JVM Lending – Walnut Creek Lifestyle

JVM’s Bridge Loans – Buy Before You Sell; You Tell Me If It Is A Good Idea!

I came across another interesting JVM Lending blog recently, and I want to dive into it here. Jay Vorhees, owner/lender at JVM, wrote about the Best Bridge Loans in 2024 and how there is a shocking amount of demand for them. But first, some context:

Bridge loans are short-term loans that typically tap into the equity of a borrower’s departing residence to allow that borrower to buy a new home before they sell their departing residence (basically the solution to how one can buy before selling).

Here’s how they traditionally work: JVM has an investor who will lend up to 75% of the value of the departing residence, but without paying off the first mortgage. So, if their borrower has a $1 million home with a $500,000 mortgage, the JVM bridge investor will loan $250,000 of cash to the borrower (to get 75% combined loan-to-value ratio) – with no fees or payments due. But the investor will require the borrower to pay 2.4% of the sales price of the borrower’s departing residence when it sells (which still often works out to be much less than the fees associated with non-JVM bridge loans).

Coupling that with no payments makes bridge loans incredibly popular. Do note, though, that the investor will not pay off an existing first mortgage, meaning borrowers remain responsible for the payments associated with that first mortgage. And if the borrowers have tight debt ratios, this often prevents them from qualifying for a new mortgage to purchase another home before they sell the current home.

So, JVM now also offers an EasyPath Mortgage Program, meaning the investor charges borrowers $2,500 for a guarantee that they will buy the borrower’s departing residence. They don’t lend money at all. But their guarantee to buy the departing residence no matter what allows lenders to ignore ALL of the payments associated with that residence which, of course, makes it much easier for the borrower to qualify for a new home before selling the old home.

If borrowers then need cash to buy a new home, they can max out equity lines before they enter into an agreement to sell their home to JVM’s investor. The investor gives borrowers 120 days to sell their homes for top dollar themselves, and only steps in if the home does not sell. This option makes a lot of sense for sellers looking to buy up or buy in areas where there is limited inventory.

It gives sellers peace of mind that they can find a house, move into it, and then sell their home. There is a lot to consider, but it might be worth it for those who really need to move but don’t want to put their home on the market until they see something they want to buy. With such low inventory, your offer might not be the one that is accepted.

The Fed Does NOT Control Interest Rates

Take a look at this blog from Jay Vorhees at JVM Lending. It’s an interesting discussion about the Fed, interest rates, and how they both affect the housing market. I’ve added my two cents at the end, like usual!

The Fed raised “rates” last year at the fastest pace in history! There were 7 “rate” increases in total:

0.25% in March
0.50% in May
0.75% in June
0.75% in July
0.75% in September
0.75% in November
0.50% in December
0.25% in February

But, despite increases totaling 1.25% over November and December, 30-year mortgage rates fell almost 1.5% since January. You can see that the same thing happened in July; 30-year mortgage rates fell sharply after the large 0.75% increase in the Fed Funds Rate. Rates fell recently, not only in the face of two large increases in the Fed Funds Rate but also in the face of a lot of Fed bluster about more rate increases to come. So why, since February, have rates now increased again, you ask? They rose largely in response to strong retail sales and employment data, and the Fed’s comments in regard to that data.

As a reminder, the Fed primarily influences the short end of the yield curve, as it only controls the “Fed Funds Rate” or the overnight rate that banks charge each other to meet reserve requirements.

Long-term rates like the 10 Year Treasury and 30-year fixed-rate mortgages often move independently of the Fed, no matter what the Fed says or does. The 10-Year Treasury, for example, dropped as low as 3.37% today after hitting a high of 4.25% in October. And, as I mentioned above, mortgage rates have dropped almost 1.5% since October.

This is despite all of the predictions we saw and heard last year about mortgage rates hitting 8% to 10% this year. All of those people were listening to the Fed and NOT listening to people like Barry Habib and Jeff Snider who follow the data instead of the bluster. Mortgage rates respond to other factors, such as inflation and economic outlooks.

If inflation is coming down and the economy seems to be weakening, long-term rates will usually fall – irrespective of the Fed’s bluster. We all might all be wise to listen to the data guys and not to the Fed watchers. And, once again, the data guys, who have been correct all along, are predicting more rate decreases to come. Barry Habib in particular is now telling us that May 10th will be the “big day” – when we see a major drop in rates because of the way inflation data and year-over-year comparisons are shaking out.

