The Jason Theory
Jason Stratton of KlopasStratton Team, a top 20 team in the nation with over 1.2 billion sold , sits down with weekly guests to talk about becoming successful, the real estate market, and crazy stories/people we run into. Visit www.klopasstratton.com to see more!
The Jason Theory
S4 E2 - explore the connections between rising bond rates, government spending, and the resulting effects on consumer behavior and sentiment in the housing market
This episode explores the intricate connections between rising bond rates, government spending, and the resulting effects on consumer behavior and sentiment in the housing market. The hosts challenge listeners to contemplate how these challenges impact financial decisions and stress the importance of adapting to these economic dynamics.
• The rising bond rates are tied to perceptions of increased risk
• Government spending influences inflation and purchasing power
• Current buyer sentiment is driven by fears of rising rates
• The importance of long-term perspectives in investment decisions
• A critique of fiscal policies affecting everyday consumers
• Consumers need to navigate financial choices thoughtfully
Everything in life has risk. The more risk you have, the more payout you want. The more payout they want means that rates have to go higher, so people will buy the rates, which means Chicago and the government have to pay out more interest more because people don't want to own the bond. They have to basically beg people to invest. This is the same thing in multi-units. The rate of return in Lincoln Park is lower than the rate of return in other areas that are not as affluent, because people don't know if people are going to rent those places. So they need risk premium. So what Chris is talking about is risk premium. That's why the bonds keep going higher because they don't trust the people that are issuing the bonds. What's the five P's, do you?
Speaker 2:remember it Preparation prevents poor performance.
Speaker 1:There you go. It doesn't matter how much money we get, if we don't close, it's no money, right? So no clothes is no money. I'm everything that I am because of my dad's death, and I wouldn't be as successful without his death. All right, welcome to the second podcast of 2025. We just finished up the roundup. This one is we're going to go over them here with Chris Delaney. Chris, give us a little uh, returning guests, give us a little bio and let's get into it.
Speaker 2:Yeah, Uh, do I get like a special jacket for for the three timer club?
Speaker 1:Are you three timer?
Speaker 2:Yeah, oh Jesus.
Speaker 1:You're like a Steve Martin in uh in the Saturday.
Speaker 2:live Jesus you're like Steve Martin in the Saturday Live, I am president and co-owner of Reside Home Loans local mortgage brokerage. I have two other business partners. We worked together for 10 plus years at a prior company decided to open our own shop, so we're coming up on a year of that. We have four employees now, so we just hired another processor. So you know, when the February jobs report comes out for January, one of those jobs will be from us. Man, you're doing your part. Yeah, yeah, yeah so, but no, it's been good.
Speaker 1:You're adding to inflation.
Speaker 2:Yeah Well, considering that we don't really have like a physical product to sell. But no, it's been great, it's been a. It was a really good year, pretty much in line with what our projections are were for production and everything. But we decided to bring on another person just to kind of help manage the flow a little bit more and also so we could expand a little bit.
Speaker 1:Nice. So, um, so I'm going to. We'll finish when we finish. I've decided like so I listened to tool all this morning. I still have a little bit of pre-workout in me. I did a cold plunge and I literally, when I was in the sauna, I just went through like 400 rants in my head. We're going to go into them.
Speaker 1:I'm going to rant today at the end of this, to the point where Chris may get embarrassed. But there's just a couple of things I want to go on. But first and foremost, obviously the market has started really early. Yes, and I attribute that to, I think, like last year, everyone losing out. Yes, and I attribute that to, I think, like last year, everyone losing out, everyone. For the first time, I had so many buyers say to me I don't want to be like in the thick of it in late February and March. I don't want to be dealing with X, y and Z, let's get out, I think. I mean, obviously the weather sucks. This weekend We'll get down to like seven, but the weather's been mild, which I also think helps too. But we're already seeing multiple offers and everyone wants to know, you know, rates. Like obviously that's such a huge part of it they're not going down Um. What do you think will help these rates come down on the longterm rates, come down on the long term.
Speaker 2:That's a pretty big question. Well, I think right now, as it pertains to rates, especially the bond market is, there's a lot of sentiment built in, and what I mean by that is. So let's just look at the 10-year and let's look at inflation, right, so go back to when inflation was 9% and where yields were right, and then go to today where inflation's at and where yields are. So there's clearly a detachment and it's not necessarily in line with fundamentals, which would be based on actual inflation, gdp and everything else, and I think the fundamentals would probably say that the 10-year, for instance, should be closer to 3.5, somewhere around there, and the 10-year spread between that and where the 30-year rate that people know what's the spread on that?
Speaker 1:So if we're at 3.5, where should rates be at?
Speaker 2:Well, historically it's changed a little bit, but uh, usually that two percent range okay is usually the distance right, so we should be at six or a tad under yeah, well, I'd say it's about two and a half, right, okay, uh.
Speaker 2:But you know it has varied anywhere from down to one and a half in terms of the spread, up to two and a half, and I think even you know, especially like fall of 2023, I think that that gap was much wider than that. So it has come in line. But you know, just looking at rates and again where inflation's at, you know there's definitely a sentiment that's in there. There's definitely a sentiment that's in there, right? So, speculation sometimes they call them bond vigilantes, who are just out there consistently shorting the market, and, of course, you're going to have hedge funds shorting the bond market too, because rates are going up and as rates go up, they just keep shorting more and it can be a little bit of a spiral.
Speaker 1:But getting back to answer your question. So what is that speculation? So like when you're saying what are they speculating?
Speaker 2:So I think it's, it's, it's, um. So there's a a kind of a buzz term that I've heard thrown around lately, uh, term premium, which, my understanding is, doesn't really mean anything. It's just a way to describe something that doesn't meet the fundamentals, and so this term premium is essentially looked at as this is what investors need in order for them to take on the risk of these bonds right now.
Speaker 1:That's what I want to get into. So I'm glad you said that, because that was one of my rants. So there we go. Yeah, I think what chris is saying and what people really need to understand is that everything in life has risk. The more risk you have, the more payout you want as the us government. And this will lead into chicago too, as chicago is um, as they have more risk in terms of what people think are going to happen to the US government or Chicago, the more payout they want, the more payout they want means that rates have to go higher, so people will buy the rates.
