S6 Bonus: New Home Construction Lending Updates

SEASON SIX, BONUS EPISODE PODCAST TRANSCRIPT

INTRO: Welcome to The Art of Custom from Hibbs Homes.

KIM: Hi everyone. My name is Kim Hibbs, the host of The Art of Custom and we have a special bonus episode for everyone because there's a lot of interesting news going on that has to do with inflation. Obviously inflation ties into mortgage rates and we wanted to drop a special bonus edition while Melody and I are hard at work on coming up with our topics for season seven. And whenever we need to talk about finances, we always have a go to that we go to and her name is Trisha McConkey with Associated Bank

Tricia, it is awesome to have you here. Thank you so much for joining us.

TRISHA: Thank you for having me again!

KIM: You know, what's kind of spurred this is Robert Dietz, who is the Chief Economist for the National Association of Home Builders, happened to be in town a couple of weeks ago and you invited me to sit at the Associated Bank table, which was right up front, which I really appreciate. There was some really interesting conversation because it had to do with the financial side of where we are with the housing industry.

I talked to Melody and we really feel like this is a good topic to kind of launch into to help our listeners understand where we are. I remember we talked about it last year during Season Six. Obviously, we will focus on it at some point during Season 7 or at least have some conversation about it.

This is an important topic because financing whether its new construction or existing homes, probably 90% of the people who are buying homes do finance, right?

TRISHA: That's correct, and it's always changing. Again, if you went back and listened over the seasons you can hear what we talked about, you could certainly see how it came to fruition. And I love this breakfast with Robert Dietz every year. So it's one of the ones that I love to attend, and I was certainly glad that you could join us that day

KIM: He's very knowledgeable. He's been the Chief Economist at the NAHB for several years. As a matter of fact, you might say decades now, but he's really sharp. He's on top of it. The short-term take away, and then we'll dive into it a little bit more, is that things are looking very bright in the residential industry - whether it's existing or new construction. But there's a little bit of a short window in which people might want to consider. If they're on the fence or on the sidelines right now thinking about timing things to take advantage of what appears to be interest rates that should drop for a little bit longer.

Now, if we all remember, the Fed was very aggressive over the past couple of years in raising their interest rates. Interest rates, although they're not tied directly into mortgage rates, they do have an effect on those mortgage rates. We're really tied into the 10-year treasury note, so the difference in what consumers should be looking for when they talk about how the Fed either raises rates or lower the rates - it's not a direct connection to what your long-term mortgage rates are because they're really talking about shorter term rates that they’re affecting but there is a trickle effect right from one to the other. We certainly saw it in 2023.

TRISHA: As we watched rates rise, right. The Fed was raising rates while your long-term rates were also rising, definitely see the connection. You really want to pay attention to the 10-year treasury, it can be a good indicator. The SOFR rate is also another good indicator.

KIM: I spent the day yesterday on the sofa this weekend. Okay, the SOFR rate.

TRISHA: Both of those things can be good indicators to tell consumers where rates are headed, what those rates are looking like, what they are doing. The other thing I always tell clients is feel free to reach out to me. So if you have that trusted mortgage advisor reach out to them, let them give you updates. I certainly do that with my clients and let them know we'll do a little look back, what have rates done in the last three months? What have they done in the last three weeks? And where do I think they're going to head going forward?

KIM: What prompted the rate increases had to do with inflation. Inflation was really out of hand and the Fed is trying to cool the inflation to get it under control so the price of everyday goods and services wasn't so high. It really spiked the interest rates, or the mortgage rates, I should say, that people were paying on their loans.

Now what Robert said is that over this year- and we're taping this by the way in February of 2024 - but he said that later this year he expects to see at least three actual rate cuts, which has to help not only the psychology of our industry but, quite frankly, it's going to help mortgage rates too.

TRISHA: So I know that there have definitely been indicators, not any official announcement I think that you could find, but basically if we stayed on the trajectory where we're at in terms of inflation, or we continue to see improvements that we would see a rate cut by the Fed in the third quarter followed by another cut in the fourth quarter

KIM: That obviously is good news, but as we are taping this today, where are our interest rates and what are your expectations between let's say now and summer before the Fed even gets involved and starts to cut?

TRISHA: Rates have come down from where they were in 2023.

KIM: They were, if not at eight, approaching eight, right?

TRISHA: I would say we were at eight absolutely, and they have come back down again. It depends on what type of loan and what your credit score is. And that's always the way it is, but I would say now that we're seeing rates in the mid sixes to somewhere in those very low sevens. We've seen quite a bit of change when you talk about where we were in the eights and where we were in those high sevens. We didn't have quite as much range as we're seeing right now.

There's been a lot of headwinds made that way; rates are going down slowly. What we saw was the opposite in 2023. They just spiked. Faster than you could get anything done they were going up. Now we're seeing what I would say is like a trickle-down. That doesn't always mean that rates are going down every day, but that yield behind the rate is increasing. And as that yield increases that's what allows us to lower that interest rate. So we're definitely headed in a positive direction.

