Rising Mortgage Rates: The Impact On Rentals (Podcast #392)

by Stephen Michael White

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November 28, 2022

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Podcast 392: The Impact Rising Mortgage Rates Have on Rentals

In this week’s episode, Podcast Host, Property Manager & Business Owner, Andrew Schultz, chats about the rise of mortgage rates and the impact it will have on the rental industry including just how much you’re paying per sq. ft on a house now vs. years prior.

We’ll also chat about a Buffalo, NY landlord that abandoned multiple properties, many of which had dozens of lead paint violations totaling around 5.1 million dollars. Find out what the city’s solution is for the hazardous situation and more!

Andrew Schultz: (00:00)
Hey everyone. Welcome back to another episode of the Rent Prep for Landlords podcast. This is episode number 392 and I’m your host, Andrew Schultz. On today’s episode, we’re gonna be talking about 5.1 million in lead paint violations, the rising mortgage rates, and the impact on the rental market. We’ll get to all that right after this.

Voice Over: (00:24)
Welcome to the Rent Prep for Landlords podcast. Now, your host, Andrew Schultz.

Andrew Schultz: (00:29)
The Rent Prep for Landlords Facebook group has over 13,000 members, so if you have a question or a situation you’ve never encountered or you just need to bounce an idea off a big group of housing providers, this is the place we’re one of the largest curated investor-friendly Facebook groups out there. If you’re not already a member, check it out today at facebook.com/groups/rentprep. Don’t forget to mention the podcast when answering the questions so we know how you found us. Little bit different style of podcast this week as we actually are bringing back our in-the-news segment for not one but two news stories. I saw these two news stories in the Buffalo News here recently and I felt like it was important to share both of them. Uh, and I’m gonna provide a little commentary after each one here, but there’s just a couple of really interesting articles here that warrant the attention of investors across the country. We’re gonna go ahead and start with this one titled Judge Orders Former Landlord to pay nearly 5.1 million for lead paint violations written November 7th, 2022 by Dale Anderson for the Buffalo News. Let’s go ahead and jump right in.

Andrew Schultz: (01:34)
A former landlord who has considered one of the worst in Buffalo has been ordered to pay nearly 5.1 million in penalties, restitution, and forfeited rent for lead paint violations. State Attorney General Latisha James has announced the State Supreme Court Justice. Katherine Nuit Panto handed down the decision Monday against Angel Elliot Del whose rental properties included more than 150 single and two-family homes in predominantly low-income neighborhoods. As a result of his reckless negligence, more than two dozen children are suffering the effects of lead poisoning. James said It is believed to be the largest penalty ever imposed for lead paint violation cases in Western New York. Pen. Pento directed that the money be used for efforts to combat lead paint poisoning. Multiple cases of lead poisoning were reported at seven of Dolphin’s properties. She noted. Pen Pento pointed out that 16 lead hazards had remained unresolved for more than one and a half years in a house on Desler Street, and seven violations were not remedied for 877 days at a residence on North Hampton Street.

Andrew Schultz: (02:36)
The Attorney General reported the dolphin and sold or abandoned all of the properties he owned and managed in Buffalo. She also noted that her office has contacted all of the new owners to tell them what lead abatement needs to be done and has informed all of the tenants of their rights. She said that her office is working closely with Heart of City Neighborhoods Inc. A nonprofit community redevelopment agency to rehabilitate several houses formally owned by Del and provide safe conditions for former tenants in those homes. The Attorney General’s office charged that Del failed to maintain the properties allowed lead paint to deteriorate and misled tenants and purchasers about lead paint hazards, sometimes providing no information at all. Del operated using a Web of 19 companies incorporated in the states of Wyoming, Maryland, Delaware, and New York, and he shuffled the properties among them. According to court records, only two of the seven entities named as defendants in the state’s civil case were ever authorized to do business in New York, which meant that they could not legally evict their tenants.

