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John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have our good friend Sam Clement. Sam, say hello.
Sam Clement (00:36):
Hey John, how are you doing?
John Norris (00:36):
Sam, I’m doing fantastically here and some other people that are doing fantastically here today.
Sam Clement (00:43):
Who’s that?
John Norris (00:43):
That is the U.S. consumer because this morning the Bureau of Labor Statistics announced that the consumer price index for the month of July, 2024, was up two tenths of one percentage point, and over the last 12 months it has dipped down below that sort of mental barrier; that magic number 3%.According to the BLS, the CPI is trailing at 2.9% over the last 12 months. Whether or not that is your personal experience, Sam is anyone’s best guess. Mine’s a little bit higher than that. Maybe yours is lower, but that’s the official data and that is what we have to work with.
Sam Clement (01:21):
That’s what the markets go off.
John Norris (01:22):
Yeah, I mean it’s not what…
Sam Clement (01:25):
It’s not what you think I think, or
John Norris (01:26):
Yeah, it’s not what I spend at the Fresh Market or the Publix or what I spend anywhere, but it’s what the government says. Now, interestingly enough in the report, while there are a lot of negative signs in front of some various sub-sectors and various commodities and products and services, one area that, while there was some improvement in June of 2024, we saw come kind of roaring back to life at least a little bit, was the rental equivalency of the primary residence, which is at 23-24% weight overall…
Sam Clement (01:55):
It’s a big chunk.
John Norris (01:56):
It’s a big chunk and they’re trying to determine just how much housing is impacting the average American consumer’s wallet. And this portion of the CPI was up four tenths of one percentage point. Obviously annualize that out, that’s going to be a shade over 4.8, let’s just say 5%. And this has really been sort of that sticky-wicket in the overall CPI as housing affordability has just dropped through the floor and you have people being forced to rent longer and longer and because they can’t get into a house because interest rates are higher, housing prices haven’t come down, you have apartment landlords that are able to raise the rents a little bit more and obviously that makes it more difficult and it’s almost like a death spiral in some ways for young people. People of your generation, out of college, mid twenties, people that historically in this neck of the woods would be thinking about buying their first home, are stuck, renting longer because rents are more expensive, all that stuff. I’ve already covered that – and it really does sort of beg the question: When will housing ever become affordable again for that first-time home buyer?
Sam Clement (03:13):
Well, it’s a complicated question and a complicated issue because there are so many different reasons and trends that are impacting this. I mean there is an undersupply of housing, I think latest estimate…
John Norris (03:23):
We can talk about that.
Sam Clement (03:25):
Yeah, there’s these haves and have nots and with what’s happened with inflation and you’re seeing buyers in all cash continuing to rise. So these people that can buy houses and aren’t as price sensitive, they’re doing fine and it’s continuing to push more and more people out. You’re seeing investors coming in and updating houses and raising rents, and that’s making it harder. And so you just have all these issues, but really I think the main thing is it’s becoming these haves- and have-nots and I think anecdotally, at least, I feel like more people are resigning themselves to never owning a house. And that’s not necessarily going to be the case, but that’s the sentiment of a lot of young people now is you see the prices and it doesn’t make sense to buy for most of them. And you can rent the same type of house and spend a half a third per month on it.
John Norris (04:22):
And that’s kind of what we’re seeing. My son John, who just graduated from college back in May, has moved into a house with my nephew. They’re of close friends as well as being cousins and as well as a family friend. And the rent that they’re paying on that house would be significantly less than whatever mortgage they would be able to take out on that house. And obviously the argument is when you buy a home, you build equity in it, but I’m not even sure they would be able to build the difference…
Sam Clement (04:48):
I don’t think the numbers line up at this point for that.
John Norris (04:51):
And I mean a huge chunk of the reason is obviously interest rates are higher, mortgages for first-time home buyers being, what are they going to be, 8%? I mean, depending on…
Sam Clement (05:02):
Yeah, they’ve come down, but still, yeah, it’s going to be higher than the most low qualified buyer.
