 million or more, it’s going to take sub-6% mortgage rates with duration.
We will track the purchase application data weekly, however, I am only focused on that 4.72 million monthly print number for 2024 because the lack of affordability with rates still this high is impacting sales.
New home sales
As long as mortgage rates go lower, the builders can sell homes because they can lower mortgage rates even more than the existing home sales market and they have a pipeline of homes to sell. They have 106,000 homes that they haven’t even started construction on yet, and only 78,000 new homes have been completed and are ready to sell. They will manage their supply slowly.
Economic outlook
Looking at the economic cycle and the housing economy, we have a similar playbook going into 2024 as we did in 2023. Let’s look at that dynamic.
I raised the final flag in my six recession red flag model on Aug. 5, 2022. However, by Nov. 9, 2022, I saw that housing market dynamics had shifted and if I was right, the builders were about to get more positive about their business. Sure enough, the builders confidence survey started to grow again going into 2023.
As mortgage rates started rising toward 8%, the builders survey started to go lower, mostly due to smaller builders feeling the pinch. Now that rates have fallen again, this is a positive for the single-family housing market. The new home sales market means more to the economy because of construction jobs and big-ticket item purchases. In contrast, the existing home sales market is more about the transfer of commission and moving trucks.
People correctly keep an eye on the builder’s survey. However, the builder survey and new home sales rebounded to growth in 2023, and now, with rates almost down 1.5% for 2024, lower rates will help the builder survey again.
This is only for the single-family housing market, not the apartment market, which is heading into a decline in activity. This is something to watch on labor, as certain builders will not need as many people to build apartments. When rates stay too high for too long, you eventually impact future production.
We will only start talking about a recession when jobless claims break over 323,000 on the four-week moving average. We won’t talk about a recession today, or next year or even this decade until that happens. The history of economics has shown us that we need the labor market to break to have a job-loss recession. If you followed my work during COVID-19, you know my critical two takes about the labor market and how household balance sheets are much better now than ever. When jobless claims break that critical level, we will have a good discussion about the economy and the housing market, just not yet.
If the economy doesn’t have a credit event where lending gets tighter, the consumer should hold up in 2024, especially with lower mortgage rates. This means the homebuilders can sell more homes and keep construction workers employed longer. Falling construction employment is a staple of all job-loss recessions, and we have avoided that so far.
For 2024, I want to stress that the economic data can turn on a dime — both positive and negative — in ways that weren’t the case in the previous decade. Following the weekly tracker will be essential for the housing market and the economy. I track this stuff daily so you don’t have to!
The existing home sales market has spent the last 18 months with sales near great recession levels. Now it’s time for the Fed to give up on its covid-era housing economic policy and be pro-housing once again. It’s time to get U.S. housing off the COVID-19 policy and get sales growing.
It was late 2022 and Mike was feeling the pressure. Mortgage rates had climbed close to the 7% range and he was determined to remain competitive on pricing with rival loan officers in North Carolina.
But there was a problem: pricing exceptions, in which the lender takes the hit, were becoming scarce at his company. So he did what a lot of retail loan officers in the industry were doing — Mike would reclassify a self-generated lead as a corporate-generated lead, thus slashing his compensation from 125 basis points down to as low as 50 bps, giving him a low enough rate to win the client and eventually close the deal. His manager and company bosses knew that he and other LOs were lying about where the lead source came from, he said.
The lower comp rate stung. After Mike paid his loan officer assistant, he was clearing just 40 bps. Still, it was better than nothing. After all, tens of thousands of loan officers had already exited the industry because they couldn’t generate enough business.
“At this time, I didn’t really think of it as an ethical issue,” Mike, whose last name is being withheld for fear of retaliation, told HousingWire in an interview in late November. “But it started to wear on me to where it was like, okay, I’m getting price-shopped left and right. I’m feeling the pressure to cut my pay, because when I do it, and my agent partners, they see that I do that, and then they’ll tell people they refer to me. ‘Hey, he can dig deeper if he really has to.’”