Speaker 1:This is like when yesterday, chicago got Moody downgraded our bonds. That means hey, moody's saying we're not buying. This is a fictitious number. We're not buying Chicago bonds at four percent because there's too much risk. Yeah, we need them to be at four and a half or five, which means Chicago and the government have to pay out more interest, more because people don't want to own the bond. They have to basically beg people to invest. This is the same thing in multi-units. The rate of return in Lincoln Park is lower than the rate of return in other areas that are not as affluent, because people don't know if people are going to rent those places, so they need risk premium. So what Chris is talking about is risk premium. That's why the bonds keep going higher because they don't trust the people that are issuing the bonds.
Speaker 2:Well, and it can, it can that. And then you know also, you can potentially get into this death spiral scenario when you talk about government bonds and government spending, in that they just have to keep borrowing and keep borrowing and issuing these bonds and that drives rates up and nobody's buying these bonds and it can almost end up being a death spiral where rates just continue to climb. I personally, I don't think we're in an environment where we're going to see rates spike. If I had to give my best estimate, I would say and this is probably a pretty safe prediction that we'll be somewhere probably between 6% and 7%.
Speaker 1:Which is like historically fantastic yeah.
Speaker 2:Well, you know, I always I, you know I probably I posted a meme about it, I think this summer, and it was like the squid games guy, you know, where he's looking all sad and then he's happy, and one of it's, like you know, six and a half 20 in 2022 when he's sad and then six and a half 2024, it's all about perspective and I think that's why we're so busy.
Speaker 1:People are like fuck it. This is where we're at.
Speaker 2:Man, I have said this for a very long time. Of course you know rates are going to influence some buyers, right, but the people that are actively buying, it's that time in their life they want to make that move. Rates aren't the problem, no, it's the inventory Inventory. A hundred percent. You know a lot of the people that have started to come out of the woodwork at this time of the year especially for me, have been people last year that put five, six, seven offers on places and lost out multiple offers. And you get exhausted from that, you know, and you just say it's demoralizing.
Speaker 1:I'm going to rent for another year, yeah, and then. And then they're like that's right, and that's where everyone's like. I got calls in December Like we're not. We're not going through what we went through last year. Our rents, our rent, they're like our rent's done in April, we'll buy in January. We'll close in as far out as we can in the herds in March.
Speaker 2:Well, especially if they're in the suburbs, because the single family market out there is just it's nuts out there. It's insane.
Speaker 1:Yeah, it's nuts. I mean I don't like. You know, people always say I'm going to move to the burbs because it's cheaper. I'm like it's not, it just isn't. I mean, unless you want to go west of Naperville.
Speaker 2:Yeah, you want to go west of naperville. Yeah, well, you know there's some suburbs that you know I wouldn't necessarily say are going to be cheaper, that you may not have as high of taxes as you're going to have, and you know oak park or naperville or some of those suburbs, uh.
Speaker 1:But you know everybody that's making that move in their life is thinking about the burbs and single family homes out there I just think a lot like when I go up with people, like I'll have people that are saying, hey, listen, let's look at this, and then let's also do Arlington Heights, glenview, let's do Wheaton this and this. And you know I I mean the base price at in Glenview is one, two and up. You know, at Ar arlington we couldn't find anything other than under a million. You know, wheaton's coming, I mean like it's, it's just like which, what you thought like, hey, I'm gonna go there and get a nice house for 600 grand.
Speaker 2:That that's done yeah that's done well, and when you get up into those price points, I think the somewhat surprising thing is the increase in the level of cash offers that you'll see. So I have a client that's looking in Winnetka up to 1.5.
Speaker 1:Winnetka 1.5? They're willing to give up a child.
Speaker 2:They just had a kid. Are they offering it? Well, so we had kind of a call you know the clients and their agent and she was explaining to them you know, 40% of offers up here are cash. Oh yeah, so I mean, and that's, you know it's. I would say where are people coming up with this disposable cash?
Speaker 1:So so you, you would think that, but, like think, if you think, if you were in your mid twenties in 2015 and you just started saving and then all of a sudden, the S and P went up 300%.
Speaker 2:Well, and that and that's one of the things I told them was you know, a lot of this is people borrowing against their assets.
Speaker 1:So it's not really cash, right. They'll. They'll borrow off their assets and then they'll just for leverage to get the place, which is smart, and then they'll refi out of that to a normal, to a normal loan.
Speaker 2:I mean, what idiot has one one and a half million dollars sitting in a savings account? I mean, the FDIC is only insured 250 of that.
Speaker 1:So it's really interesting. Every time it's a cash offer. When I get one, they just print out their stocks and my person's like what this? I'm like they're just gonna borrow against it. Yeah, yeah, yeah, I'm like it's the smartest thing to do, the rate's not bad and and listen, like in winnetka, at one five. That's a war. That's like people are probably knifing each other. That's a tough. That's a tough price point really anywhere it's.
Speaker 2:It's gonna be interesting. You know I'm hopeful foreign great people, so I think they'll end up laying in on something.
Speaker 1:I mean as long as they don't need air and heat.
Speaker 2:Well, luckily they, they all you know they have a nice place right now in the city and you know they're it's not. They don't have to do contingent or anything, so you know that'll work. They've, they've got time and they're. They're under no delusions that this may not happen in the next couple of months, and it could go into the summer or even the fall. Until the fall.
Speaker 1:Yeah, so I was having, I had lunch yesterday with a really good friend of mine and my financial advisor. We kind of the same conversation about the rates and I was like you know, I could see Rates drop by a full point by someone just saying I a couple of things, there's a couple of bills on the table and Congress that are going to be brought to Congress, I think could lower rates just from showing that they're going to get this under wraps, curb spending. So everyone knows that. You know Congress is the one that spends money. So you know if there's going to be, if there's going to be change, it's going to happen from Congress. And this speculation that Chris is talking about is exactly it. They just can't see. They can't see the U? S government stop spending. They can't see, in the same thing, chicago stop spending. So the two big things right Is term limits, which is going to hit the floor soon, I think. If they, I'm dying to see which Congress people won't limit their power.
Speaker 2:Probably the people that are near death.