Andrew Schultz: (03:32)
Nevertheless, between 2015 and 2020, Buffalo Housing Court records show that Dolphin and the defendant entities initiated at least 192 evictions in her decision. PanAm Pento cited an affidavit and testimony from Dr. Melinda s Cameron, a pediatrician at OSHA Children’s Hospital and a medical director of the Western New York Lead Poisoning Prevention Resource Center who said that the children here had higher lead levels in their blood, then the children in Flint, Michigan where lead contaminated the drinking water. Cameron testified that the prevalence of lead poisoning among children in Buffalo, particularly in an impoverished black neighborhood, is still terrible. Although some progress has been made, pan Pento granted all $5,094,018 in 45 cents in penalties that the Attorney General’s office sought further, she declared the court directs the money be used by the city of Buffalo, Erie County and New York State to prevent, abate, mitigate and or control the exposure of children to lead hazards.

Andrew Schultz: (04:31)
An undetermined number of children and families have been severely and permanently injured by the intentional and cruel actions of the defaulting defendants. She noted justice requires that the money collected from them should be spent to stop the generational trauma inflicted on our Western New York community. The monetary judgments included $630,000 for 126 violations based on false led disclosures or no disclosures at all to tenants and property purchasers. The maximum $5,000 penalty for each violation, $3,101,900 in restitution for county code violations relating to lead poisoning, 100 per violation per day over 877 days from November of 2019 through April 12th, 2022, $60,050 in restitution for Buffalo Property Management licensing violations, $50 per violation per day for over 1,201 days sought through January 1st, 2021, $21,590 in restitution for unpaid buffalo rental registration fees and $1,263,478 and 45 cents in dis discouragement of rents received for the 63 homes cited for lead paint violations for the time period starting when each of the properties was first cited and then $17,000 in allowances costs and disbursements. Concentrated efforts are underway in Buffalo to combat the silent epidemic of lead poisoning that is disproportionately impacting poor children and children of color living in old rental housing, but more must be done. Penta Pento observed in her decision unsafe rental houses in East Buffalo abandoned by landlords like the defendants in this action must be made safe for tenants and their families.

Andrew Schultz: (06:23)
So being a landlord or a housing provider or whatever you want to call it, it’s a huge responsibility that should be taken seriously, and obviously, some of us take it a little bit more seriously than others. Some of us take it a lot more seriously than others is really what I should say there, but we’re constantly fighting the term slum Lord because of people exactly like this. This landlord had no intent to comply with lead paint laws. They never did. You can tell by how they were organized and how they were shifting properties around. Don’t get me wrong, asset protection is a great thing, but you shouldn’t be using it to screw your tenets. Over-lead paint is a hot-button issue right now with good reason. A lot of our nation’s housing stock is older homes and chipping and peeling paint is a constant issue.

Andrew Schultz: (07:06)
Pretty much every house that I manage was built before 1978, so we’re dealing with this on a basically a daily basis. Knowing how to properly deal with it can help fight against the spread of lead dust in particulate, which typically is how lead transmits into our bodies. Get the EPA training on how to work with lead paint. It’s like an eight-hour class. It’s offered by a bunch of municipalities, different contracting groups. We’ve even seen it being offered like some of the on-the-job training centers and things of that nature. It’s not hard to find these classes. It’s like an eight-hour class. I think we paid $150 the last time we put someone through it. A lot of times you can find them for either very, very little, or no cost and understand that by law the class is required. For anyone that’s working in homes built before 1978.

Andrew Schultz: (07:50)
It’s also required for property managers. The class includes hands-on training and it’s probably going to feel a bit basic if you’re used to doing contracting work, but it shows you how to set up scrape sand, paint, whatever you need to do and how to tear down properly. It also shows you how to deal with the lead paint correctly. It’s not complicated in most instances. Now, understand why I’m pushing this class. The amount of lead that it takes to cause serious health effects in an adult or in a child is literally about the same as the size of a few Dandra Flakes. Everybody knows what Dandra Flakes looked like. Everybody knows how small they are. A few flakes worth of actual lead inhaled into the system is enough to cause serious health concerns for an adult and even less than that for a child. So even something as simple as just sanding a surface without putting a mask on is putting you and everyone that comes into that space at risk sanding is releasing a lot of dust in particulate into the air.