John Norris (05:06):
Well, I’m talking about just for that first time home buyer. I mean that 25-year-old that has
Sam Clement (05:12):
FHA loans
John Norris (05:13):
Yeah, I mean 5% to put down on a purchase, probably going to pay a little bit more than you might. But when I take a look at everything, I just don’t know if this is going to get that much better. We’ll talk to the home builders and they’re saying, “hey, our margins are great. We’re putting up higher end homes and we’re selling” and it’s some of the best times they’ve ever had this in a relatively slow housing market. It’s that used house, the existing home that people just aren’t flipping. And when a certain affordable house comes on the market, you’re seeing people from “out of state” or out-of-market or even people in-market that are gobbling up these homes and turning them into rentals. And so you’re seeing actually a decrease in supply for a certain type of home buyer that’s just completely vanishing and the home builders don’t want to put up grade B or grade C houses because the margins on the A stuff that they’re doing are so great. Why do you want to take a step back and make significantly less money on a lesser house? So I’m sitting here thinking… what’s going to change? Obviously the Federal Reserve will be meeting again in September, 2024, the 17th and 18th, and more than likely at 2:00 PM Eastern daylight savings time, the Fed will announced that they cut the overnight lending target either by 25 or 50 basis points. Right now, the future’s market’s kind of
Sam Clement (06:41):
Coin flip
John Norris (06:41):
Coin flip on whether or not it’s 25 or 50, and we will have to see how the PCE core deflator does, the employment situation report…
Sam Clement (06:49):
There’s a lot of time,.
John Norris (06:50):
A lot of time, a lot of data that we’re going to have and that should make things a little bit better. But when I take a look at the future, I am doubtful I’ll see any sort of significant improvement in housing affordability for the average first time home buyer because when those mortgage rates start to drop, and they will eventually, all that’s going to do is raise the price on housing.
Sam Clement (07:14):
And you’re exactly right, the benefit of buying your house versus renting, it has always been, you kind of mentioned, one half of it being that your rates kind of stuck. You’re paying a portion’s equity and then you pay the same amount. It’s not really going to keep going up. You’ll have taxes and things like that that go up, but for the most part, your payment’s locked in. The other beauty of it is that you can always refinance. I mean the 30-year-fixed rate mortgage is somewhat a U.S. phenomenon. It’s not as common in other countries. It’s floating, what have you. But that spread is so big, it makes sense. I think people will be fine if it’s you rent a house for a thousand or the mortgage is $1500, okay, that can make sense because over the next couple of years it’s really going to make sense.
(08:01):
And if rates come down, great, I can refinance, but we’re seeing double, triple, quadruple the price per month to buy these houses versus renting them. That doesn’t really make sense. And the population’s still growing. Immigration is continuing and is going to continue, and we are under supplied houses for people that are in the prime age of buying houses and again, the people who can go out and buy houses, the people part of the generational wealth transfer that is really kicking off… They’re fine and it’s continuing to divide these haves- and have-nots for a country where houses can very often be the primary source of wealth for someone.
John Norris (08:42):
Well, and you’re right about that because your home is oftentimes really, I mean you’ve heard probably expression that it’s your piggy bank in a lot of ways, and it is because when you pay your mortgage, you’re paying a little bit of principal a little bit of interest. Hopefully your house will appreciate at least in keeping with inflation over time. So you’re making some money on this on your balance sheet, you’re paying down your liability, the asset value’s going up, that’s all good. Well and good, and that’s the way it should be. However, in terms of just housing for younger people so they can get into that home ownership and do what I just mentioned, pay down their liability, asset price goes up. I’ll just cut to quick. I’m part of the problem. I’m a huge part of the problem. I live in a section of Birmingham called Mountain Brook, which has a nice school system, fire and police, all that stuff.
(09:35):
And historically, oftentimes what happens is once a couple’s kids get out of the school system, they will consider downsizing or moving out of Mountain Brook, which has the highest millage rates in the state, and move into something else. And Beth and I, Beth, my wife and I have talked about it, but where am I going? And that’s a huge part of it. You know, we have a mortgage that’s in the low fours. I forget when we got it, but a long time ago, I still have a note on the house. I can’t pay it off with cash, well I could but mean I wouldn’t want to. I mean, just lot of other things going on. So I’m going, okay, if I go out and buy, let’s say I just don’t want to add to my mortgage. I don’t want to add anything to my mortgage. I’m just going to make an even swap whatever I sell for whatever I buy for all that stuff. My monthly note just went up.
Sam Clement (10:26):
Significantly.
John Norris (10:27):
Significantly.
Sam Clement (10:28):
And think of all the people with the two and a half to two and 3/4 mortgages, which was people got two chances at that. Everyone is at four and below just about that hasn’t bought a house since rates have gone through the roof. And so that’s the other part of it. Not only do you just not want to move… I hear it every day. I don’t want to move. I don’t want lose my two and 7/8
John Norris (10:51):
Well, the thing is, I mean there were times I kicked myself at the time for not refinancing periodically, but I never thought I was going continue to live in the house. I was like, generally when you refinance back in the day, it would take you about two years, maybe. That’s generally the rule of thumb. For every percentage point increase, it’s about two years in any the word decrease, it’s about two years to pay off the difference between closing costs and all that stuff. I never wanted to commit to staying in that house for that long. So I didn’t refinance when I could. But now I’m like, Hey, look at this. Look at what I’ve got here. But again, going back to it, if I move in order to keep my monthly note from exploding, I have to move into something substantially less, which I’m not sure I want to do.
