S2E25 – Mortgage Interest Rates Will Remain Higher For Longer

Mortgage Interest Rates just hit the highest level we’ve seen in 6 months with the FED talking about the potential of another rate hike in June? When will we see interest rates moderate? Will higher rates cause a housing crash? In this episode, we discuss the idea of mortgage rates staying higher for longer due to The FED paying too much attention to employment figures versus what’s actually happening in the economy along with an interest rate forecast as we help you become The Educated HomeBuyer.

✅ – Want to get connected with us or to a local expert in your market, please reach out at http://www.theeducatedhomebuyer.com/expert

Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith

Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

📩 – info@theeducatedhomebuyer.com

For Show Notes, See Below 👇

[00:00:00] Jeb Smith, Huntington Beach Realtor: Is there a chance that interest rates could remain higher for longer? Over the last couple of months, Josh and I have been talking about the idea of mortgage rates following inflation. We’ve seen inflation come down and for a period of time we actually saw interest rates come down as well. But since then, we’ve seen mortgage rates more or less rise to the highest level that we’ve seen in the last couple of months. 

[00:00:56] And on top of that, there’s a lot of news circulating that the Fed could hike the Fed funds rate even further. So today’s episode we’re gonna talk about the idea of interest rates going higher, what could cause them to retrace a little bit, and ultimately what drives mortgage rates.

[00:01:15] Josh, there’s, I think, this misconception out there of what actually pushes rates up and pushes rates down. So I feel like that’s a really good place to start today’s episode. 

[00:01:26] Josh Lewis, Expert Mortgage Broker: Yeah, so the actual driver of what we can look at and say this happens, this ends up translating through to your rate sheets, is the price that is paid for mortgage backed securities. The more a buyer of mortgage backed securities will pay, the lower rates are.

[00:01:42] The less they will pay, the more the rates rise. They vary inversely, the price versus the yield. So that’s what we look at on a daily basis. But time has proven that mortgage backed securities will closely track the performance of US treasuries. Depending on where we’re at in the cycle people will typically say, look at the 10 year treasury. 

[00:02:03] But currently we’re probably tracking a little more closely to the five or the seven year, and the reason for that is that lenders do not believe those mortgages will stay on the books for 30 years. It’s a 30 year mortgage. It’s technically a 30 year bond, so the owner of those bonds is committing to tying their money up for 30 years short of selling that bond at whatever the market will bear for it.

[00:02:25] But you are not committing to keeping that loan for 30 years. You can sell the home and pay it off. You can refinance and pay it off, and therefore there’s duration risk to the lender. Right now they are saying we’re gonna price more closely off the five or the seven year because we don’t think these loans are gonna stay on the books very long.

[00:02:43] And if you’re a keen bond market follower at home, you might be saying Josh, that’s great, shorter term treasuries have lower rates. That means that rates should be lower today. The actual answer is no. We have yield curve inversion because of inflation. Investors in the bond market believe that short term inflation is gonna remain a problem. Longer term, it’s going away. 

[00:03:03] So the shorter term interest rates are higher. But when we look on a day-to-day basis, Jeb, and say, mortgage rates went higher. What are we looking at? We’re looking at mortgage backed securities. They closely track treasuries. We’re looking more closely at treasuries for the longer term direction of what will happen with interest rates.

[00:03:21] Jeb Smith, Huntington Beach Realtor: Okay, now there’s two additional things that I think come to mind when people think about interest rates. One is the Fed, right? You hear, the Fed meets what? Eight, nine times a year. And they come out and they adjust rates, right? So a lot of people believe when they adjust rates, that directly impacts your mortgage rate.

[00:03:40] So let’s talk about that a little bit. And then also the idea of inflation, right? We’ve said as inflation comes down, interest rates should, in theory, do the same thing. So what we saw, last June, July, Inflation was sitting somewhere around 9.1%. The day we’re recording this inflation is sitting somewhere around 5%. 

[00:04:00] So inflation is almost half of what it was last year this time. But interest rates are still higher than they were this time last year. So maybe let’s talk about the idea of that as well. So relate that back to what you said. 