Andrew Schultz: (08:46)
Some of that is lead dust and none of it is good for your lungs. If you have an old painted wooden sash window or window frame, there’s friction between that sash and that frame. Every time it’s opened or closed, every time that paint is rubbed by the window sash, it degrades a little bit. That’s another opportunity for lead to enter the air. So if this is something that happens not just during renovations but also on a day-to-day basis, it’s definitely something that you need to be aware of. Understanding the lead paint disclosure laws is also pretty important. If you have knowledge of lead paint in your home that needs to be disclosed. If you go to sell or lease the property, there are a bunch of forms on the EPA website that can help you meet this requirement as well. The bottom line here is take care of your rental properties. Don’t be this person. There’s already such a stigma against landlords, especially with everything that we’re trying to fight against in 22 slum lords like this. Give the rest of us a bad name. Don’t be this person. Changing tracks a little bit. Our second in the news article is going to be a little bit different. We’re gonna be talking about the rising interest rates is specifically mortgage interest rates. This article from Buffalo News November 8th, 2022. This one was written by Jonathan Epstein. As interest rates rise, home shoppers start to think cheaper.

Andrew Schultz: (10:04)
A recently engaged couple finally found a house to buy last month. After more than two years of searching across Erie, Niagara, Genesee, and Wyoming counties, the town of town of Wander Couple were searching for an older rural home with some land but in move-in condition, not an easy goal in a housing market where the number of homes for sale remains near record lows and the search in mortgage rates didn’t help either. Forcing them to aim for lower-priced homes to make up for hundreds of dollars that the rising interest rates added to their monthly payment. Just when they were about to give up, they found an 1800-square-foot farmhouse on one acre of land in the town at Lockport. It’s now under contract for 235,000 with a December 9th closing. We said we’d quit and then a couple days later we found a house. The buyer said eight months ago they could have spent a hundred thousand dollars more on a bigger house and gotten the same monthly payment.

Andrew Schultz: (10:53)
It was an experience that’s all too familiar with home buyers in today’s market. Soaring mortgage rates, which have more than doubled this year to a 20-year high of more than 7% are forcing buyers to lower their sites and their price range. It did change what we were looking for, said the purchaser H 53 had we found something before we would’ve been in a much larger and much newer home spike in mortgage rates and offshoot of the Federal Reserve’s campaign. Detain inflation by slowing the economy has been one of the earliest and most severe impacts of the policy change. According to the National Association of Realtors, a homeowner with a $300,000 mortgage would now have to pay nearly $2,000 per month compared to 1265 a year ago. That’s changing how home buyers are shopping. They’re still out there looking and buying, but they’ve had to shift their focus and their price range downward because they just can’t afford what they could before.

Andrew Schultz: (11:42)
The higher cost coupled with the limited choices buyers have because of the historically low number of homes for sale has slowed the pace of home sales across the region. Pending home sales, the most timely indicator of the sales pace because it reflects homes that have signed contracts but not yet closed tumbled by more than 17% in September and have dropped for 10 straight months in a row according to the Buffalo Niagara Association of Realtors. Absolutely. The activity has slowed down from earlier this year and definitely from the summer and the higher interest rates are definitely having an effect said Bill Severin and agent at Hunt Real Estate. Usually, the people that are impacted the quickest are the ones that are at the lower end of qualifying. He said for some people it either knocks them out completely from being able to buy or it takes them to a lower price range if they intend to continue at 3.5%.