Mike continued: “Well, doesn’t that smack of bad faith if I’m not offering them my best price from jump? I would get people saying to me, ‘I’m not going to go in with you. I don’t feel comfortable with you, because you tried to get me to go for a higher pricing first, and then only offered a better deal once I told you I had another offer.”
Mike said he left that lender in early 2023 as a result of the ‘bucket game’ and refuses to manipulate where lead sources are coming from at his current shop.
“It’s a race to the bottom,” he said of the practice.
Over the past two months, HousingWire has interviewed more than a dozen loan officers, mortgage executives, attorneys and also reviewed several companies’ loan officer contracts and text messages between recruiters and prospects to shed light on the growing issue of pricing bucket manipulation, which critics say distorts market pricing and could represent a violation of fair lending laws.
It’s unknown how many retail lenders are engaged in the practice of falsifying lead sources to lower loan officer pay, but industry practitioners say it’s widespread, and in most cases, reclassifying leads into different pricing buckets before they lock is not permitted by the Consumer Financial Protection Bureau’s rules under Regulation Z.
It’s also unclear whether the CFPB is policing the practice; HousingWire could find no record of enforcement actions taken, and the agency’s audits are not public record.
Evolution of the LO Comp rule
In the wake of the housing crash in 2008, the CFPB created new rules that reshaped how loan officers were compensated. The architects of the new rules wanted to prevent loan officers from taking advantage of borrowers, which was a common occurrence in the days leading up to the Great Recession.
Under an updated Regulation Z, lenders could no longer pay loan officers differently based on terms of loans other than the amount of credit extended. In theory, this means loan officers provide the same service and pricing on loans, reducing the risk of steering.
“LOs also can’t get paid on proxies, and they define proxies to be pretty straightforward: some factor that correlates to terms over a significant number of transactions, and the LOs have the ability to change that factor,” said Troy Garris, co-managing partner at Garris Horn LLP.
But the CFPB did allow loan officers to be compensated differently based on lead sources, which do not fall under the category of terms or proxies and are neither a right or an obligation.
For example, when an existing customer calls the lender’s call center for a new mortgage or refinance, and the lender redirects the loan to the LO, “the LO gets paid less because it was sourced from the company, and it is less work for the LO,” said Colgate Selden, a founding member of the CFPB and an attorney at SeldenLindeke LLP. When it’s an outside lead, “the LOs generated the lead themselves; they are spending time marketing to new borrowers, so they get paid more.”
Attorneys told HousingWire that in the current marketplace, violations of LO Comp rules can arise when lenders and LOs alter compensation by changing the lead source after the initial contact with the borrower to lower their rate and secure the deals. Regulation Z generally does not allow LOs to change which lead source was used.
But, in today’s competitive market, “I do think there’s an incentive, especially on the LO side, to find ways to do something different – and probably also for companies to decide to take more risk,” said Garris. “We believe this is happening because people are frequently asking if there’s a rule change.”
How the ‘bucket game’ works
LOs who spoke to HousingWire said managers often told them they wouldn’t get pricing exceptions on deals, so if they wanted to gain an edge it would have to come out of their pay. Three loan officers at three different retail lenders described it as a feature of their lender’s business model.
“You feel out a prospective client during the initial conversation, get a sense of whether they know how everything works, if they’ve spoken to another lender, if they’re going to shop you, right? And you quote them the best possible rate you could give them that day, knowing that you’ll put them in a bucket just before lock,” said one Wisconsin-based LO. “It doesn’t really matter what you quote them in the initial conversation as long as you can get it below competitors around lock time…either through a pricing exception or the bucket [manipulation].”
One top-producing California-based loan officer said she was excited when a top 35 mortgage lender tried to recruit her with the promise of multiple pricing buckets. Having the buckets would provide her flexibility that her current lender didn’t offer, she thought at the time.