KRISTIN’S TAKE: How I see this affecting buyers and sellers:

Sellers, you have lost equity from 2022, but overall values are higher than 2021. Price your open for today’s values, not last year’s. Houses that are priced accurately and are move-in ready, show well and are getting multiple offers. It may still sell close to list price, but it isn’t sitting for months and ultimately selling for less.

Buyers, consider a 2/1 rate buy-down paid by the seller to get you into the home with a lower rate for the next two years. If you believe rates will fall, then you can refinance; most lenders are offering 2-3 year free refi. If you wait until the rates go down, we will be back to multiple offers with no contingencies. I just spoke with an agent in Fremont who had a 1322 sq, ft home in a nice neighborhood price around $1.2M, it was remodeled, not a flip but had $8k+ of section 1 and some plumbing repairs. She had 60 offers and it was going in the $1.5M range. We still have a housing shortage.

Rent Vs. Buy Analyses – Misleading!

My friend Jay Vorhees at JVM Lending wrote a blog about rent vs. buy analyses last fall that I think is still applicable to this current market. I’ve shared a shortened version of Jay’s post below, with my own two cents at the end. Let me know what you think!

Rent vs. buy analyses are often ridiculously misleading. A typical rent vs. buy calculator like Freddie Mac’s will look at the total cost of renting (including renter’s insurance) over a period of time against the total cost of owning a home over the same period of time (and accounting for closing costs, payments, appreciation, maintenance, etc.).

The analyses, however, are too “financial” and objective, and here are just a few of the things they miss:

Forced Savings/Housing = Nest Egg! Housing payments are very effective “forced savings plans” because missed payments will destroy credit. Each payment is both paying down a loan and paying off an asset that will appreciate over time.
Refinance Opportunities. There is a high chance of being able to refi into a lower rate, which rent vs. buy analyses never account for.
Stable Housing Payment. Rents always go up, but housing payments are fixed. This is important especially now with rent skyrocketing in many places.
Equity for Emergencies. Homeowners eventually build up equity (no matter what happens in the market) that can be tapped into for emergency needs like tuition, home repairs, medical bills, or temporary help if there is a job loss.
Pride of Ownership. Young people who have recently bought homes love their homes and turn them into showplaces for their own enjoyment and for entertaining friends and family.
Freedom. This is the most significant missed item. Homeowners really appreciate the freedom to renovate their homes or just do whatever the heck they want, really.

Kristin’s take: I am a firm believer in paying yourself instead of paying “the man” (like, somebody else’s mortgage for example). Of course, there are people who might move in a couple of years, just starting out, etc. where renting makes more sense. However, if you are young and start buying real estate and continue to buy investments over time, it will set you up 30 years from now!

Permanent Vs. Temporary Buydowns

My friend Jay Vorhees at JVM Lending wrote a great blog about the difference between permanent and temporary buydowns – and I think this is information my clients and readers should know about, too! Here is a shortened version of Jay’s blog below, with my two cents added at the end.

A “permanent buydown” is when buyers or sellers pay points (1 point = 1% of the loan amount) to permanently buy down a borrower’s interest rate. In this market, one point will buy down a rate by about 1/4 of a percent. Either buyers or sellers can pay permanent buydown points.

A “temporary buydown” is when the seller pays points on behalf of the buyer to buy down the rate significantly more, but only temporarily. A 3-2-1 buydown, for example, buys down the rate 3% in year one of the mortgage, 2% in year two, and 1% in year three. But, after year three, the rate goes back to the full market rate. For more about temporary buydowns, click here.

Some believe permanent buydowns make more sense because buyers get a lower rate for a full 30 years and, therefore, save far more money overall and qualify for more. But, here’s the issue: nobody keeps their loan for 30 years!

That is especially the case now because so many macro-observers believe that rates will be markedly lower in several months, making a refi into a lower rate extremely likely. So, if a buyer (or seller) pays permanent buydown points, those points will all be wasted once the loan is refinanced (meaning the buyer does NOT get the points refunded).

On the other hand, if a seller pays temporary buydown points, the buyer will get all of the unused points back if he or she refinances before the temporary buydown period ends. This is because the unused temporary buydown points are all held in an escrow account and can thus be used to pay down principal when buyers refinance.