Andrew Schultz: (12:30)
Where rates were before the hikes began, every thousand dollars of additional borrowing meant $4 more in monthly payment. Now it’s $7 for every thousand, so if you were looking at a $200,000 house, you might now only be able to afford closer to a hundred thousand, said Gary Gorski and Associate Broker at Hunt, you could still buy, but you’re not at the price range you were six months ago. That’s an education for buyers that may require hard conversations. When interest rates move up, they’ve gotta make adjustments on their sales price, said Peter, scarce, gen Hunts general manager for the Buffalo Naer region. That’s tough to do when they’re looking at certain sales range and then they have to move down. The alternative is they have to move to the sidelines. That’s also starting to be reflected in local home prices. Median sales prices soared by a total of 29% in 2020 and in 2021, but the pace of the increase this year has slowed considerably with single-digit increases in each of the past three months, including a 7% rise in September.

Andrew Schultz: (13:24)
According to the local real estate group, there are signs that the market is shifting. Said Rebecca Simpson, a real estate agent at Hunt. Real estate purchasers that have been active in the market for the last seven months or longer understand that their buying power has been reduced. It’s not the same market that it was a year or two ago. The market also is not as frantic as it was before, including instead of collecting 10, 15, or even 20 offers, a song after home may only get two or three. Although that still means there’s competition and someone doesn’t win, the activity is just not as amped up as it used to be. Scarcella said market times are a little bit slower. Homes are still selling quickly. The average home sold in 17 days during September, but that was three days longer than the record low of 14 days set back in August.

Andrew Schultz: (14:07)
With sellers, it’s like managing their expectations of getting offers right away when it doesn’t happen, but in key markets, there is still high demand. Scarce said many homes are still selling for more than the asking price, though not by as much as previous, but there are so also many more price reductions. The average home that sold in September went for a little less than 6% more than its most recent asking price down from the record premium of nearly 11% in July. Buyers have gained back some ability to be pickier, said Nick Cordo also a hunt agent. A few of the buyers I have just have a more careful sentiment on price because the sting is felt and agents say the houses are lingering on the market a little bit longer, especially those that need some work. Buyers are definitely more cautious. They seem to be be waiting for some stability from the Fed regarding interest rates and encouragement from the stock market before moving forward.

Andrew Schultz: (14:57)
First-time home buyers that are living at home and not compelled to buy have dropped out of the market temporarily. She said others reduced their purchase price considerably. They compromised a lot, said Janice Rose an agent with hunt real estate nationally. Two, the rising interest rates are having an even stronger impact on the pace of sales nationwide. Pending home sales fell for the fourth straight month, dipping 10.2% in September from August and 31% from a year ago. According to the National Association of Realtors regionally, the group said sales in the Northeast dropped 16.2% from August and 30.1% from a year ago. Persistent inflation has proven quite harmful to the housing market. Said na, chief Economist, Lawrence Young, the Federal Reserve has had to drastically raise interest rates to qu inflation, which has resulted in far fewer buyers and even fewer sellers. Her homeowners were already afraid to list their homes unless they absolutely had to move for fear of not being able to get a new home, but now young noted, they’re also unwilling to give up the record low mortgage rates of 3% that they previously locked down.

Andrew Schultz: (15:58)
The new normal mortgage rates could be around 7% for a while. He added only when inflation is tamed will mortgage rates retreat and boost home purchasing power for buyers. Freddie Mac expects that the slowdown and declining demand will continue. It expects home sales to fall to 5.1 million in 2023 down from an expected 5.8 million this year and 6.9 million last year, but our buyer isn’t worried. She remembers the last time mortgage interest rates were this high because she had purchased a home at that time at 7%. If rates drop again, buyers will have the option to refinance to a lower rate. I don’t think the rates are going to keep going up and up and up. She said at some point they’re going to turn around.