Speaker 1:Yeah. So, like I would tell everyone out there, no matter if you're a left or right, if, if your congressman does not sign that, they're willing to cap limits in the future term limits, do not vote for that person, because that means they're power hungry and the reason they don't want to get out is that they're making so much money in Congress because you, the original, the original people that were in government in the 1700s and 1800s they had to leave because it was free and they had to go make money. So it was people that were giving their time up and not being paid. So that'll be. And then the other one will be single stock trades. Oh, yeah, yeah. Those two things alone.
Speaker 1:I think that would send a shockwave and I think people would be like, oh, hold up, there's going to be a change. And if you get those two things signed, I think you have like a half a point right off that, because that'll pull that that risk speculation out of there. It'll bring in. I could see that. That's what I talked about yesterday. And then I said and the second thing is the minute Doge or anyone else says we're going to start cutting spending here, here and here and start sending this up to Congress, sending that stuff to Congress, and you start seeing you don't need to have the actual spending. Stop for the speculators to say, oh shit, now here's what happens to. What happens when everyone's caught on the wrong way. So, being a trader for years, the biggest movements happen when people are caught short or long. Sure, that's a squeeze. If you got all of these hedge funds in one direction, the squeeze is going to be out of control.
Speaker 2:I mean, well, we've seen it before.
Speaker 1:Yeah, so, like the two and a half that we have now, the squeeze that we have, one way, you're going to get the other way and there is, the market moves like nothing you've ever seen when everyone is on the same side because there is no one to take that trade on the other side and it is a vacuum and it's it's the worst feeling when it's like a vomit inducing feeling. But I think that's what's going to happen. I think you just need we just need a rumor. We just need something that says we just not rumors the wrong word. We just need some sort of. We just need something that says rumor is the wrong word. We just need some sort of action that says, hey, you know what, we know, we've let things get out of control.
Speaker 2:You think they're going to admit that though.
Speaker 1:They can admit it. No, they're not going to admit it. But what they can do, what they can do is say, hey, listen, single stock trades, which has bipartisan term limits, has bipartisan, those two things have bipartisan. If those two things happen, you start taking money, special interest, out of Congress. When you do that, the spending drops because special interest just wants you to spend money. I'm I just that. I don't think that's that far fetched to say they, even if it brings to the floor. I think that's what's going to be the catalyst. And then I think we're going to have people caught the wrong way and you're going to have overselling and when the bonds overbuying, like you're going to have, you're going to have this. You're going to have this risk off stocks, yeah, risk on bonds, yeah. You're going to have this thing where like, oh, my God, we're on the wrong way. They're, they're sure they're doing this, yeah, and it only takes. I mean, it only takes like, what are we? I'm gonna forget the number, but I think we're we're 35, 36, 37 trillion.
Speaker 2:It changes yeah, it goes up every day yeah.
Speaker 1:so I think you know you, you sit and you say, okay, you know the, the, the, we're at seven and a half trillion, which was supposed to be. Let's just say they go and they say we, we'd bring in $5 trillion in receipts and instead of spending $7.5 trillion, this package is $5.5 trillion. If you can get us close to par, I think you're going to get six as low. I think it's going to be like this and I think it's going to go that way. I think we're going to go like this.
Speaker 2:And I think the spending is a. I mean, it's a tough conversation as a nation, right, Because the way I look at it is, if we don't get spending under because all we've done for decades is kick the can down the road and it just keeps snowballing If we don't get it under control, We'll never truly tame inflation and all the other stuff, the social stuff None of that will matter when people can't afford their basic necessities.
Speaker 1:That is my yeah and that was what another thought I had. It's like we all want to take care of everything. Right, I get it, but we can't save a bird if we can't feed our people. Yeah, like we need, we need to contract, get everything together. Like, listen, the last couple of years have been hard for everybody, you know. I look at yesterday I printed out my, my chase bill and I'm like what can I eliminate now? Would I love to have seven different movie channels and this and this and this? I'm like, yeah, but when eggs are nine dollars and your kids are eating and my kids eat them.
Speaker 1:Yeah, it's like I have to. Ok, do I want Netflix or do I want eggs? Yeah, and that's that's what the government has to do. That's what Chicago is, that's what everybody has to do. We have to say what are the necessities. Let's get that under control.
Speaker 1:You know, I'm like I love people listen to my podcast, but I will tell you, the number one podcast that anyone should listen to is the all in podcast. Okay, it's amazing. Um, they're all VC guys. It's completely data driven. It's a completely data driven podcast and you can't argue with the podcast cause it's just data. You know, like sure, like you can say you have an opinion, but this is the truth and they brought up, it went viral, but they brought up Chicago and they're like 80% of Chicago's money is goes straight to pension debt from years ago and 80 of the of the of our taxes only attack 25 of the pension debt.
Speaker 1:So the, the, the pension debt, and that's the same thing that we make. Five trillion dollars in america, one trillion goes to the debt. Just the interest, not even the debt, just the interest. How are you going to take care of homeless? How are you going to take care of all these other things if you can't get your act together there. And the reason I'm saying this because all of this that we're talking about is why rates don't go down. They've cut rates three or four times.
Speaker 2:I mean three cuts, but I guess, technically, if you're going to count every 25 basis points as a cut, it's been four.
Speaker 1:So they've caught a full point on the overnight and rates have jumped a full point. The people that are willing to really put their money where their mouth is don't believe in what we're doing. That's it. It's. It's a complete and utter like. It's not an opinion. This is fact. One plus one equals two. If rates were dropping, people would be like we believe that the U? S economy is doing well. It's not. That's why rates go up, but that's what the reports say that the US economy is doing well, that it's doing well.
Speaker 2:Well, yeah, we have 7% deficit spending the NFP. Unemployment just ticked down a little bit, but I mean we could get into this.
Speaker 1:Yeah, but let's pull out government spending. The economy is contracting at 3 percent. We are in a tail spin if you pull out government spending and the government spending is deficit spending. It's just. We're just. We're just like we're taking a credit card and being like all right, this discover is maxed out. Let me apply for a visa. I'm gonna pay the the discover interest with the visa and then cap out the visa and then get an annex and pay like you can and we have no one that's like at least visa will be like hey, I'm not giving you another car. No one has stopped. The people that print the money spend the money. This is like it's insane.
Speaker 2:Well, and to that point, you think like okay, family dynamics, right, Family budget. At some point the consumer, the family's tapped out and they've got to stop. They've got to stop spending, They've got to start making cuts.
