The Problems are the Path: New Standards in Residential Real Estate and the FED on Interest Rates

 The National Association of Realtors nationwide settlement that takes effect August 16, 2024 will create a new standard in Residential Real Estate.

Prior to the settlement buyers and agents would link up, be shown property and made offers with the knowledge that the seller had posted on the Multiple Listing Service the seller's intention to pay the buyer's agent his commission and how much!

The new rules change dramatically.  The change may put many buyers on a defensive path of "what if".  The path is that the buyer will be required to sign a Buyer/Broker Fee Agreement that states the commission their agent/broker will have negotiated with the buyer to be paid if their agent/broker represents the buyer in a purchase. The agreement has a clause that states the agreed commission of the agreement will be offset by any fees received from the seller to the buyer's broker.

This may cause buyers to worry, what if the seller will not pay the agreed fee the buyer signed for?  The cost of buying real estate for Residential will look like Commercial Real Estate.  The old process in Commercial was that buyer pays his agent, seller pays their agent.  There were always conditions that the seller would pay the buyer's fees.  Some times the rebate of fees would be stated in an Offering Memorandum or an online link advertising commercial properties, or negotiated between agents.

On Saturday the new standard will be that NO SHOWING of residential property will occur without the agency agreement and the Buyer/Broker Agreement and a Negotiated Fee Agreement.  That requirement will be for any showing irrespective if the buyer goes directly to the listing agent or through their buyer agent or at an Open House.

As an example if buyer goes to an open house, the buyer likes the property and wants to see disclosures or talk to the agent showing the property regarding interest in purchase, the buyer will be required to sign the agency agreement and the Buyer/Broker Agreement with a Negotiated Fee Agreement.

This is a new situation, some agents are bewildered on the outcome, or the affect on their business.  Some may not wish to be in the new real estate world and seek other choices for a career.

In total the change will affect sales and agent population.  

The buyer will need to take into affect their planning of affordability. If they want to purchase a $1 million property.  The fee of 2.5% will be $25,000, for example.  If the seller will not pay the full amount the buyer must now look at a downpayment in excess of the negotiated deposit with the lender plus closing costs if any. Affordability will certainly be pressured.

In a buyer world where affordability is already under pressure from increasingly higher listing prices and sales and higher mortgage rates the addition of a possible payment to the buyer will put pressure on buyer interest

Will sellers be willing to pay for buyer's fees.  I would wonder if this is a seller's market why a seller would be willing to pay for the buyer's fees?  I believe we may see sellers not paying.  Now if the seller is pressured by a personal situation, they may pay. If the market turns to a buyer's market the seller will be forced to pay.

The next question is what is the seller willing to pay and how much is the listing agent telling the buyer's agent.  Once the mandatory posting on the MLS is gone the seller's agent/broker may decide to keep more than a 50/50 split.  The broker may decide the broker wants a large cut of the fees and the agent must get a larger percentage of the total fees paid by the seller.

This may be the Top of the Residential Real Estate Market!  Buyers hold back and sellers refuse to pay.  Standoff!

FED acton on interest rates may see this as an opportunity to not change rates in September.  Housing is One Third of the CPI basket of prices used the the CPI figures.

So far the CPI is slightly down from past numbers and housing prices increased, Consumer Spending is still strong and Employment numbers positive.  IF the FED thinks "let's see what will happen to housing"? The impact could be a benefit to the FED numbers.

First no rate cut, or small rate cut, will hurt Landlords of all nature.  From single family to multifamily landlords who will see the value of their properties decline in value.  That will affect the mortgages on them as they mature.  Landlord mortgages are 5 and 10 year maturity.  (30-year mortgages are only for residential buyers.). The low interest rate mortgages that were from 2020 to 2022 will be maturing next year for all 5-year mortgages.  To those owners who levered their properties, they will be faced with adding equity to offset the lower valuations and higher interest rates during a refinance or sell.

Certainly the stock market will not be happy!  Too many strategies have been created by investors over the planned cut in rates in September.  Stock prices lower, more equity losses.  More selling in the stock market in what many market forecasters are saying is overpriced.  A good reason Warren Buffet has sold Apple and Bank America position plus others to add to the still enormous cash position.

The FED is still in a position of creating the next president.  A cut helps the Democrats, doing nothing helps the Republicans.  Which party will cut the deficit?  Which party will allow the FED to keep its independence?

I doubt Trump will have the power that Nixon had when he appointed Arthur Burns who bowed to Nixon on rates.  Too narrow of a senate to give Trump control to put Trump's man in charge.  Jawboning is the only pressure that Trump could create.  Doubtful Powell will bow and kiss the ring!. And Kamala?  Doubtful she puts any pressure on the FED.  A quarter of a point and then wait and see?  Whomever is elected!  Then too, no cut and wait and see.  

Even if the cut is a quarter a point and then nothing until next year?  What benefit is it to go from 5.25-5.5% to 5-5.25%?  Residential Mortgage Rates have already dropped to 6.5% in anticipation of a cut.  It went from just above and below 7% and home prices went up.  The net is ZERO!