Andrew Schultz: (16:43)
This article is why I tell people that buying a rental and hoping for appreciation is a bad move. Cash flow first. Cash last cash flow, always making a purchase of a rental property and banking on appreciation is a fool’s errand because I’m literally watching people’s wealth get wiped away by purchasing properties that were too expensive when they purchased them and now seeing these interest rates go up. They know that if they needed to sell, they wouldn’t be able to get what they put into the property. For the property. It’s largely only an issue if you’re trying to sell a property right now. It’s one of those situations where if you bought something in the last year or two and you need to sell in a hurry because whatever life event popped up, you’re probably gonna wind up taking a bath. You’re probably not going to be able to get for that property what you have into it.

Andrew Schultz: (17:33)
Let’s talk about some real numbers here. I understand that that article was very, very stat heavy, but I wanna break this down a little bit more. In January of 22, we were looking at about a 3.2% interest rate On a 30 year fixed rate mortgage, we’re gonna use a $200,000 purchase price here. We’re gonna assume that your principle after your down payment and everything else, you have a $200,000 principle payment, okay? At 3.2% interest, that’s 8 64 93 a month principle and interest, and that was in January of this year. Now today’s November 10th, as I’m recording this, November 10th, 22, the current mortgage rate is 7.8% for a 30-year fixed. If you wanna know the change in monthly payment, it’s $1,439 and 74 cents compared to just shy of 6 85. Put a little bit differently. If you were still trying to buy a $200,000 house in November of 2022 versus that same house in January of 2022, it’s gonna cost you 66% more in principle and interest on a monthly basis on a monthly payment.

Andrew Schultz: (18:40)
Now, let’s talk about if you wanted to keep your principle and interest payment level. If you wanted to stay at that 8 65 per month, your purchase power at a 7.8% interest versus a 3.2% interest is reduced to $120,000 to get that same $865 a month mortgage payment for your principal and interest, and that’s a 40% decrease. Between January and November. People lost 40% of their ability to purchase assuming they wanted their principle and interest payment to remain level. That’s something to really, really think about. My recommendation here for investors is stay liquid deals are coming and for closures are coming back. Many sellers are still trying to sell for 2021 in early 2022 prices, and they need to understand that those aren’t realistic comps anymore. Many buyers are feeling this crunch and may not be able to afford as much home with these new higher interest rates until these prices start coming down and there’s going to be room for investors to come in and make smart investments.

Andrew Schultz: (19:44)
Again, brush up on how you run your numbers If you haven’t done it in a while, talk to your bank and get some backend financing lined up and be ready to move when the deals come along but also be wary of this market. Don’t overpay banking on appreciation. Did you know that we’re publishing regular content on our YouTube channel as well? If you haven’t had a chance to check it out, do it today over at youtube.com/rentprep. Our latest video goes over the top tips to best maintain the interior of your rental. Again, check it out today over at youtube.com/rentprep. That pretty much wraps up this episode of the Rent Prep for Landlords podcast. Thank you all so much for listening. We truly do appreciate it. Our goal with the podcast is to help as many people as possible make educated decisions when it comes to real estate and you can help us to reach our goal.

Andrew Schultz: (20:32)
If you heard anything in this week’s episode or any other episode that will help someone you know, please do us a favor and share it with them. If you’re looking to get in contact with me, I can be reached over at whatsdrewupto.com. From there, you’ll find links to everything going on with me over at Own Buffalo, as well as other projects that we’re working on. Grab a copy of our free deal analysis tool today over at whatsdrewupto.com. There’s no obligation and it comes with a companion video showing you how to use it. If you’re looking for top-tier tennis screening services, head on over to rentprep.com. There are multiple products to choose from, including a tenant-paid option, and if you’re over 50 doors, ask about the enterprise-level programs and pricing. I’ve been an enterprise user of Rent Prep for years now and it’s changed the way that we screen our tenants for real. Check that out today over at rentprep.com. Again, thank you all so much for listening. We’ll be back in two weeks with an all new episode you won’t wanna miss. Until then, I’m Andrew Schultz with own buffalo.com for rent prep.com and we’ll talk to you soon.

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