Speaker 1:The government doesn't have that problem. No, they just. They just print more money, which is, which is a huge tax on all of us, because every time they print money, our money's worth less, right? So like, oh, we can't, let, let's just deflate the dollar so we have more money. Like, I don't understand how this is. These are not opinions, this is fact. I don't understand how people don't look at this and say we have to stop spending money. Like, and I always bring up the family thing with people I'm like listen, we all live in a house at some point. There's no more money there just isn't. And you have to make choices Sell a car, don't go out to eat, sell your house and buy a house that you can afford. Like, these are just and no one wants to make these choices. They're not happy choices, but if you don't make it, you're screwed.
Speaker 2:Yeah.
Speaker 1:I mean, we're living in a society where all of us have to be held accountable and the people that are providing for like are supposedly providing for us are not held accountable. It's such bullshit.
Speaker 2:Well, and again to your point, the more they spend, the more it harms us in terms of inflation, which we don't really get much of a say in us. In terms of inflation, which we don't really get much of a say in and I think it was Milton Freeman that said nothing will destroy a society more than inflation.
Speaker 1:Every major I will tell you too, like every major war starts with, every major revolution starts with inflation. Sure, as soon as you can't buy bread, yeah Right, like as soon as you can't afford to feed, as soon as the people cannot afford to feed themselves, that's when revolution starts, and that's what I you know.
Speaker 2:Go back to what I was saying about if we don't get it under control, all the other social issues don't matter, they won't matter, they don't, None of it will matter, cause you can't have money for it.
Speaker 1:I mean, it's unbelievable. All right, so that that that actually embodied a couple of my rants too. I'm just like. I just I just can't understand, like and and everyone, you know, every time I said like last night, you know, I was at the bulls game with a friend and he's like you know where rates going, how's the market? This and this? And I'm like listen, the market's fantastic. I'm like cause there's no inventory, right, you got 10 homes. There's a hundred people that can afford those 10 homes. That's just, that's just the you know we need. We need 110 homes and a hundred buyers. Then you're going to have price pullback, right, right, some deflation.
Speaker 2:Yeah.
Speaker 1:We do. We like we were talking yesterday too, we need deflation, and I was. I had I'll get your thoughts on this. I had a. We're negotiating an offer right now and they're like you know, we don't know what's going to happen to the economy this and this. And I was like, listen, here's my two cents. I said at some point we're going to, we're going to be in a deflationary environment where everything has to kind of come down and pop. I said, but at that point the U S dollar should start to get stronger. And I said would you rather have a one four house that goes to one eight and have eggs go from $6 to 20? Or would you rather have a one one house and have eggs go from $6 to a dollar 50.? I said the second one, you've made a lot of money. I'm like don't look at the print, look at what you can buy. And I don't know if people have the the wherewithal to understand that.
Speaker 2:People tend to have a very short term view, right? So we're going from one four to one eight or the other direction over time. I mean, if you have a home in that value, yeah, that's a big swing, but you're likely in that home for a long time, right, so you're going to have the fluctuation in price. But to your point, I mean the cost of the goods that you buy every day are really what matters. You're not looking every day what's the value of my home? What's the value of my home? You're not looking at that when you make that monthly payment. That's probably on a fixed rate, that you're making that same payment every month. That's more of what you're thinking about, rather than, is the value of my home going up substantially or not? I mean, it's great over time, but I think the necessities are, or what is more important, and what you're paying for on a daily basis.
Speaker 1:Yeah, cause when the dollar gets stronger, the cost of your, the price of your house is going to fall and and but it's falling. But the power of that house, when you sell it, the buying power is more, and I always tell that to people. I'm like that's what's great about getting in the market whenever you want and I know people say that but like you know, financially you just get in, because if we do get into a situation where rates start to drop, you can just refinance. You're locked into that dollar amount finance. You're locked into that, that dollar amount, right, like. But if you get into inflationary amount and and all of a sudden everything starts to go higher and higher and higher, you know that house is worth less and less and less if you don't have it locked in because that dollar is getting worthless. So I just think that a lot of times people are hesitant in terms of where the prices are going to go.
Speaker 1:I agree with you. But what's more important is what it costs to live on a daily, daily basis, and that's the strength of the dollar. And the dollar will continue to get stronger as we stop spending it and we stop printing it and we start pulling these dollars out of the market. That's the one thing we have to do. We have to pull the dollars out of the market. When they raise rates, what they're trying to do is pull dollars out of the market and make the dollar stronger. The problem is when you have a lagging economy and rates go higher and you're in stagflation. Then we look at the 70s and then that's a problem.
Speaker 2:Yeah, well, I would say to that we always have to be careful, using the past to predict the future. But certainly there are some similarities in the situation, but much different circumstances. I mean, our main issue here was massive stimulus, no production, and we're still dealing with the ramifications of that.
Speaker 1:Yeah, dealing with the ramifications of that. Yeah, you know, I was also thinking about. You know, obviously your son is at Lane Tech and my son will be going there soon and that was a vocational school and I always think about that. You know, like two days ago the print was oh, you know, another loan forgiveness program. They're trying to sidestep the superior, you know, the Supreme Court try to figure it out.
Speaker 1:And I'm like, instead of giving stimulus to someone that you know majored in humanities and great books and spent $200,000 on that and decided to, you know, do whatever. And I was like why don't I mean come on, let's call it how it is why don't we take that money? Why isn't junior college free? Why isn't vocational school free? Like, why aren't we building like electrical, like places people can go and learn how to be electricians and plumbers? Let me tell you something my electrician, my plumber, my HVAC guy, they all make about a half a million dollars a year. They work two seasons and then they go and do things the rest of the time. A South Park episode about that. But it's the truth. I'm always like Jack, where are my roofer, where are you? I'm in Europe. I'll be back in three months, you know he. You know he doesn't work the winters, you know. And like, I just don't understand, why should we be giving money to people that made mistakes versus giving money to people that are going to enter the workforce and have a talent, right A talent?
Speaker 2:Well, a skill, yes, a skill that is needed. So I talk about this with my son all the time. You know he some time back he was saying, oh, I think I want to like learn to code and maybe you know I'll be a coder. And I'm like, listen, number one, everybody's learning to code right now. Number two AI is going to probably crush that field. And I was like, if you go into coding and you go out to get a job and it's a saturated market with potential employees, you know that drops your value, right? So it's, it's. You can look at that and supply them. Uh, supply demand dynamics. So, yeah, you get these goofy degrees. Of course you're not going to go out there and make a substantial amount of money unless you figure out a way to, you know, start a business or something like that, which most people that start businesses don't have degrees.