[00:04:13] Josh Lewis, Expert Mortgage Broker: The Fed actually does control a couple of interest rates. They control the federal funds rate that dictates the prime rate that a lot of credit cards, home equity lines of credit are tied to. Auto loans are very sensitive to that.

[00:04:25] But they don’t directly control market interest rates either in treasuries or in mortgage-backed securities. That’s supply and demand buyers and sellers showing up every day and voting with real dollars. So what we’re seeing, Jeb, is everyone has heard the saying, buy the rumor, sell the fact.

[00:04:40] It’s not truly a rumor, it’s. What do we expect to happen? So a year ago, you’re correct that inflation reads were up around 9%. We’re 50% of that right now, and yet mortgage rates are not 50% of what they were last year. I believe that what market participants, investors in mortgage-backed securities and treasury bonds were looking at last year was they expected a much more rapid return to normal.

[00:05:03] And in this context, what is normal? Somewhere around the Fed’s preferred target for inflation of 2% annually as measured by core PCE. So we haven’t got anywhere near that, and the market is sitting here going, okay, we’re gonna bounce around at these highs until we see meaningful progress towards that 2%.

[00:05:22] And we haven’t seen it. It’s been delayed. The big belief that has been fairly prevalent. Although I saw someone going against the grain this weekend saying that they’re seeing housing costs as they’re measured inside of the primary inflation indexes is actually accelerating again. But what we have seen the massive home price appreciation, rent increases during Covid, the way they’re measured lags. 

[00:05:45] So despite the fact that they’ve been moderating over the last year, the way they get picked up in CPI, PCE show a big increase year over year. We are expecting in June and July that some of the moderation. It’s not really decreases. You haven’t seen home prices come down, you haven’t seen rents come down the year over year. Increases have moderated. 

[00:06:03] As that works its way through, we should see some significant progress on both CPI and PCE. My belief would be that will bring rates down. Now Jeb, this is, just over the last week or so, you and I have somewhat diverged on this. You’re now of the belief… the topic today is interest rates could remain higher for longer.

[00:06:21] Higher for longer, absolutely. I did not believe they would stay this high this long. I didn’t think they were gonna go back down to 3% or even four and a half percent anytime soon. But moderating down to a five handle sometime by mid-summer, so not 5.00, but 5.75, 5.875 and we’re not seeing that.

[00:06:39] So again, you are now of the mind that this is gonna linger a little longer. My belief is it’s just gonna be a very slow moderation. It’s not flipping a switch and we’re back going from 6.75 rates to five and a quarter rates. It’s gonna be a slow grind down to that level for mortgage rates but also for those inflation reads.

[00:06:59] We’re not gonna see a month over month change where boom, everything’s good. It’s gonna take some time to get back where markets are comfortable at lower levels of inflation, and therefore lower levels of interest rates. 

[00:07:10] Jeb Smith, Huntington Beach Realtor: I wanna dive into why we’re having these differing beliefs in just a minute.

[00:07:15] But before we do that, I wanna ask a favor, if you’re watching this video, if you like the podcast at all, do us a favor. Subscribe to the channel, hit the thumbs up. It shows us that you like the content and ultimately helps the YouTube algorithm push it out to more people like you. And for that, we would be very appreciative.

[00:07:30] So Josh, I want to talk about the idea of us differing but there is something that, that comes to mind here, that we haven’t touched on it and that’s why are we so worried about what the Fed is doing if it doesn’t directly impact mortgage rates. 

[00:07:46] Josh Lewis, Expert Mortgage Broker: It’s a pretty simple one. Because the Fed is reacting to inflation, what are their policy tools to control inflation?

[00:07:53] So the Fed is reacting to inflation and actually trying to impact its direction In the future, markets are just looking and saying, what do we think is going on? So paradoxically, when the Fed doesn’t act. Parts of the reason why rates are so high is as recently as the beginning of 2022, they were still buying treasuries and buying mortgage backed securities.

[00:08:12] When you say it now, when we’re a year and a half into really high inflations, you laugh. You’re like, that’s insane. They were actually stimulating the economy 18 months ago when we were seeing fairly high inflation. So markets, mortgage backed securities, treasuries started going, whoa, the fed’s outta touch here.