I still like the Commercial Real Estate Market for Investors!  Residential is good for cash buyers and weakening prices.  To those who find the right residential property offer 10% less to figure in the possibility you may pay your agent.  if the seller pay the better off you are!

The Problems are the Path: Goldilocks Recession and the FED

You all know the story about Goldilocks and the Three Bears...Don't You??  Let me summarize it here.  Three Bears: Papa Bear, Mama Bear and Baby Bear lived in the Woods.  Mama Bear made porridge.  Poured in Papa Bear's Big Bowl, Baby Bear's mid sized bowl and Mama Bear's small.  It was Too Hot.  They went for a walk and here comes Goldilocks skipping through the forest.  She sees the open door to the the Bear's house and walks in.  She was hungry and the porridge smelled so good.  Papa Bear's was too Hot, Mama Bear's was too cold....BUT Baby Bears was just right.  

So we are in the Goldilocks' economy.  The last US Government report had July with a 2.8% GDP growth rate and a 2.5% inflation rate.  The stock market was hitting new highs and property prices kept moving higher with little inventory.  Mortgage rates were above 7% with affordability still big question.  The FED's measurement of inflation still had two areas that need to come in.  The Stock Market with former Greenspan's comment if "Irrational Exuberance" and housing.  Once those two number started to come in the inflation rate of 2% would be viable.

Prior letters from me had pointed out that we were already in a recession.  It was only a matter of time before the stock market and housing market realized it and the result would be a bite...a BIG BITE!  It appears we have finally had that BIG BITE.  The stock market has dropped three days in a row.  The NASDAQ has gone into correction territory.  Housing has finally had the realization with Stockton being the Top Foreclosure Town in the US.

The Financial gurus are calling for 3 rate cuts again for this year as the call was at the same time for last year. The call last year never happened.  Never happened as the CME futures market had forecast it as happening at over 90% probability.  The futures were calling for a 1/2 point cut.  SO TOO are the forecasts for this year.  Media power appears to be the thing as the forces that are behind the Media, commonly referred to as Wall Street, have big bets on the direction of interest rates.  Three rates cuts for this year and 1/2 cut and aggressive cutting to bring rates down to 3-4%.

BUT WHY?  For speculation profits?  The FED is supposed to be beaten into submission by financial gain for a few?

Several weeks ago Chairman Powell stated the FED would maintain its independence.  Many thought this was a response to Donald Trump....I think not...CME Futures did not hear it!

There are some political ramifications on an interest cut.  Cut before the Election would benefit the party in power looking for re-election to dominate Congress and the Presidency.  A cut after the election would benefit the opposing party.  No cut, the opposing party would have the power to be beaten on inflation, job loss, housing affordability.  (Leave personalities out of the equation)

If the FED were considering a rate cut by politics the Democrats want to raise taxes and continue deficit spending the Republican was the cut taxes spur the economy and take government out of regulation.  The Democrat policy would bring back inflation and Republicans?  The argument is the expansion of the economy and Drill Baby Drill with government out of regulation would cut the Total US Debt.  Well all arguments so my call is the FED lets the People decide and stays out of politics until there is a real sign of a Recession.  The recent decline in the stock market is not a panic...my bet it rallies back and all forget about the recent sell off!

The change in Job Growth coming in at 144,000. slightly less than forecasted, and unemployment ratio increasing is not really a recession sign.  The summer had a increase in new people to the job seekers....GRADUATION!

August will be the Dog Days and the Bull or Bear Market will turn into the Buffalo Market....Wild and Wooly!

Mortgage rates have dramatically come down below 7%, housing inventory has increased and Days on the Market in the Bay Area are now over 30 days.  Opportunity is knocking.  New listing are now seeing price cuts and no over bids and increasing prices. The commercial market of the initial layer of income properties are seeing the stand off between sellers at 5-6% Cap Rates and 7%+ in Cap Rates for buyers folding in toward the buyer.  All it took is a 1000 point decline on the Dow Jones to bring "I's a Believer" to the sellers!

I doubt if the 1000 point decline had anything to do with it; other than, a little nudge.  The debt and refinancing behind much of commercial paper has a maturity that is facing a decision to add to the equity in order to refinance or sell and move on.  Either Big properties or little Properties or medium properties are seeing reality of making a decision.  JUST LIKE THE THREE BEARS.  That is were the opportunity will lie for commercial investors and residential buyers alike.  From a demand side the medium ..Baby Bear..size of the market is the most in demand.  Affordability is the reason.

This affordability is not going to end quickly or kindly.  Fannie Mae and Freddie Mac are tightening their lending rules.  Too much fraud potential is the reason.  Tighter rules means qualification tighter and approval rates will decline.   The only resolution is home prices must decline to match rules and interest rates and of course affordability payments.  Just like the stock market too much money will impact over priced properties.  From my evaluation a home in Tracy is selling for one half of Redwood City.  A estate in El Dorado Hills and Loomis it is one tenth to one quarter of a similar property in Atherton.  

Good luck in your real estate ventures!

As before, call or write for any question you may have and think of me of your "in the know real estate professional".