Speaker 1:It was really interesting you said that because this morning we were talking and we're talking about mechanical engineering and stuff like that and like different types of engineering that that won't be replaced, like stuff that you really need, and and I just like I was talking to Lee and my wife and I'm like you just need to get a job where a robot can't replace you. I mean, elon said it yesterday. He's like we're going to roll out X amount of robots. He goes in 26,. It'll be 10 X, 10 X. I mean this, the guys on the all in we're talking about the robots. Uh, two episodes ago. He's like yeah, I just bought 3000 robots for $1,600 a piece. I put them out on my properties and they walk the properties, they collect data and they tell me how things are going. They have automatic drones that go over.
Speaker 1:I'm like like you have to make sure whatever you're doing, you're making the robots, and the robots isn't going to do what you do and it's sales. It's there'll always be sales people always. There's always going to be a human connection, you know, because I mean like, look at, look at like people like like obviously you do your like now you do online, you do, hey, I'm gonna do my application yeah, but it's still talking to chris. Yeah, like g-rate's like oh, you don't have to talk to anybody right. Application yeah, but it's still talking to Chris, yeah, like G-rate's like oh, you don't have to talk to anybody, right, that was their whole thing. It's going to be everything's automated. No, dude, this is a fucking convoluted process. You need somebody there. That, to me, is robot proof, I mean sales are robot proof you get into underwriting.
Speaker 2:That's AI and I'm sure it will probably get to that point in the mortgage space. But there's a lot of red tape and risk.
Speaker 1:But you have to evaluate the person, sure, and what that person's dreams are, what that person wants to be. Well, yeah, like, there's always going to be that space. I always say that to everyone. It's like, oh, real estate, they're going to do this. I'm like like, no, you can't. I said you can't do valuations. Ask, you know, ask, zestimate. It almost destroyed, zillow, when they were buying all these homes and trying to figure out what the values were. Like. You know, no, that's, it's never gonna happen, because each street is different, right, each loan application person has a different tolerance for risk, different outlook, what they're using the place for when they're going to move.
Speaker 1:Again, that, that data, that personal data, that feeling, I mean, until we start tapping into people's brains and maybe that happens, but we'll be dead by then. So I don't really care, it's not my problem, but I still think there's all that and it's like, why don't we spend the money on educating people? Like, listen, not everybody's gonna be a doctor, not every person's going to be to college, right? I think only 10 or 15% of America should be in college period as it is. The rest should be learning a vocation. And then you're driving down prices, you're driving down inflation and then on top, you're going to get lower rates, sure, yeah.
Speaker 1:I just don't understand why there's not an emphasis on that. The emphasis is let's hand out money to people that made bad decisions right, and then you know the person. That's the person that's a handyman, the person that does do the hvac, the person did go to vocation school. They're paying for that money, like anytime. I love when they say the government did this, I wish they just replace it. You did this. Yeah, american people, you're paying. Did this? I wish they just replace it. You did this. Yeah, american people, you're paying for this. Why don't we just say that?
Speaker 2:I mean you could look at I mean especially like college tuition. You could potentially look at that and I think there's actually a theory and I don't remember the name of it that is connected to the substantial increase in college tuition and the availability of government loans for those right, because those loans there's like no criteria I mean 18 year old kids getting loans for tens of thousands of dollars that that you know. There's a theory that that's led to, you know, a substantial increase in in college tuition and you know these colleges are marketing to these kids. I mean you got, you probably get them to get a thousand things in the mail every day, every day. You know these colleges are marketing to these kids. I mean, you got, you probably get them too.
Speaker 1:You get a thousand things in the mail. Oh my god, every day. You know it's such a business and if they, just if they, just if they just had less people now. Now, college admissions and people going to college is trap is dropping rapidly, makes sense, which makes sense, and I just think that's people saying, oh, I don't need to do this, let me do Z. I think that's advent of the phone and people doing their businesses. So I mean like, yeah, I mean I think that's good, but like, just like, just like the money supply that's out there that needs to drop, which then you have less defaults on these loans. So these schools, I mean I mean how does a school go from? How does Notre Dame go from 30,000 to 90,000?
Speaker 2:yeah 90,000.
Speaker 1:You gotta have a school, you gotta have a yeah, you gotta have a that are not payable. Yeah, so someone has to pay that. And who's paying? It are the people that the other students that can't pay the school's getting their money oh yeah, because it's Gary.
Speaker 2:Yeah, uncle Sam's not the one that's getting paid back.
Speaker 1:I mean $400,000 to come out of Notre Dame or any other of these institutions.
Speaker 2:You can't file bankruptcy on them.
Speaker 1:So let's talk about issues you have with people that have huge debt coming out of college or trying to buy a home.
Speaker 2:I wouldn't say I have a lot of issues.
Speaker 1:How does the banks look at that debt?
Speaker 2:Well, so there's a couple of ways. Number one is what's the payment that's reporting on the credit report right? Oftentimes that may be lower than what the payment actually is right, so we go off that.
Speaker 1:If there's no payment, let's say Now, how is it lower than what the payment actually is?
Speaker 2:It's just whatever's reporting to the credit report. I mean, I've had borrowers say I think I'm paying a little bit more than that, but it's what's on the credit report, because that's what they're reporting to the creditors. But how does that happen? I don't know. Sometimes I think there's a detachment from what borrowers think they're paying and what they're actually paying. They may be paying a little bit more every month and not realizing it, like I've had that happen with people with mortgages where somehow they started paying more and they totally forgot about it and they didn't realize I'm paying an extra thousand bucks a month. You slapped them. It was a good, good buddy of mine. You actually met him, a good buddy of mine. I called him to tell him to call the bank and get the PMI terminated and he was like I've been paying an extra $500 a month and I'm like why were you doing that? He's like I didn't even know I was doing it. Oh, there's got to be some, all right.