When all is said and done, I do love temporary buydown points but hate permanent buydown points – now more than ever, because rates are going to fall.

Is Inflation Inevitable – At Some Point!

When I was in high school, I had a savings account with $20k, I am a saver. I went to deposit more money and the teller said I should put this in a CD. That CD was earning over 20% in interest. I thought that was awesome, but in the 80s, inflation was out of control. When I went to buy a house in the 90s, the interest rate on our loan was 8.5%. I didn’t think much about it as I didn’t know any different. Below, I’ve shared a portion of a blog from Jay Vorhees at JVM Lending with his thoughts on inflation:

He currently thinks much less on inflation and considers deflation/recession a possibility in the near term (over the net 6 to 24 months) like he discussed in a recent blogs, including this one, his Car Wash Indicator and Scary LinkedIn Indicator. My personal favorite is the Car Wash Indicator.

But after the next one to two years, all bets are off, as prices are likely to surge everywhere for several reasons.

1. Commodity Prices Will Surge: The world is facing massive energy and commodity shortages due to a lack of investment over the last several decades, and it will take decades more to replenish supplies and/or to find alternatives and thus we will see massive resource shortages.
2. Labor Shortages. This is something author Peter Zeihan addresses often, as the largest generation of workers in American history is now retiring en masse, and that will foster a labor shortage that will drive up labor costs and prices overall.
3. Monetizing Debt. America’s overall debt load is 3.7x GDP right now, and that there is no way we can pay it off. Our Federal debt alone ($30 trillion) exceeds GDP ($25 trillion), and when you couple that with all our state and local debts and, worse, our unfunded pension, social security, and Medicare liabilities (over $100 trillion) – we are screwed. The only way we will pay off all that debt is by effectively printing money or conjuring it out of thin air somehow – and that will result in massive inflation.

Jay goes on to mention that one of the best inflation hedges is real estate, which he likes best because it generates income while appreciating, has a history of good performance against inflation, and more. That’s where my two cents come in!

I believe now or in the near future is a good time to buy. We are in an odd transitioning market. Some homes are selling for about 1% less than asking and may have had a price reduction and homes are sitting on the market longer. Then around the 17-24 day mark, a couple of buyers make an offer. Other homes are selling for more than list. It depends on location, condition and where the listing agent was able to list out the gate. If rates go back down, you will see more buyers in the market, multiple offers and prices increasing. If rates go over 6% and continue going up, then prices will come down, but the higher rate erodes your price point. If you are looking to buy, buy now and if the rates go down you can refi. If rates go up, you will be glad you bought when you did.

Perspective On Interest Rates

Jay Vorhees at JVM Lending shared a blog about interest rates recently, which I want to discuss further here. You can see Jay’s blog at JVMLending.com right here. Basically, Jay acknowledges that rates are about 2% higher than they were when they bottomed out after COVID first hit. They are back to 2009 levels now, but that doesn’t necessarily mean they are “high.”

When you look at the rates over the last 50 years (see below), you see that current rates are still very low compared to many other eras since 1971. By the end of the 1970s, the average rate was over 15% and over 18% by 1981. In fact, throughout the 1980s, rates hovered around 10% while the economy boomed.

Even in the 1990s, when many people reading this blog may have been purchasing a home, rates were around 8% with the occasional dip below 7%. The rates as we know them now only dropped into the 5% range after the 2008 economic collapse. I bought my first home in 1992, we paid 8 % interest and then refinanced about 7 times over the years. Initially it was an interest only loan. It wasn’t until I divorced and bo0ught him out of the house that I financed into a fixed rate.

So, yes, rates are a little higher than our recent “all-time lows,” but they are still MUCH lower than they have been in decades past. Hopefully that helps put it into perspective a little bit. Rates are likely fall in the next year as there is a lot of talk about a recession, so these current higher rates might not last long.

I highly recommend the link below Barry Habib has an amazing track record on predicting the future of the mortgage industry. To learn more about the rates, recessions, and demand, watch the video linked below. Barry Habib, who comments on mortgage and real estate markets on TV regularly, has some interesting information to share:

https://thenationalrealestatepost.com/barry-habib-calls-it-again/

The Housing Inventory Crisis, Explained

Jay Vorhees at JVM Lending wrote a blog about the “Housing Inventory Crisis” recently, and I wanted to share a lightly edited version of it. Read on below:

Picture yourselves walking into your local Whole Foods and seeing 2/3 of the shelves entirely empty. That is exactly the state of the single-family residential real estate market today, according to Jason Hartman, a true expert when it comes to residential real estate.