“What the [recruiting] company told me explicitly was the loan originator, when they go to lock the loan, they check a box – is it self, branch or corp gen? And you only get to check one box, but it’s the loan officer’s choosing, not the branch,” she said. “So the loan originator is choosing, not the branch that says I’m going to give you a lead and this is the comp for it. Not the corporate advertisement or online group that says you’re getting this lead from us and here’s documentation that it occurred and now you’re going to get less comp. It’s the ultimate in legalized fraud. Because it’s not true.”
These days, many lenders have pricing buckets for corporate-generated leads, branch leads, builder leads, marketing service agreement (MSAs) leads, internet leads from aggregators and more. In and of itself, it’s legal, provided the lead really did come from the source and it’s diligently tracked by the lender.
Loan officers and mortgage executives interviewed by HousingWire said some lenders justify the practice of manipulating the buckets by telling LOs it’s legal and they’ve been audited by the CFPB, which has not found any wrongdoing. Several executives accused of the practice declined to comment on the record about pricing bucket manipulation, though they all said they track leads as required and are in full compliance with the law.
Selden, the former CFPB attorney, said that LOs are telling borrowers who complain about high mortgage rates that companies are “running a special offer.” Borrowers are directed to the company’s website, where, by indicating the LO name, they supposedly qualify for a special deal with a lower rate. In reality, at lenders without adequate controls to prevent lead source manipulation, this shifts the source from self-generated to an in-house lead.
LOs interviewed by HousingWire said that in some cases they would be able to change the lead referral source themselves, and in other cases they’d need a manager to alter the lead source in the loan origination system.
While many instances of price bucket manipulation were directed by managers, LOs would also self-select, said Mike.
“Most of the time you don’t have a loan estimate from a competitor, you’re just afraid that you’re going to lose it because you’re so embarrassed about the rate. And that’s why a lot of my comrades… were going to the corporate-generated lead bucket before they even confirmed that they had to. Partly because you wanted to lead with your best price.”
Steve vonBerg, an attorney at law firm Orrick in Washington, D.C., worked as a loan officer and underwriter for seven years. He emphasized the potential trouble for lenders and LOs inaccurately classifying the lead source.
“Often, a [CFPB] examiner would see if the lead channel changed later in the process. That could be legitimate: the borrower starts working with an LO, and it’s a self-sourced lead for that LO, but then decides to buy a home in a different state in the middle of the process; the second LO that it has to be transferred to has now an internal-company referral, and so the lead source would legitimately change,” vonBerg said. “But, if there isn’t a legitimate reason for the lead source changing midstream, that would be fairly easy for an examiner to identify.”
“It’s wrong”
Victor Ciardelli is frustrated by the bucket game. Deeply frustrated. The Guaranteed Rate founder and CEO says he is losing money and loan officers to rivals because of a business practice that he says is flagrantly illegal, pervasive, and does not appear to be slowing down anytime soon.
Some rival retail lenders, he says, are creating up to a dozen pricing buckets for their loan officers. The tiered nature of the bucket comp structure in many cases — self generated being the highest at up to 150 bps, 100 bps for another ‘bucket,’ 80 bps for another, down to 60 bps, 40 bps and sometimes all the way to zero — proves that it is a deliberate business strategy, he said.
“It wasn’t intended that the loan officer at the time that they’re talking to the consumer and quoting them a rate, that the loan officer can put the consumer in any bucket they want,” he said in an interview with HousingWire. “But that is exactly what’s happening. What’s exactly happening is the fact that there’s all these different pricing buckets for a lot of these different companies out there. And that the loan officer is allowed to go in and offer the consumer whatever rate based on what the loan officer wants.”
He argued that LOs are maximizing their personal income per borrower.
“It’s no different than what happened prior to Dodd-Frank, where it was the wild, wild West and people were playing games with customers on rates and fees,” said Ciardelli. “It’s the same thing today. There’s no difference except the fact that there’s a law in place that tells the mortgage company and the individual loan officer. And the loan officers know that they’re violating the law. It’s greed.”
Ciardelli says the rival CEOs — he declined to name individuals and said it’s an industry-wide problem — are establishing these buckets and know “full well that the bucket is put in place in order to lie about where the lead source is coming from.”