(11:38):
And so here we sit. I have more house than I need for my wife and I and our two small dogs. And why that’s a problem is… historically people who were in my boat moved out of the area and that were living maybe outside of Birmingham, they might not be, but the Crestline Heights neighborhood or what have you, would come on in swoop on in buy my house and the whole process would start over again. It’s just old people move out, younger people move in. People straight out of college come and these starter homes in Crestline Heights. Now you’ve got people living in Crestline Heights for 10, 15 years because people aren’t moving out. So you have that issue going on. And then someone’s asked me the question, a coworker has asked me a question, what are the recent changes to the National Association of Realtors?
(12:30):
They lost a lawsuit about transparency over commission rates. What are the recent changes to what they’re doing with commissions? Is that going to change? I mean home buying and what will that do to housing prices just in general? If you’re not familiar with what’s going on, on August 17th, for all intents and purposes, buyers get to negotiate with realtors how much they’re willing to pay in terms of commission or how much the buyer will be able to get. The seller’s going to have a little bit greater flexibility to negotiate on their part and, in our area, it was always just sort of assumed at 6%, which the seller would pay and generally the seller’s agent would split with the buyer’s agent. No one really questioned it. Now with this happening, I think people will probably be more apt to be willing to negotiate. And so what will that mean, do you think, for the home industry, and particularly for that first time home buyer?
Sam Clement (13:30):
I’m not so sure how much it’s really going to change things. All it’s done is basically put one more thing on the table to negotiate. You can say, I’m paying my buyer’s agent $5,000, and the seller may have already said they’ll pay the buyer’s agent $10,000 and you can ask for that $5,000 back. Or you can say, give it to my agent. It is one more variable on the table, which there’s always been these gives and takes with, add it to the mortgage payment and then you fix something in the house and I finance it into the mortgage, that kind of stuff. So I’m just not sure. I think what will change is that it will make this more obvious to people because first time home buyers I don’t think will be really coming out of their pocket. I don’t view that as really being the case to pay their buyer’s agent, but it changes the negotiation because I think most first time home buyers aren’t really aware of it. I mean, you’ve basically got it for free, is what it’s felt like.
John Norris (14:29):
Yeah, I mean, instead of paying the sales tax – what you do in every other transaction – it doesn’t matter if it’s a Jack Links beef jerky or an automobile, the buyer’s paying that. However, not the case with homes. They’re not paying that commission or anything like that. So it is always been kind of weird to me in that regard and frankly, we probably have a lot of sellers out there that aren’t really quite clear on how that works. Truthfully, the money just comes from somewhere. So now that this has changed so much and both sides have a little bit more negotiating room, I would imagine the average agent is probably still going to push for that historical 6%, at least in this neighborhood. That way there’ll be at least 3% for the seller’s agent and 3% for the buyer’s agent that will be out there. And that still might be sort of the path of lease resistance. However, I do think what you’re going to see is maybe not the buyer’s negotiating quite as tight. You might see the sellers be willing to negotiate a little bit more. Just like, “Hey, now that the buyer’s got it, that’s their issue. I don’t care. I don’t care about them whatsoever, so I’m willing to pay 4%. If you want to take three, then that’s great.” Then we got 1% for the buyer and they can deal with it on that end. So how does that change home buying?
Sam Clement (15:52):
Look, I think most of it’s going to end up getting built into the price one way or another. And maybe that helps a little, but if buyer’s agents aren’t willing to pay their agent out of pocket, maybe you add their “commission” to the sales price and then the seller pays them. So I’m just not sure. Look, I think there will be some frictions, and I think it’s the clarity that people will have that… you’ve always kind of been paying this, on both sides, and now… you have to have contracts with your agents now. Your buyer’s agent. That’s a big difference.
John Norris (16:27):
Now, you don’t have to have it if you’re just walking into an open house.
Sam Clement (16:30):
Sure, an open house or something,
John Norris (16:31):
But if you contract or say you’re going to be my person that’s doing this, there has to be a contract with the agreed upon commission rate that that person will get.
Sam Clement (16:39):
And you can do hourly, you can do flat rate,
John Norris (16:42):
Flat rate or what have you. So it’s going to be a little bit different for a lot of these realtors. And I’m just going to tell you this, Sam, and I might make some realtors upset about this. My first house that I bought was $160,000. And that seems like, oh really? Norris, how old are you? I mean, that’s ridiculous. But the 6% commission rate on that was $9,600 bucks. And by the time the seller’s agent got their portion of the buyer’s agent, my buyer’s agent wasn’t making that much money off me in absolute terms, what- $4,800? And by the time they split that with the firm for which they worked, maybe she was pocketing $3,000. And for that, I probably got about 3,000 hours worth of work. I remember thinking that this is lifelong friend of mine or friend of the family. I remember thinking, okay, I’m not sure exactly what she did, but, ok. And then when we sold that house, the house had gone up in price pretty significantly.