[00:08:28] They’re not raising rates. We’re going to pay lower prices and demand a higher yield on any bonds that we buy to compensate us for this inflation risk that we see. So now for 14 months the Fed has been aggressively hiking rates with the goal of bringing inflation down. 

[00:08:46] When the market believes that the Fed has achieved their goal, buyers for mortgage backed securities, buyers for treasury securities will require a lower yield when they believe the Fed has achieved their goal. And that will happen before the fed cuts rates. So we’re not necessarily looking and saying what the Fed does feeds directly into our interest rates in mortgages.

[00:09:09] It feeds directly into it in terms of market participants’ expectations of inflation going forward. They lost confidence that the Fed understood what was going on. The Fed was hiking aggressively and we don’t have a handle on when we’re gonna get back to that 2% range for inflation. I don’t think anyone really knows right now.

[00:09:29] I believe we will get back to that level. There are really smart people who don’t think we’re gonna get to. They think we’re gonna see three and a half, three to three and a half percent will be what the new normal is. I think we will get back to 2%, but my guess would’ve been late this year, early next year.

[00:09:43] It could be two or three years before we get there. And there are implications inside of that for mortgage rates and what that means for housing and home buyers. 

[00:09:50] Jeb Smith, Huntington Beach Realtor: No. Makes sense. And the Fed has been out of touch, right? We’ve talked about that before, right? And part of the reason is it’s the data that they follow. It’s in the way they follow the data. Some of this data is lagging 6, 7, 8 months even a year at what they’re looking at. 

[00:10:06] And when we talk about the rent shelter component of inflation, for example, when they’re looking at it and say, August of 2021, for example, it’s not showing that rent and shelter data is going through the roof yet because it hasn’t yet caught up.

[00:10:21] So they’re still saying things are transitory, so on and so forth. And you can say that across the board with different, goods and services and what have you. I’m just using the written shelter component and now we’re on the flip side, and they’re essentially doing the same thing, saying, Hey, this data is still reporting way too high.

[00:10:37] Why? Because the data is still 6, 7, 8 months outta touch in some cases. And so it looks like, again, rent and shelter data are accelerating. For example, and the reason I use rent and shelter data is because it makes up such a large percentage of what they look at on the inflation side. That, they’re looking at lagging data, right?

[00:10:57] And so by the time the data actually reports correctly, Have they gone too far for too long? It’s hard to say. A lot of the really smart people out there, a lot of, economists believe that’s actually the case, right? That they’re going to push the economy so far, slow growth so much that by the time they realize that they’ve done it, we’re in a full-blown recession. 

[00:11:19] And some people believe a hard recession or a hard landing, some believe soft landing, regardless of what you believe, you’ve got to have slower growth in the economy, at least on what they’re looking at metric wise for them to pause, pivot, slow, have a more dovish stance on rates. And that’s part of the reason that I believe that there’s a chance that we see interest rates stay higher for longer. 

[00:11:47] I wanna be clear, I do think interest rates are gonna come down in the mid fives, high fours at some point. Is that six months from now? Is it a year from now? I don’t know, but I just feel like. They’re so out of touch and they’re not willing to vary from looking at the metrics that they’ve been looking at that have been lagging on both sides. At the same time, employment is still showing, that the economy is strong.

[00:12:12] You’ve got, consumer confidence. You’ve got, all these sentiment surveys. All of these different metrics basically showing, hey, the economy is still growing, and in turn, That more or less means inflation could potentially be a problem out there, and therefore their foot stays on the gas pedal.

[00:12:30] Which means they leave this belief in the market that we might still hike that that there’s an opportunity there. And what that does, Josh is creates volatility. And we’ve talked about volatility in the markets. Interest rates don’t like volatility, right? They like certainty. And because of that, I feel like.

[00:12:48] There’s an opportunity for rates to stay higher, but I know you’re on the flip side of that. So what are your thoughts? 

[00:12:53] Josh Lewis, Expert Mortgage Broker: Here’s what I would say high for longer because we’ve both been in the same camp for several months now that, the Fed futures market was predicting fed cuts by the end of the year.