They have an obligation to know where the leads are coming from, that the loan officers are putting them in the appropriate bucket and that they are being tracked, he said.
“The loan officer may take a hit on that loan, and may make less on that loan, but the company themselves doesn’t take the hit, their margin stays the same. So the company CEO is happy, because they’re like, ‘I’m giving my loan officers all this flexibility to go out and be competitive and win deals. And they’re going to win more deals than anybody else out there, because they’re going to be able to slot the individual borrower into these different lead channels. So the individual CEO is making all the money. They’re the ones killing it.”
Ciardelli says he asked about the bucket pricing game and attorneys all told him no, it’s not legal, he said.
“I’ll play by whatever the law is…But when the rules are set up to be a certain way and people are not following the rules, then that’s a problem.”
Two other executives at large retail lenders also said they’ve lost loan officers to competitors who are sanctioning, if not directing, the manipulation of pricing buckets.
“The LOs get told this is legal, it’s just pricing flexibility so they can compete, and they have a compliance team that monitors it,” said one executive at a regional lender in the South. “Obviously that’s not true… What’s happening is they [the lenders] are pricing high and basically forcing the LOs to cut from say 150 [basis points down to 50 [basis points] on some loans because otherwise they just won’t do enough business. It’s a feature, not a bug, as they say. We asked our attorneys if we could do this and they told us absolutely not.”
The Mortgage Bankers Association (MBA) is aware of the issue. The organization asked an outside attorney from Orrick Herrington & Sutcliffe LLP to study the permissibility of the practice. In a letter sent to members in February 2023, Orrick advised MBA members that changing the lead source of a loan after beginning work on the application in order to make a competitive pricing concession “is not permissible.”
The letter has had little meaningful impact, sources told HousingWire. If anything, the practice has increased over the last year.
Fair lending concerns
Another repercussion in the market is that savvy borrowers gain access to lower rates when lead sources are manipulated. Less educated applicants could be quoted higher rates for the same loan, raising concerns about fair lending practices.
But this argument prompts a broader discussion on the efficacy of the LO comp rule, with divergent opinions on the matter.
“I used to be an MLO for seven years. I was in the industry in the 2000s until it melted down, and then I ended up going to law school because I had lost my job. I originated hundreds of loans myself, and personally, I think overall the rule is a good rule,” vonBerg said.
vonBerg elaborated: “Under the old regime, LOs were not incentivized to offer their consumers the best loan and best pricing for them. They were incentivized to give them the loans and pricing where they would make more money. Although it has some issues that should be corrected, I think the LO comp rule makes a lot of sense, in that it removes a gigantic conflict of interest.”
Not everyone shares this viewpoint.
“The LO comp rulewas designed to prevent steering to high-cost loans. And really, those things don’t exist anymore. We can’t put borrowers in homes that they can’t afford,” said Brian Levy, Of Counsel at Katten and Temple, LLP.
According to Levy, the rule creates “a tremendous amount of anxiety for the mortgage lending industry that doesn’t benefit consumers in any meaningful way.”
“The industry is frustrated. They’re unable to easily reduce prices. For example, in the past, before the rule was around, LOs were able to take less as a commission, just like any other salesperson – a car salesperson – to make the deal work. That’s illegal now for loan officers. The mortgage company can make that decision [of lowering their margins and reducing rate], but the loan officer cannot.”
Levy noted that some consider the LO comp rule to be a de facto fair lending rule.
“But we already have fair lending rules. The idea that if the loan officer is discounting their fees, they would end up discounting on a discriminatory basis would already be problematic under existing law, so you don’t need the LO comp rule to make that illegal. It’s already illegal to discriminate in pricing. That said, it’s not illegal for people to negotiate just like you can negotiate a car price.”
The CFPB has also taken issue with other forms of pricing concessions over the last year. In the summer of 2022, the agency reported that pricing exceptions, in which the lender offers a discount, had harmed protected classes, who were less likely to be offered discounts.
Where’s the CFPB?
Multiple sources said the CFPB audits about 20% of mortgage lenders per year, and because of the prevalence of this practice, would undoubtedly have come across lead bucket pricing manipulation by now.