Speaker 2:But anyways, there's a couple of ways so we can go off the credit report. That's probably 90% of them, especially now that we're out of COVID forbearance and all that stuff. If they're deferred, they're in forbearance, then it's anywhere from 1% to a half percent of the balance that you qualify them on. And then there's also the option of okay. Payments are really high. Are you on an income-based repayment plan? Because often those are much, much lower, especially for conventional loans. You can go off that which is very helpful, that which is very helpful If they're a physician resident, something like that. Then there's a little bit more flexibility if you use a physician loan product in terms of how they'll calculate those student loans.
Speaker 2:But I wouldn't say I have run into a situation where in recent memory where somebody couldn't qualify because of their student loans. I have a lot of people that call me. Initially they're worried about it and then we get into it and it's fine. It's fine. Yeah, I mean I I had a. I had a lady that I was working on a pre-approval for, I think maybe back in June, and I don't think we did a full, I think we just did a soft credit pull at that point in time, which those are always kind of a little funky.
Speaker 2:Sometimes the student loans come across a little messed up. But she had all these student loans and I'm talking to her about it and the way that I'm looking at it is. It looks like half of these were just transferred. And she's like no, no, no, they weren't transferred and it was just too much for her to qualify. And that was at the time the student loan forgiveness was still on the table. So she was waiting to find out about that. So we tabled it for a little bit. We got back in touch, maybe in like September or October, to try again, and I re-pull credit and sure enough that one half is completely gone, and I re-pull credit and sure enough that one half is completely gone. And I told her I'm like this is what I thought happened was that the loans got transferred and if we could have just you know, if you would have looked into that and we could have documented it.
Speaker 1:Oh, so she was. They were showing a double payment.
Speaker 2:Right Right, because it was in the midst of being transferred, got you. So it was still the old one, still reporting. You know, and I can kind of tell when I look at that stuff, because a lot of the balances are similar. They're not exactly the same, but I'm like.
Speaker 2:This is close enough where there's some funkiness because, you know, when we look at a credit report for student loans, it's not just the one total right, it's there's, there's going to be 10, 12, you know, 13, 15 different student loans. They're all broken out. And so when I see that, you know, I suggested that she check on it and let me know. And she swore up and down they weren't transferred. And then, sure enough, when we re-ran credit a few months later, she was fine. Listen to Chris. Listen to Chris. I mean I've seen enough credit reports.
Speaker 1:I don't profess to be a credit expert but I've seen enough credit reports that I kind of know what's going on. You know what else is happening in terms of giving people ability to purchase. That's changed. You see changing in 25,. Any rumors in terms of people like, hey, you know this is going to be changing, this is going to be changing? No, I always have different limits in FHA. How about this is going to be changing? No, you always have different limits in FHA. I have a question for you how about the sustainability in FHA for multi-unit buyers?
Speaker 2:For three to four units. I haven't heard any changes in that. It's never been a thing. On two units, Three and four units it is. That's an incredibly difficult thing to pass in a rate environment. I've had it. I've had it passed once and it was like a two and a half percent rate. This was years ago and he bought out the upfront pmi instead of financing it and it worked. So it's. I tell everybody.
Speaker 1:You know, I always like to set expectations and be honest can you explain that sustainability for people that are looking at multi-units? So for and it's only for three units. I didn't know that. Three and four.
Speaker 2:Okay, three and four so it doesn't apply to two units. So uh, essentially fha wants to know you know, if you your job, can the building maintain itself on the income that it brings in? So they look at the rents for the building. They take out a 25% vacancy factor in that.
Speaker 1:And they don't look at like. They don't look at vacancies in those Like it's 25%. Nothing is vacant in Chicago for 25%. They don't make adjustments. It's like that's national, it is what it is.
Speaker 2:Maybe we could write to HUD and make the case, but I'm just saying that's a lot a fourth of the year. The 25% vacancy factor is also a. Not that there's a sustainability requirement for conventional, but if we're like renting out a departing residence, they'll give you 75% of that lease.
Speaker 1:So it doesn't that's just what they do, so it's just kind of a standard across the board.
Speaker 2:So so the sustainability test, uh, the rents, at 75%, need to cover the total monthly payment including taxes and insurance. And it's just you're not gonna. There's not a situation where you're either going to find a price, a property that's priced low enough that the rents are high enough, or vice versa.
Speaker 1:You know, I I just never ran into it because it rents it's never been. Rates were never that high. And we were looking at three units like oh, this is perfect. And we and they're like oh, and this guy's like listen, he's like it doesn't fit sustainability and I'm like what's that? And he's like all the units have to be able, like they have to be able to sustain with, you know, and I was like well, that's, I literally said to him. I looked at my client and go, I don't think that's possible. No, I'm like you would need a cap rate of like 13% or 14%.
Speaker 2:Well, and it helps now that, especially because FHA is only for primary, that conventional dropped that requirement down to 5% from 15% for Fannie Mae. Well, that was two units. Say that again. So if you're buying a two to four unit conventional financing, you can do five percent down. Okay, used to be 15 down for a two year old, so you know you can stay away from fha 20 down if you went freddy, for freddy has not followed suit yet and it's been, I think. I think we just passed two years on that requirement.
Speaker 1:So conventional two to four units. You could put 5% down if you're on ROC and there's no sustainability, no sustainability, okay, then what's the point of FHA at that point, then, is it a little bit of a lower rate?
Speaker 2:Yeah, but DTIs. Dtis a little bit more flexible. One and a half percent difference in the down payment, which isn't a whole lot when you think about it. Difference in the down payment, which isn't a whole lot when you think about it. There's also lower loan limits on FHA. But with conventional you need six months of reserves, which could be a non-liquid retirement account, investment account, something like that. If you've got, I mean overall, obviously you're going to probably have a little less deferred maintenance issues with conventional loans than you are FHA Because, as a lot of people know, with government financing you know they are a little more picky on deferred maintenance.
Speaker 2:Now that's not to say that a conventional loan, an appraiser or an underwriter if they see it in the pictures will not call something out, right, I've had peeling paint come up on a conventional loan before because the building was older than you know, 1978. Right, so it's potentially still a concern, but a lot less unconventional. Other than that, I would say the big thing with FHA is much more leaning on lower credit scores. Okay, so, so that's where it comes into play. More, um, yeah, sometimes there's a little bit of flexibility on DTI. I think, though, really, in what I tell every client cause I get a lot of people, especially first time buyers, are like oh, you know, I heard about FHA and conventional and I said here's the deal Mostly is going to come down to credit. If you have a pretty good score, I'd say generally 680, 700.