[00:13:02] And I’m looking at saying, why would they cut. Cutting is saying that we got it wrong. They’re not gonna say they got it wrong in the near future. They’re gonna say, Hey, we’re remaining data dependent. We think those hikes were appropriate and we’re gonna let them play out. They don’t want a whipsaw where they start cutting and then inflation comes back. So they’re gonna keep those rates higher for longer. 

[00:13:24] I don’t think the market cares what the Fed does at this point as long as they’re seeing underlying data. So we talked about a big piece of the data being inflation reads. A secondary measure that’s probably more important for the Fed right now is unemployment.

[00:13:40] Unemployment is a record low right now, 3.5%. 3.4. We get a new read on Friday. It’s supposed to tick back up to 3.5, 3.6. Either way it’s absurdly low. I’ve been doing this for 27 years. Early in my career, I was always told that. 5% is full employment. The reason being, everyone has a crazy uncle who gets drunk at 8:00 AM and couldn’t show up to a job on time.

[00:14:02] That person is unemployable. So 95% of people can be employed. So if we have 5% unemployment, that’s just the hardcore unemployables that could not hold a job. We’re at three and a half percent. So meaning a lot of those crazy uncles have jobs right now because employers have no choice. 

[00:14:18] Jeb Smith, Huntington Beach Realtor: Anybody that wants a job has a job. Some people have two. 

[00:14:20] Josh Lewis, Expert Mortgage Broker: Yeah. Yeah. And looking at that is a precursor to inflation. We saw Jeb, the Jolts report today, showed that there were a million more job openings than the last month. And you go job openings, then that’s not a good thing. It’s kind of negative for the economy, but look at it as a measure of supply and demand for jobs. 

[00:14:38] Anyone who wants a job has options. There are more jobs available than job seekers or workers. There’s a lower supply of workers than there is a demand for them. So you have to pay more, so you have wage inflation.

[00:14:51] We are not seeing that. We showed the chart on the show a couple months ago, Jeb, that wage growth is moderating back to the normal long-term trends. But with these really low levels of unemployment, the Fed’s fear is employers are going to have to pay more for better employees and that will work its way through the economy as inflation.

[00:15:09] So is there logic to it? Yeah, there absolutely is. Do I think that’s gonna be the case? No. What we’re looking at there largely Jeb, is demographics. We talk all the time about demographics in housing, how millennials, there are so many of them reaching prime home buying age, a much bigger cohort than Gen X, which was a baby bust and rivaling, if not exceeding the size of baby boomers.

[00:15:30] And we’ve underbuilt for the last 15 years. So those people coming into the housing market, there are more buyers than there are homes for them to buy. The flip side, that big baby boom generation is retiring. Xers behind them. Were smaller. Millennials about the same size, but we’re 40 years further down the line.

[00:15:48] Bigger country, bigger population, more jobs. And what we are seeing is there are not enough people to fill the jobs that we have. I think this is a permanent feature of our economy, that we’re going to have low unemployment. And it’s not likely to lead to wage inflation. People are worried about things like chat, GPT and other forms of AI gonna put people outta jobs.

[00:16:11] And the reality is it’s going to save us from having jobs that can’t be filled because we don’t have enough people to fill them. So being able to use automation, technology, AI to do a lot of the mundane, repetitive tasks that people do now will allow people to have more and better jobs and get everything done that we need.

[00:16:30] So long way of saying, I don’t think that the low unemployment is going to be inflationary. I don’t think it’s going to improve in the near future. One of our favorite economists that we like to watch, like to hear what he has to say. Logan Mohtashami over at Housing Wire. He says there’s a line in the sand at roughly 3.3% on the 10-year treasury.

[00:16:49] We will not move below that until you see unemployment over 4%. So is 4% unemployment reasonable? Yeah, it is. But people talk about, Hey, we’re worried about the housing market. The recession’s gonna come and you’re gonna see unemployment spike. If unemployment doubled, it’s at 7%. It’s like half of what we reached in 2008.

[00:17:09] So we’re just in a different world. And when you have changes like that over what we’ve historically had, when you had 300, 400 years of our country with a rapidly growing population, now we have a mildly growing population. We’re not seeing the population in the United States decrease. It’s just growing at a much slower rate, and it has impacts for all of these supply demand dynamics throughout the economy.