Mr. Hartman was recently on the Rebel Capitalist YouTube show making this point, while also discussing real estate in general and why he is still buying. There are currently only 380,000 homes for sale in the entire country, per Mr. Hartman, which is less than 1/3 of our normal inventory of 1.2 million homes.

This massive inventory shortage both drives up prices and makes it increasingly difficult to even find a home – as most of us in the real estate and mortgage industries know well. So, why is inventory so low?

Builders are not building. I have mentioned this many times in previous blogs, but builders are bringing some 500,000 fewer units to market each year than they were prior to the 2008 meltdown. Freddie Mac says that we are “underbuilt” by 3.8 million units right now – and there are many reasons for this.

Starter homes are not profitable. In Northern California, it costs a builder $170,000 on average to prep a single lot for buildings (for permits and regulatory compliance) which is considerably less than the $6,000 it takes in Tennessee. And, unfortunately, California is not alone. When you couple these costs along with all of the other environmental and safety regulations (low flow water; insulated windows; fire safety; etc.) and inflated material and labor costs, starter homes are nearly impossible to build at a profit.

Labor shortage. This is a more recent phenomenon that was fostered by COVID and government policy, but current labor shortages are significantly exacerbating supply problems.

Millennials getting old. The oldest millennial is now 41, amazingly. What this means is that the largest generation to surge through our economy ever is now hitting its highest earning potential and thus buying homes at the fastest pace ever (in contrast to 2008 when the homebuying demographic was at its lowest point). This is a major reason inventory is getting mopped up.

Investors galore. Mr. Hartman reminds us that “buy and hold” single-family real estate investing is a relatively recent phenomenon, as it largely did not exist prior to the 1950s. But now, both individual and institutional investors are buying and holding real estate at levels never before seen, as both groups chase inflation hedges as well as higher and safer investment yields.

man in black shirt sitting on chair near white wooden house during daytime

Buyers awash in cash. The video linked above also discusses the massive influx of cash into our economy, as there is currently $3.6 TRILLION sitting in checking accounts compared to only $1.2 TRILLION prior to the COVID crisis. When buyers have that much cash, they are more willing to bid aggressively and to just buy more homes in general.

This is what I found most encouraging when it comes to our mutual clients and their concerns about a bubble: Hartman, who knows more about residential real estate than any of us, is still buying like crazy; he has made 11 offers in the last two weeks alone.

Why? The millennial homebuying contingent will not peak until 2026, the inventory problem is not going away, and inflation! To repeat my inflation-hedge mantra: Housing is a hard asset and a natural inflation hedge; rents go up with inflation, making investment housing an even better hedge; and 3o-year mortgages are an “asset in an inflationary environment,” as I explain in this blog.

Kristin’s take: Coulda, woulda, shoulda. So many people sat back because, over a year ago, prices were too high. Now, they’re even higher. I also know many buyers that have been priced out of the Bay Area and have moved out of the area altogether. We also have an added issue: there is very little land to build on. It is usually tear-downs or flips, or you have to go farther out for new construction. As Jay notes above, a mortgage can be a fixed cost, something you know you’ll pay every month. When I bought my first house, I felt we were treading water to my upper lip. Within months, it all normalized. Sure. I could not go on the big vacation that year, but now, 21 years later, it was the best investment I have made. I can’t imagine where I would be if I had followed my divorce attorney’s advice not to buy out my ex-husband 12 years ago.

Rates Have Never Been This High!*

*since 2021…

My friend Jay Vorhees at JVM Lending recently wrote about this, and I wanted to share a couple graphs he included in the blog to give context to the “rising” interest rates.

As Jay mentions in his blog, there is perspective to be considered when discussing the rising interest rates. They HAVE risen (1/4% – 3/8%) since last summer, but did you know they are actually lower now than they were on April 1st of this year?

Or that they remain lower than they have been for most of the last 10 years? And significantly lower than where they were for most of the last 45 years? As Jay puts it at the end of his blog, today’s rates remain a gift!

