The Expert Podcast

So if you're in the building trade, you actually have a lot going for you right now. According to this article from CNBC, the happiest job in the world is the building trade. You get to see the fruits of your labor. But there's more than that. You won't find the happiest workers toiling away at desks; chances are they're working outside. Construction workers have the highest level of self-reported happiness than any other major industry category. If you're into building trades, you know this. Sure, it's hard work, and you have to lift things; it's physical labor. But in this day and age, with modern equipment, tools, hydraulics, even cordless nailers, it's not the same type of job that broke the backs of your grandfathers.

Right now, there's even more going on in the industry that makes it even sweeter. We know certain developers that are paying $70–$80 an hour for construction workers and site workers. So not only is it a happy profession, but it also makes a lot of money. If you're in that industry, it's important to know what's going on behind the scenes.

Here's a very underrated industry event in real estate that's happening. It talks about mortgages, and the first thing it says is that mortgage closing costs have jumped. Well, that's not the big punchline. We'll get to the big reveal in a minute. This comes from the CFPB, the Consumer Financial Protection Bureau, a government agency that oversees the mortgage industry. Closing costs have gone up. If you refinance a mortgage or buy a new house, you have to pay closing costs to the mortgage company. It's a one-time fee paid at the time of the transaction. Those have gone up. There's also an increase in denials for insufficient income — we'll come back to that one. But here's the big one: the growing proportion of cash-out refinances.

This is very serious and shouldn't be overlooked. When you refinance a mortgage, for those of you who know this, I apologize for being redundant, but it’s a good refresher. Let’s say you buy a house and pay $250,000 for it, putting down $50,000. You finance the rest with a mortgage for $200,000. That’s how the math works. You pay on that mortgage for five, six, seven years, and at some point, you decide to refinance. Refinancing is kind of a misnomer — you’re not really changing your existing mortgage. What you’re doing is paying off the old mortgage and getting a new one. It’s a mortgage replacement.

Why would you want to do that? A lot of times, refinances were done to get a lower rate. For instance, if you buy a house at a 7% interest rate and rates go down to 4%, you refinance. That’s what happened in the 2000s. Interest rates were about 7% or so in the early 2010s. Then rates dropped to the 3%–4% range in 2019–2020. People refinanced to take advantage of lower rates, reducing their payments. That’s great, right?

Sure, but you can also refinance to do a cash-out. Here’s how that works: If you owe $200,000 and decide to get some cash, you get a new loan for $250,000. You take the first $200,000 of that new loan to pay off the old one, leaving $50,000 in cash to use however you want — buy a boat, remodel, or put on an addition. In the building trade, we see this a lot with clients doing rehabs or remodels. Sometimes, it’s also used to pay off bills, as mortgage rates are typically lower than credit card rates.

The problem with this news about refinances is that all of them are happening now as rates are going up. Currently, refinance rates are around 8% or higher. If you’re refinancing at 8%, you’re likely replacing an older mortgage with a lower rate. Most people with mortgages now have rates lower than 8% because they either bought their house when rates were 4%–5% or refinanced when rates were cheaper. So, why would someone trade a 3% mortgage for an 8% one? The only reason is cash — they’re running out of money, their bank accounts are drained, and they need cash-out.

This becomes problematic. If you owe $200,000 at 3%–4%, your payment might be around $1,200 per month. But if you refinance to $250,000 at 8%, your payment jumps to about $2,000 per month. You’ve added $800 to your monthly bills to get $50,000 in cash. If you’re already low on money, this higher payment could make things worse. Essentially, you’re giving away part of your house.

Keep an eye on this growing trend of cash-out refinances. Another issue we glossed over is denials for insufficient income. Why is this happening? As home prices have climbed from $250,000 to $450,000 and interest rates rose from 3% to 8%, more people are being rejected for mortgages due to insufficient income. It’s not about their credit but their ability to support the mortgage payments. For example, most banks use a 30% debt-to-income ratio. If you make $100,000, that’s $30,000 a year or $2,200 per month for housing. At 3%, you could afford a $250,000–$300,000 house. But at 8%, entry-level homes costing $350,000 require a $3,000 monthly payment, meaning you’d need an income of $150,000 to qualify.

What’s happening with home prices? They’ve hit record highs. Remember the real estate crash everyone anticipated in 2020–2021? Some experts believe it already happened — it was so brief you may have missed it. Prices dropped slightly in some areas but have since rebounded, rising for six consecutive months.

For builders, it’s crucial to note the resilient part of the housing market — newly built homes — is starting to crack. Sales of new homes decreased 8%, from 739,000 units to 675,000 units. Tight inventories of existing homes have pushed buyers toward new construction, but higher rates and costs are impacting sales. Similarly, new apartment construction is slowing due to rising interest rates.

However, there’s always a need for remodels, additions, and repairs. The building trade should continue to do well. But be cautious — the economy shows cracks. Consumers are pulling back on purchases, seeking refunds, and becoming more skeptical. Rent, mortgage, insurance, and now resumed student loan payments are all impacting spending.

What do you think about all this? Share your opinions in the comments!