Why there hasn’t been any enforcement to date or whether there’s a future enforcement action is just on the horizon is hard to know.
The CFPB, which is undertaking a broad review of the LO Comp rule, declined to make anyone available to speak on the issue.
“We cannot comment on any ongoing enforcement or supervision matters,” said Raul Cisneros, a Bureau spokesperson. “Those who witness potential industry misconduct should consider reporting it by going here. Additionally, we always welcome stakeholder feedback on any of our rules, including the loan officer compensation rules.”
In early 2023, the CFPB initiated a review of Regulation Z‘s mortgage loan originator rules, which include certain provisions regarding compensation. However, industry experts do not foresee substantial changes or anticipate the CFPB addressing the issue of lead source manipulation.
“In fact, there haven’t been a lot of public enforcement actions by the CFPB in several years [on the LO comp rule]. But having said that, we used to complain that the CFPB was participating in regulation by enforcement, and now they seem to be regulating by supervisory highlights,” Kris Kully, a law firm Mayer Brown partner, said.
The CFPB’s latest move regarding the LO Comp Rule was to issue a supervisory highlight in the summer stating that compensating an LO differently based on whether a loan product was originated in-house or brokered to an outside lender is prohibited.
Industry practitioners said the lack of enforcement from regulators has allowed the pricing bucket manipulation practice to flourish, creating an uneven playing field.
“You have all these companies that all of a sudden are starting to get a free pass,” Ciardelli said. “They’re like, ‘I’m not having any audits. I’m not having anybody come and say anything to me. I mean, nothing’s really happening. I’m pretty much unscathed here.’ And year after year goes by, there’s no auditors, there’s no issues. And then they start to move the needle on how they’re running their business and decisions they’re making. And they have less fear of the government, less fear of the existing rules that are in place, because the rules that were set up are not being enforced.”
Another mortgage executive speculated that the pricing bucket games will come to an end not because of CFPB enforcement, but because loan officers and executives will battle it out in court.
“I’ve got calls from loan officers who feel like they’ve been pushed into a lower commission scale than they thought they were going to get to start with,” he said. “I hired somebody from a well-known lender. When they hired her, they told her, ‘Hey, these are what the rates are and this is what the commission is.’ When she got over there, the rates they were quoting were the lead-based rates, not the hundred-based points they were promising her… I don’t think the enforcement will come from the CFPB. I think it’ll come from some type of lawsuit like that.”
The lasting impact of LOs cutting their comp to win clients and close deals won’t be clear until mortgage rates meaningfully fall for a sustained period.
But many fear that the genie can’t be put back in the bottle.
“We’ve done this so much that they’ve built it into their pricing,” said Mike, the loan officer in North Carolina. “They are pricing things higher, assuming that we’re going to cut our pay, and protect their margins. So to me that’s the bigger issue for us selfishly, is we start doing that, and it’s going to become the norm. The pricing system and everything is going to assume that we’ll do that.”
He mused that RESPA guidelines prohibit an LO from buying a Realtor partner a Big Mac after a closing but lying about a lead source is not policed.
“Personally being an LO, the biggest issue to me is, they’re screwing with us and just… That’s how all these shops are finding a lifeline to keep their doors open. ‘We don’t have to pay them 100 bps, we can just pay them 50, and they’ll take it on the chin.’ And it’s like, yeah, we’ll take it on the chin. Many of us are using the heck out of our credit cards right now to survive. It’s not cool.”
The path to the top ranks wasn’t always smooth, Cavanaugh suggested during a telephone interview. A company she worked with in the early years succumbed to the Great Recession of 2008, yielding some hard lessons along the way. “In my earlier years it was all about the stability and the comfort zone,” she acknowledged. “When … [Read more…]
That’s when he decided to pursue a career in the mortgage industry. “At the time, I couldn’t fathom or understand what a mortgage broker was or did, but I was really intrigued by his lifestyle and the material things I saw. That was the draw for me. It wasn’t like I was making big money … [Read more…]