Here are those graphs for context (first, mortgage rates over the last 10 years, followed by rates going back to 1971):

So, if you are on the fence about purchasing, rates are still very low and we are only just starting to experience some inflation. You will lose more purchasing power with rates going up (which usually occurs when inflation comes around) than with prices going up.

I have not had any recent issues with appraisals. I just had a buyer increase the offer price by more than $100k over the list price and the appraisal came in. Who knows what the future will hold, but overall it is still a good time to purchase.

High Appraisal Fees, Oh My!

Jay Vorhees at JVM Lending wrote a blog recently about high appraisal fees and I wanted to share a specific portion of that with you:

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Appraisal fees have risen from as low as $250 in the early 1990s to over $1,200 now – for a standard appraisal. Lenders everywhere are raising their fees in order to get the increasingly more limited supply of appraisers to accept their appraisal orders. There is simply no choice if we want to attract skilled appraisers with fast enough turn-times to allow us to close on time.

We are warning borrowers up front, of course, but I am encouraging agents who read this blog to also warn their clients, as we are seeing some serious “sticker shock” right now when we disclose what we now have to pay to appraisers.

So, why are appraisal fees so high? Inflation is obviously a major reason, as $1 in 1990 is worth the same as $2.08 today, per this really cool inflation calculator. Appraisers also have higher fees for licensing, insurance, E&O coverage, vehicle costs, software, MLS access, continuing education, and more.

The main reason the fees are so high is that there is a shortage of appraisers. One of our best appraisers is in his 80s, and he just works because he likes to; he certainly does not have to. And that is the case for a large number of our other appraisers. They can command all the fees they want, and they have no reason to tolerate mistreatment.

Kristin’s perspective: In my recent experience, most transactions are closing late because of a delay in getting appraisers to the property. Even if the buyer removed all their contingencies and they have a loan, you still need the appraisal to close. The shortage of appraisers – and the rising costs because of that shortage – are very, very real. Don’t be surprised when your lender or agent mentions those costs!

The Big Question – Rates?

My friends at JVM Lending wrote an interesting blog recently, and I wanted to share a summary, plus my input on the topic: “why the Fed can probably never raise interest rates.” Read on:

The Fed Funds Rate is a rate that banks charge each other to borrow “reserves” overnight, which is currently at 0-0.25%. Paul Volcker was a Fed Chairman in the late 1970s and early 1980s who sent the U.S. into a massive recession by raising the Fed Funds Rate to 20%.

The result of Volcker’s actions were a horrible recession, a crashed economy, and 11% unemployment. To recover, it took enormous political will – the likes of which we are in short supply of nowadays (for many reasons).

Last week, the Fed talked about the possibility of raising rates almost two years from now. Stocks tanked and interest rates shot up. Markets reacted negatively because even the mere mention of higher rates down the road causes a reaction. Investors know that our economy can’t afford higher rates.

Here’s the thing: the Fed likely can’t afford to raise the rates. Our total federal debt is about $28 trillion and growing, while State and Municipal debt is approaching $4 trillion. The interest paid by the federal government for its debt this year will be just under $400 billion, with government debt rates around 2%.

So, if rates returned to even 1990s levels (6-8%), interest owed would triple or quadruple and quickly bankrupt the government. Even more concerning, potentially, is corporate debt. There is $11 trillion in corporate debt in the U.S. and many of those corporations could not begin to service their debt if rates went up. They depend entirely upon cheap capital and bailouts.

In terms of real estate, existing mortgages do not depend on low rates. They are long-term and fixed. However, housing itself represents a huge chunk (almost 18%) of the economy, and that sector is now dependent on super-low rates, too. Basically, the entire economy is addicted to low rates and the Fed knows it.

Several pundits expect the Fed to find excuses as to why 2023 is not a good time to raise rates and kick the can down the road yet again. So, we will either see a continuation of a Japan-like situation for a very long time with continued low rates, slow growth, and massive government intervention…or inflation will set in and the Fed will lose control of rates, as investors simply demand higher yields.

Either way, I would not expect the Fed to actually raise rates itself in 2023.

KRISTIN’S TAKE: Nobody has a crystal ball, and if rates do start to edge up, it would take some time for them to get into the 5%+ range. We are also seeing a bit of a reprieve on the buying frenzy. More houses are having price reductions, not as many multiple offers, etc. I am just not sure if it is because everyone hit vacation mode, but if you’re a buyer who got priced out earlier this year, it might be time to start looking again.