Morning! This is MF Lending - the cool breeze of mortgage newsletters. We’re the fool-proof way to serve up mortgage and real estate market knowledge without any of the guesswork. So you’ll look like the smartest agent in the room (and you are!)

Here’s what we’ve got for you today:

1. Blackstone Finalizes a $30B Real Estate Fund 💰

2. Wednesday’s CPI Print - What Does This Mean for Rates? 📠

3. “Date the Rate” is a Nightmare and Clients are Just Waking Up 🧟

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Nuwave Rates Today 📉

Blackstone Finalizes a $30 Billion Real Estate Fund 💰

Blackstone, the world's largest real estate private equity firm, has announced the creation of a new $30 billion real estate fund, which is expected to have a significant impact on the real estate industry.

Objectives

The new fund has two key objectives:

1. Capitalize on changing market conditions brought on by the pandemic

2. Invest in assets that are well-positioned for future growth

Blackstone plans to invest in high-growth markets, such as the United States, Europe, and Asia. Additionally, the fund will prioritize investments in properties that can be repositioned or redeveloped to meet changing market demands.

In the latest news from the Commercial Observer Blackstone is shifting its focus from commercial office buildings to residential housing.

Potential Impact

Critics argue that the fund's massive size could lead to an over-inflation of real estate prices, making it even more difficult for average people to afford homes.

How could it not? If this fund enters emerging markets like Nashville, Austin, and Miami (to name a few…) with an unlimited cash account, it could step in and purchase homes well over list price, all cash, one-week closes. How can a seller say no to that?

Blackstone faced similar criticism for its role in buying up single-family homes in the wake of the 2008 financial crisis and then renting them out at high prices.

What does this mean for potential buyers?

Even as rates begin to fall (potentially as early as 2024) affordability could continue to be an issue for potential home buyers.

Blackstone could create over-inflation in real estate prices, which would raise prices across the country. The raise in prices could wipe out the monthly savings homebuyers would see in falling interest rates.

As I continue to emphasize, buying a home today is the best time over the next decade. As long as a client is comfortable with the monthly payment, it is an incredible time to enter the market.

TLDR

Blackstone's new $30 billion real estate fund is a significant development in the real estate industry. The fund is shifting its focus to residential homes as office returns stall. This could greatly affect affordability and could lead to over-inflating the housing market.

Wednesday’s CPI Print 📠

The inflation rate fell to 5% (from 6%) in March - once again below expectations and the smallest rise in inflation since May of 2021.

Core CPI (which removes energy and food costs) - rose to 5.6% (from 5.5%).

What does this mean for mortgage rates?

Sadly, not the best news. With Core CPI remaining “sticky” and the job market remaining very tight, market experts are expecting the FED to raise rates an additional 25bps in the upcoming May meeting.

The probability of FED raising rates jumped to over 70% - according to the CME Group (below).

With rates hovering around 6.375%, this future hike may force mortgage rates above the 6.5% barrier we have seen since the end of 2022.

In my opinion, I think rates are going to stay higher for longer than people want to believe.

If your clients can stomach the higher payment, you will find deals on homes that will not exist when the FED starts its cutting cycle.

Here are some other initial takes from wall street this morning:

“Date the Rate” is a Nightmare and Clients are Just Waking Up 🧟

We have now reached the one-year mark of the phrase “Marry the House, Date the Rate” marketed by real estate agents and lenders across this country.

Since the very beginning of this wave, I have been sitting in coffee meetings, speaking on podcasts, and writing about the absolute lunacy of it all.

This is merely a marketing ploy pushed by parties that are financially incentivized by clients buying homes with them.

So - I decided to do a “Year in Review” of this honeymoon phase of a client’s home loan.

-

To start, the chart below details the average interest rates over the last 3 years.

This time last year, the average interest rate in the US was 5.00%.

If you were a client buying a home in Apr 2022, you were primarily sold two options to get a lower rate:

1. Pay for Discount Points

2. Use a 2-1 Buydown

Let’s assume that the seller was giving 2% in seller concessions (this is what is needed to do a 2-1 buydown) and the borrower took out a loan for $400,000 in April 2022.

Option 1 - Pay Discount Points

With option 1, you have a 30-yr fixed rate loan. You take the 2% in seller credits and apply them to discount points. This gave you a 4.0% fixed rate on your loan for the full 30-yr term.

(…this is what we have been telling clients to do since 2021)

Option 2 - 2-1 Buydown

You take the market rate (5.0%) and do a 2-1 buydown. The 2% credits are applied to pay the difference in monthly payments during the buydown period.

-

In Yr 1 (2022-Today): with the lower introductory rate, you saved $224 on your monthly payments for total savings of $2,689.

In Yr 2 (Today - Apr 2024): you have no monthly savings. Your payment is exactly the same as the person who chose Option 1.

In Yr 3 (Apr 2024 - Apr 2025): you would have a higher rate (5.0%) and be losing $236 per month.

Here is a visual grid of the two loan options buyers had in 2022:

Now - the easy retort is that you are going to refinance before your payment goes up to 5% in Yr 3.

But is that really even possible?

Here is a look at the expectations for rates in May of 2024 - the majority falls in the range of 350-400bps (with none less than 300bps). If that holds true, mortgage rates would be between 4.0% - 5.0% in May ‘24.

If these projections are accurate, this leaves homeowners with two options in May ‘24:

1. Refinance to 4% (which is the same rate you would have gotten back in 2022), thus restarting your 30 yr term.

2. Take the 5% rate on your original note and hope rates continue to fall when you can then refinance - with this option, you also slowly eat up all the savings you incurred in Yr 1.

But remember - refinances aren’t free. Even if you get your origination charges waived by a loan officer, you still have to pay for a title policy, recording fees, and an appraisal.

A $400,000 refinance can cost between $3,500 - $5,000. That’s more than all the savings you incurred during Yr 1 of the loan.

So who is really winning in the end?

The real winners are the loan officers, mortgage lenders, and real estate agents selling clients the 2-1 buydown. They are going to make money, once again, when you refinance your loan in the future.

-

After the “Year in Review” it is more clear than ever that this “Marry the House, Date the Rate” narrative was a ridiculous marketing ploy.

It was a marketing spin used to give clients a false sense of security. It made them feel like it was cheaper to buy a home and that they were saving money.

But in reality, it was just bad advice.

It is my belief that as real estate professionals, especially lenders, we should be guiding our clients to be more financially intelligent and help them make the most informed decision they can.

I have yet to see any evidence that doing a 2-1 buydown saved any client money.

-

If you disagree - please let me know in the comments. I would love to have a discussion on what you have seen on the ground.

The Cul-de-Sac

Mark your GCal 📆

1. FED Meeting - May 3rd

2. Existing Home Sales Report - Apr 20th

Thanks for reading - that is all we have for today 😎

Please forward this to your friends and colleagues if you found it valuable.

— Michael F DiLucchio