(17:53):
And the same person that listed the house was also our buyer’s agent and all that stuff. And the numbers started getting a little bit different. I remember thinking to myself, Dawn, I’m paying 6% out here. That house had more than doubled in value. For a lot of reasons. And then buying a house where I was actually adding a little bit to the mortgage. And so you start taking a look at all this money, you’re going, wait a second. They’re not doing anything fundamentally different than what they were doing 10 years ago. Someone’s just paying a heck of a lot more. And now with what’s happened to housing prices since the last time I bought that house over in Cherokee Bend, which you’ve been to, I think you know, 17-18 years ago, houses done pretty well like that. I started thinking about 6% on that. I’m going, hold on a second.
Sam Clement (18:49):
Yeah, percentages don’t
John Norris (18:50):
I mean, hold on! There’s a difference between absolutes and relatives and all of a sudden the 6%, but you’re going, wait a second. That’s a lot of money. How is your value add – out of my equity – How is that broker’s value add gone up that much over such a short period of time when- contracts haven’t changed all that much? I mean, the legal costs, they are what they are. The whole process of buying and selling a house hadn’t changed dramatically, but yet all of a sudden the absolute dollars out there have gone up. I think really, Sam, I think you are going to see, moving forward, a lot of sellers going, now four percent is what I’m paying,
(19:38):
And the higher the value of the price, maybe 3%. Take it or leave it. And so I think what’s really going to happen is there is going to be some pressure on the real estate agent side and it’s going to be a heck of a lot more work. But kind of going back to your main point, I don’t think it’s going to impact the housing market as much as maybe the NAR and others suggested it’s going to. Ultimately, if you were a first time home buyer, 25, let’s say 25 years of age, you’ve saved up $30,000 in order to put down payment on a house. Do you care about this?
Sam Clement (20:14):
Yeah, right.
John Norris (20:15):
Or do you care about the mortgage rate and the price of a house?
Sam Clement (20:17):
I just care about your monthly payment.
John Norris (20:20):
Yeah. I mean, you care about your monthly payment. I don’t care about this other stuff.
Sam Clement (20:24):
They’ll figure it out.
John Norris (20:25):
They’ll figure it out. That’s up to them. That’s up to the person selling the house. This is what I can pay. This is what I can pay, and on the other side, this is what I’m going to do. So I don’t think those changes that the NAR is coming out with, they’re going to have anything to do really with a whole bunch of transactions. I’m not going to say it’s a nothing burger because you’re going to have a bunch of real estate agents that are going to get negatively impact in my estimation, but there’s still going to be a lot of money out there for him to make on this stuff. And so when we take a look at everything just moving forward, taking a look at the CPI report this morning, the rental equivalency of the primary residence going up 4/10 of percentage point during the month of July 5%….
(21:04):
Take a look at Pro Logic or whatever, CoreLogics, any of that, I forget the index now, but the year over year 20-city-price average going up as much as it has been for existing homes. I’m sitting there thinking to myself, if we don’t get some relief here on mortgage rates anytime soon, and by that I mean significantly, two or three percentage points, and the Fed can help with that, maybe we’re not going to see all of a sudden housing affordability go up for those first time home buyers. We’re not going to see those B sort of grade B and grade Cs all of a sudden take off. You’re not going to see a huge influx of affordable housing at all. And I think we probably, you know, this time next year, the housing market might be a little bit better. Housing affordability might be a little bit better maybe, but it’s not going to be as much as it would have been in the past once the Fed starts easing.
Sam Clement (22:08):
Right. I agree.
John Norris
Anything else? I mean, did we hit on everything? Not much will change. It’s all basically comes down to supply and demand and home builders are putting up the nice stuff, granite countertops and all the wainscoting you could ever possibly want. And that’s expensive. And it’s going to be tough for that first time home buyer and the NAR with its transparency of commissions. It stinks for them, but I don’t think that’s going to change buying and selling behavior too much, particularly buying behavior, might change the seller’s behavior just a little bit. But ultimately the deal flow will just come from mortgage rates and just the sheer asking price of the houses.
Sam Clement
I agree.
John Norris (22:56):
Alright. Well guys, thank you all so much for listening. We always love to hear from you. Also, if you have any comments or questions, please by all means, let us know.
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