Speaker 1:I was going to ask you for a number.
Speaker 2:Okay. So 680 or above, Primarily probably going to go conventional. Below that, we probably want to look at FHA, and there's a couple reasons. Yes, the rates on FHA loans tend to be lower than conventional loans and people look at that and they think that's great. But FHA has upfront mortgage insurance that typically is financed and loaned or you can pay it outright.
Speaker 1:Will the 5% conventional not have that?
Speaker 2:Well, you'll have monthly PMI. I mean, you'll have that with FHA too, but you don't have upfront Okay.
Speaker 1:But when you look at when you mean upfront like they're going to ask for a year, upfront.
Speaker 2:So it's one and three quarters percent of the loan amount. Okay, is the upfront mortgage insurance premium that you have to?
Speaker 1:pay on Now? Is that a dead cost, like you don't get that back, or is that going into the PMI?
Speaker 2:So if you do refinance, you do get a portion of that back. So that is nice, right. So if you do like a streamlined refinance which is just FHA to FHA, it's no appraisal, it's no income, super easy.
Speaker 1:How low can you go on Like? What do you? What do you like, is it? You can get 600, 580 on your credit score.
Speaker 2:So well, it varies a little bit from lender to lender. So 580 is kind of the lowest for a lot of lenders and again it will vary depending on the times. Right, we get into a situation where liquidity becomes scarce, they're going to tighten the standards.
Speaker 1:Yeah, they can.
Speaker 2:During COVID we saw requirements for that go up. So 580 is usually the lowest. You can go below that with some lenders. It becomes a little bit of a different ballgame. It's what we call a manual underwrite. You typically have lower debt ratios, sometimes higher down payment requirements, reserve requirements.
Speaker 2:But what I really wanted to say was sometimes, when you look at FHA payment versus conventional payment, even though the rate's higher on the conventional loan with the upfront PMI and the monthly PMI that you pay on FHA, even with PMI on a conventional loan, what you'll find is the payments are more or less the same. So yes, of course the rate on the conventional loan may be a little bit higher, but, especially if your credit score is higher, the PMI on conventional loans is tiered in part based on credit score and down payment. So the higher the credit score, the cheaper the PMI. It's for the life of the loan. On FHA, If you put down less than 10% conventional, you've got to reach 80%. You're going to request termination or it'll terminate automatically at 78% loan-to-value. And then there's the condo conundrum.
Speaker 1:Yeah, doesn't it seem strange to you that the person with the lower credit score gets the lower rate and the person with the higher credit score gets the higher rate?
Speaker 2:Well, it's backed by the government.
Speaker 1:But isn't conventional, also backed by the government.
Speaker 2:In a way, yes, I suppose that's correct, but not in the way that HUD collects those premiums and they basically you know that's an insurance premium for the bank if that borrower defaults, and who insures that? On FHA, yeah, I mean. Hud, yeah, and they also use those premiums for, I believe, for reverse mortgages too. Is that how the big short started?
Speaker 2:Well, well, I've got some thoughts on that but a much different situation than it is today, yeah, so, yeah, I mean there's definitely there's advantages to doing fha over conventional and certainly you know that we could get into ba2 at at some point down the road.
Speaker 1:but On the on the jumbos right now for people looking for for jumbo loans, give us just a you know, a little bit of a talking in terms of what's the best product out there If you're buying a one five house or a $2 million home, is it? Is it good to have as? Is it good to only put 20% down? Don't go more, because you're really not getting anything for that. If you have the means to make monthly payments, I'm coming to you. I want to buy a $2 million home and I have good credit scores, over 760. I can afford the down payment or I can let it go to a monthly payment. What is your suggestion to me?
Speaker 2:Well, I would say, at that price point you probably want to hit 20% down, maybe even 25%.
Speaker 1:Okay, and the difference between 20 and 25? Right now, is it a rate difference?
Speaker 2:Well, it's also you know, when you start getting into that space, especially as you get above a million and then one and a quarter and one and a half you know you're going to find that the options begin to shrink in terms of the availability of products, because obviously it's a lot of money, it's a risk. Most of those loans tend to be portfolio right. So the banks that are holding onto those loans they want a paper, they want reassurance and they want to make sure that you've got the ability to repay, and so a lot of times they will require some larger down payment.
Speaker 1:Okay, so there's no advantage. You just think that that's what people are going to ask.
Speaker 2:Well, it's kind of what I've seen. I mean, certainly, you know, when you go from 80% loan to value to 75% loan to value, traditionally, yes, you are going to see a little bit of a positive bump in terms of interest rate pricing.
Speaker 1:Okay, okay, right, you're talking like an eighth or quarter.
Speaker 2:I don't know that it would be quite a quarter, maybe an eighth. Okay, you know, truth be told, we do some jumbo stuff, but typically when you get into that price point, you know what people are doing. Yeah, so we don't see it a ton and obviously, with loan amounts increasing to 800,000, you're getting a lot more people in conventional these days. But so the one thing I do like about the direction that a lot of jumbo lending, at least in our space, has gone is that it more or less is following conventional guidelines now. So we call it like jumbo AUS, which would be automated underwriting system, which is what Fannie Mae and Freddie Mac use. So you still run it through automated underwriting. It's, of course, going to tell you it's ineligible because of the loan amount, but it still breaks down everything like Fannie Mae and Freddie Mac would on a conventional loan, right? So what that often ends up meaning is that you know, usually with jumbo you're capped at about 43% DTI. Now some of these products should be able to go up to about 50%, which obviously you don't want to see somebody doing that, but the situations where that happens is a lot of times they've got a place that they own. Now that they're going to sell afterwards. So having that little extra room helps.
Speaker 2:There's some decent 30-year products. I would probably personally recommend doing like a seven-year arm. That's kind of the sweet spot, you know. Decently lower rate. Those rates for us usually change about once a week, which is nice, okay, week, which is nice. So there's a little bit more stability in terms of locking those in.
Speaker 2:But seven years is kind of the sweet spot, I think, because a lot of these people that are buying homes in that price range are probably going to be there for a long time.