KIM: Let's talk about this in terms of new construction, which is what we are involved in. You are a lender to many of our clients. Talk about the programs that you have available. And let's say someone was thinking about designing and building a custom home. And let's say the rates are going to continue to trickle down for the next several months. How does that affect someone who might be thinking, ‘Well, I need to wait longer until rates come down more’?

TRISHA: I love that question because it's literally one of my favorite things to talk with potential clients about. Things are picking up, rates have come down, people are finding interest again in getting back out in that market. There were a lot of people who were beat up, lost out. They didn't want to fight the fight, but now they're coming off the sidelines.

I tell people, if you waited last time you didn't do it because you said ‘oh I want rates to come down’ or ‘I want the cost to come down’ and you missed that - you need to get back. You need to get off the sidelines and get back in. I say that because, while rates have not, I think, reached their bottom if you will, but if you wait until rates reach that bottom then you're going to miss that opportunity again, because you're going to be in line behind everyone else that got off the sidelines before you. Now you're talking a one-year wait or better to get to your project by a builder. Just because of the number of people that have been on the sidelines.

Another thing with interest rates is it's a big election year and you're going to really see a drive for rates to continue to go down as we get closer to the election. So waiting on the sidelines for that rate to come down, the number of people is going to really pick up.

KIM: The other thing to keep in mind too, especially if you're going to find a lot, design a home, and build a home. The location of a lot and designing a home can take four to six months up front. During that time you can go ahead and rates can trickle on down until you have the budget developed and you're ready to build.

I think you have some programs too, Trisha, that somewhat protect a buyer or a client if rates do trickle down while you're trying to put your financing in place.

TRISHA: That is one thing I absolutely love about our program and I would say probably the number one thing you would hear from our clients that they love about our program is that we do have a one-time close mortgage that has a construction feature.

At the beginning, once you get to that construction piece, that interest rate is locked. So you are protected from volatility of the market while the home is under construction. But once that home is complete, we actually offer a conversion option that gives the client the ability to now lock in that lower rate. We're doing it for a flat fee. It depends, again, on your loan size and type. But you're looking at either $350 or $800 to capture the lower rate. It is a true conversion so you don't go through the refinance process. So people love it.

It goes back to what a lot of people heard as rates were going up about, ‘love the home date rate.’ So get the home you love built while you can get in line and get it done, and then let the expert like me work for you to get that rate. And get you exactly where you want to be for a long-term financial position.

KIM: Associated Bank, I want to make sure our listeners understand that Associated Bank might be more Midwest focused. I guess my point is your program is going to be offered most likely through some other portfolio lenders outside the Midwest. So if we have someone who is listening to this, make sure you find a lender that might be able to meet your needs in your market but look for the loan that you described.

TRISHA: Absolutely I would agree and honestly, a lot of people who reach out to me from this podcast are in states that perhaps Associated Bank doesn't lend in, but I have been in this industry for 26 years so I've developed a lot of partners and friendships with other people in the business. We rely on each other to refer clients to who we know will take very good care of them just as we would. If somebody reaches out to me and it's perhaps a state that I cannot do, I can often recommend a lender and highly recommend them to where you would be very well taken care of.

KIM: Good information. One of the things I wanted to bring up is the reason I believe now is a good time. Another thing that Robert Dietz was talking about is that he believes the lower rates are going to be here through 2025. He believes those lower rates are going to spur another big jump in the new construction market, and I agree with that.

The reason that I tell people to seriously consider over the next six to eight months, jumping in and building your new home. We don't want to see what happened in 2021. Remember back then there was so much interest in building and so many people who wanted to build that it drove the construction industry prices very high, very quickly. I don't want that to happen again because it wasn't controlled. It wasn't sustainable. I'm afraid we might be headed into that same direction. I think probably by the first or second quarter of 2025 that could happen if we have a lot of people who jump back into the market.

Ahead of it prices are stable, and it's really a good time. Interest rates are coming down. That's why I think there's a window here - six to eight months, maybe 12 months - in order to start your new construction project.

TRISHA: I absolutely agree. Another one of the things he said is right now there's such a huge housing gap. There's not enough housing available for the number of people who are interested in the market and getting a home. It's going to create quite a rush into construction because that's where the solution is going to come from. There's not enough existing inventory and the gap is growing. So the only way to fill that gap is going to be construction.

KIM: Good advice. Tricia, as always, thank you so much for joining us. It's been fun to catch up with you and offer our listeners a bonus episode of what's going on in the financial market: the interest rates, the mortgage rates. It's a very interesting time out there and this information is very helpful to them.

TRISHA: Absolutely. Thanks for having me.

KIM: No problem. And as I mentioned at the top of the show, Melody and I continue to work on Season 7. Thanks everyone for listening. Enjoy your winter.

OUTRO: For more information visit www.artofcustompodcast.com or find us on Facebook and LinkedIn as The Art of Custom. Be sure to subscribe to get the latest episodes and please rate and review. The Art of Custom is produced by HugMonster sound with original music by Adam Frick-Verdeen. Thanks for listening.