What’s Next for Sky High Mortgage Rates and Home Prices?

More Renters Next Door As Home Builders Sell to Wall Street Investors

Well, US home prices are falling for the first time in years. In San Francisco, prices are down three- and one-half percent. They're down 3% in Seattle, and mortgage rates are higher at 7%, a 15 year high. So what do you do if you're a home builder and you've just built dozens of houses in a brand-new community? You started building these homes six months, nine months, a year ago with the expectation you'd have no problem selling them, because back then interest rates were a lot lower and affordability was much stronger because the stock market was higher, people had a lot of cash. But now you're in a situation where you've got a lot of houses that have been built. You can't find buyers because nobody wants to buy houses at today's high prices and today's high interest rates.

So what do you do? You sell all of your houses in one big package. You don't sell one house to one homeowner. You sell the entire package of houses that you've just built to an institutional investor. Why would an institutional investor want to buy the 50 houses you just built? They're going to rent them out and generate rental income and wait for the housing market to recover and enjoy the profits long-term. Well, that's exactly what's been going on.

September was the worst month for sales of new homes since 2012, according to the National Association of Homebuilders. So bundlers of homes are buying these houses at discounts of up to 20%. That's causing real estate prices to fall even further, because when you go to look to buy a house, you're going to look at what they call the comparable. If I'm going to pay you to buy your house, I'm not going to pay you more than what other houses have been selling for.

So if institutional buyers are paying 20% less, that means that I'm going to pay 20% less as well, which means the seller is going to end up receiving 20% less. So think about it. If you're trying to sell your home because home builders are bundling and selling at 20% discounts to institutional investors, you're going to be stuck selling your house for 20% less as well. So if you're thinking about selling your home, you better hurry up and sell it fast before prices fall further. Meanwhile, there's one segment of the marketplace that doesn't really care about any of this. They're buying houses aplenty. We're talking about the ultra-rich. They're buying homes in London and New York. There's a surge in transactions in both of these cities. More than 200 homes in New York City have sold above $10 Million in just the first eight months of this year. That's versus about 160 in 2019. 

So we are now selling more $10 million homes in New York than we were prior to the pandemic. It's an even bigger deal. In London, nearly 300 homes have sold for $5 million or more. That's up 66% compared to just a couple of years ago. So the ultra-rich are taking full advantage of the opportunities in housing and they don't seem to care about where interest rates are because most likely they're paying cash. You know, housing is the world's biggest asset class. Big investors spent $45 Billion last year. That's up from $3 billion in 2020.

Build-To-Rent Trend Thrives Beyond the U.S.

The trend is now spreading to Europe. Institutions there are building 73,000 build-to-rent properties. They're doing this in Germany, Ireland, the Netherlands and in the Nordic markets. So we're finding institutions saying, you know what, the heck with the stock market. It's the real estate market that we're all excited about. One place, though, they're not terribly excited? China. New home sales there are down 29% over last year. Most Chinese have most of their net worth in real estate, not in the stock market. So the fact that new home sales have fallen 30% over the last year is a real big problem for the Chinese economy. And because these prices are still so high this is why 80 million people rent here in the United States, only 2% of them have their rental payments, though, reported in their credit file.

That's not really fair, because the benefit of being a homeowner is that if you make your monthly payment on time, it demonstrates that you are good with credit and it makes your credit score go up, which makes your overall cost of borrowing to go down when you need a credit card or a car loan or a student loan. But that doesn't apply to people who rent.

To fix that, Fannie Mae is now subsidizing landlords to help renters build credit. But here's the thing, only positive payments will be reported. If you fall behind in your payments, you're not going to be dinged on your credit record. In other words, these folks have no downside. Lenders won't see the true picture. This is a terrible situation. It's wonderful news that Fannie Mae is acknowledging that renters need to have their rent payments count toward their credit file, but only counting good payments and not reporting failure to pay, that's not apples to apples. That's not fair. It's not legitimate. And it gives lenders an inaccurate picture of the credit worthiness of renters. So my attitude would be, if you're going to report the data, report all of the data, not merely the good to artificially make bad renters appear better than they really are.

Using Bitcoin to Buy A House in Portugal

And oh, by the way, if you're thinking of buying real estate in Portugal, you can now pay for it in Bitcoin.

The first sale of a house in Portugal occurred in September and the buyer used Bitcoin to pay for the house. The entire process just took a few minutes. It's permitted by the Portuguese tax; financial and notary authorities and this trend is likely going to spread around the world.

In Colombia, a real estate company with backing from Jeff Bezos is now accepting bitcoin. British law firm Kingsley Napley has helped 70 clients buy property using crypto as well.

In the United States, 12% of first-time buyers say they plan to sell digital assets to come up with the cash for their down payment. One company has 16 listings of houses for sale where the seller will accept bitcoin. Total value of those properties? $160 Million. There's a mortgage company in Florida that will give you a mortgage of up to $5 million if it's backed by your crypto holdings. So you can use your crypto as collateral to get a loan so you don't have to come up with the cash. Otherwise we're going to see a continuation of crypto engaging in the real estate industry and everyone will be better off for it.