Speaker 2:But even if they're going to be there for the rest of their lives, the likelihood that they're going to have that mortgage for long term is probably pretty slim. And even if it gets to the point after seven years where it's okay, rates never came down, we have to refinance the money that they've been paying at. That lower rate is going to chip away at that equity or chip away at that principal faster and property value likely to increase. So wider loan to value and maybe puts you in a position to yes, we're refinancing it, maybe into a 30 year at roughly the same rate or maybe even a little bit higher. You know, might not be the best situation to spread it out over another 30 years, but if that keeps things relatively equal and puts you in a more secure spot, that's what we can do for now, and then we'll keep an eye on things going forward secure spot.
Speaker 1:That's what we can do for now, and then we'll keep an eye on things going forward. All right, so we're going to end on this. What is the most annoying thing that's bothering you about the city? And it could be. I'll start off. So where do I begin? I'll put so so. My thing is people, so maybe this will make more sense. My most annoying thing to the point where I may start carrying a switchblade to pop people's tires Not that I condone violence, but my most annoying thing right now is people that I think it's food. People that park in the middle of the street with their hazards where no one can get by, and this is the key there's a parking spot to the right or to the left of them that they could pull into right now. That is my number one thing. I hate that more than Brandon Johnson.
Speaker 2:Okay, all right, I'll kind of piggyback off that.
Speaker 1:That's my number one thing you say, food delivery people.
Speaker 2:I will get more specific. Amazon, oh yeah, the Amazon drivers. And if you're an Amazon driver out there and you're looking to buy a home, give me a call and props to the UPS guys. But the Amazon guys will, especially on a one, a one way street where you got parking on both sides, they will stop in the middle of the road and you I mean I know you're not supposed to, you know park at the fire hydrant, but the fire hydrants right there, or you could park at the end of the street, right, and they always they always pull that shit and and they'll, and they'll stay in the middle of the street and they won't like, if there's a spot, the Amazon people have a spot all the way up the street but they got deliver here.
Speaker 1:They will slowly go up because they don't want to walk Right and they have that huge cart. I just it's a get the hell like. There was a person like two days ago was an Uber driver who stopped in the middle of the street and stopped the whole street and the parking spot was literally to the right of them and it was like two or three huge spots. I'm behind them. I got out of my car, I walked up, I knocked on his window and I'm like bro, there's like three spots to the right, can you just pull over while you're waiting? Like oh, there's like seven cars behind us and it's not like I'm in a rush, it's just like bro, I mean like there, there's no, there's no uh, be considerate you're not in your own generation, right they're?
Speaker 1:like in their own fucking world. It's like dude, there's other people that are living in this world, yeah, and you can just do little things. But like that to me right now is like it's like oh my God.
Speaker 2:Well, here's a real quick problem that I have is that every time I go out and drive anywhere, for some reason, all the other people on the road are just idiots and don't know how to drive. I mean, I don't know if anybody else experiences that, but I seem to be the only person in town that knows how to drive.
Speaker 1:So like I'll start, like my, my middle one's in the car and he's like dude, you just are road raging and I'm like, and I'm like, but hold up, I'm like my heartbeat has not moved, I go, I'm just laying and I don't raise my voice. I'm like that's an idiot, that's an idiot, that's an idiot, that's an idiot and he's like, he's like man, control yourself. My, my voice hasn't even changed. I'm just telling you where the idiots are you're narrating the.
Speaker 2:Yeah, I'm just like look at this city here.
Speaker 1:Look at this city here or how about the people that have their turn signal on and don't know where they're going and they just slowly have their turn signal?
Speaker 2:or they don't even have their turn signal on and they're looking for parking.
Speaker 1:Yeah, and it's at least, hit your fucking hazards, man. Yeah, hit your hazards. There's 17 people here, first off. No one. No one in this society in the world should ever be lost. Get a cell phone, put it on on Google Waze or whatever. The fact that you can't find your street, you're turning on, dude, it's 2025.
Speaker 2:This seems like this could be a podcast in of itself. Driving in Chicago.
Speaker 1:But I don't understand it. How do you not know?
Speaker 2:where you're going. Yeah, it's rough out there on the roads here.
Speaker 1:My mom even knows to plug stuff in and she's in her eighties. My eight year old knows how to go hit the voice box, you know. Go to. I don't know. Target on Elston, start driving. I mean it literally and it literally, you know. Turn in 100 feet, like you don't have to slow down 500 feet. It told you it's in a hundred feet. I don't know, man, those are my. That's like what's on top of mind, right Like to the point where I'm like, I'm like I like and I like when I get out of the car and I, I'm not doing it to be mean, I'm doing it because, hey man, I feel like I'm, as a person that's on the road all the time, I feel like I'm obligated to help this situation. I'm doing, I'm not doing it for me, I'm doing it for you, I'm doing it for Alex, I'm doing it for Lee.
Speaker 2:I'm doing it for everybody else out there. It's a selfless act for the citizens of Chicago. Yeah, pull over. Thank you, pull over.
Speaker 1:There's five spots. You can walk 10 feet to take your box. I don't know, man, and the other rants we did within the statement. So it all worked out. But I needed to get the car thing in Because if you do this and you're out there, at some point I'm going to start popping tires. It's going to get there, I'm still OK with it, but I I'm close. You should get like a mad max car where you've got like, oh god, I'm hold up. I have been in the car and I said, man, I just wish I had a beater and I would just run into people like literally just slam into them like mad max how about?
Speaker 2:how about the people that drive on the shoulder?
Speaker 1:Where are?
Speaker 2:the cops? I don't know.
Speaker 1:And you know they're all baked.
Speaker 2:I always think about. I always think about that, uh, that meme. That's all like the, the, the human skeletons, and it's like you know, white, black, hispanic, you know all these different ethnicities and orientations, and then it's like the, and then it's like the, not the Neanderthals skull, but like an ape skull, and it's like you know to be whatever stupid thing it is. I always think about that, but it's people who drive on the shoulder. Yeah, it happens a lot and it's it's, it's dangerous, you know.
Speaker 1:So oh, my Lord, all right. Well, that's good Everyone. Thank you so much for your time. I hope everyone learned something and then had a chuckle today. And if you do feel our pain on the driving, send us a note. Let us know what is your thing that's ticking you off. Thanks so much, appreciate your time.
Speaker 2:Yeah, yeah, thanks for having me again.
Speaker 1:Guys, thank you for episode two, 2005,. And third, it's our third or fourth season, I can't remember, but we'll talk to you soon and download and like thanks so much, bye-bye.