[00:17:32] And you only get those questions answered over time. 

[00:17:35] Jeb Smith, Huntington Beach Realtor: The problem I have, Josh, is that, the JOLTS data showed 10 million open jobs, right? And in order for unemployment to really rise, you gotta have a massive, change in what the economy looks like at the moment.

[00:17:49] Because, somebody that loses their job today essentially has an opportunity to go find another job just because of how much availability is out there? So my fear is that we don’t see the rise per se, in those unemployment numbers that we have in the past because of household formations and the things we talked about a moment ago, decreasing over time and the change in the population and the economy and all of that stuff over the last 40 to 50 years. 

[00:18:15] So are they going to change the definition of what they’re paying attention to? Because their whole job is essentially to pay attention to inflation and to pay attention to employment. If employment isn’t really changing very much because of these changes and inflation is coming down.

[00:18:34] Are they going to then start to change or are we stuck? Because that’s my fear at the moment is because they’re so stuck on things that they have done previously versus coming in with a new mindset of, okay, things have changed. We have to change the way we look at it, and they’re not willing to do that.

[00:18:55] Josh Lewis, Expert Mortgage Broker: You’re asking good questions. So there’s a dual mandate. The Fed is charged with accomplishing two things, price stability, which they, during the Greenspan era inadvertently leaked that they define as 2% inflation year over year. And full employment. We said full employment’s, 5%. So they’ve overshot their goal of full employment.

[00:19:14] So one’s outta control and one is undershooting. So they would like to, this is a bad way of saying it, stimulate unemployment. They really want to put people out of jobs because they’ve overshot the mark. Too many people are employed and it’s leading to higher inflation. So those two things come together.

[00:19:31] Now it really truly is something of a stalemate, and I would expect that rates will stay consistent here for the foreseeable future, unless we get a recession that’s stronger than I expect, than a lot of people expect. Although there are those out there that expect a hard landing, a big recession. Unless we get a bigger and worse recession than is expected and it gets employment up well over 5%, we’re gonna have a really hard time seeing treasuries under 3%.

[00:19:59] So let’s bring this back, Jeb. What does that mean for mortgage rates? We talk about the general measure of spreads between treasuries, we say in normal times we follow closely to the 10 year treasury. Now it’s more like the five or the seven year, but stick with the 10 year. Historically, going back to 1972, it’s like a 1.72 spread. Whatever the 10 year treasury is, mortgages average about 1.72% higher than that. 

[00:20:24] So if we’re at a 3.5, 3.6 10-year treasury, we would typically be looking at a 5.3% mortgage rate. We’re not, we’re in the high sixes, we’re like percent and a half above that. We are at record levels of spreads between treasuries and mortgages. So if we get a prolonged period where treasuries stay level somewhere in the three, three to three five range, I think it is reasonable to expect that those spreads will normalize.

[00:20:52] So we just said over the last. 50 years normal is 1.72. Maybe we don’t get back to that level. It’s a whole nother show where we could talk about what drives those spreads and why they’re higher. But if you get ’em to 2%, two and a quarter, two and a half, even rates come down a half, three quarter percent from where they are right now.

[00:21:12] So let’s say you had a two and a half spread between the 10 and the treasury and the 10 goes to 3.3, you’re still 5.75, 5.8 on mortgage rates. Much better level for interest rates, but in the bigger picture, nothing’s changed. We’re still in this range and we don’t have a move to lower interest rates.

[00:21:30] We just have investors in mortgage backed securities getting more comfortable that this is a newer, longer term range. So high for longer to me more than higher for longer. The market every time the 10 year goes back, it’s not reaching new highs. We’ve stopped seeing new highs. It keeps going up outta the range and then comes back down and it goes up and it doesn’t go quite as high as last time comes back down.

[00:21:52] So at some point we’ll see a breakout. And I do think that breakout will be to the downside due to recession. I think it’s farther in the future than most people think. So relating it back to the show, if you’re listening here, you don’t care what Jeb and Josh think about interest rates, you really care what does that mean to me as a buyer or seller of my home? 

[00:22:08] And the reality is, I think it’s more of the same with slight improvement at a much slower pace than most people want or hope. What are your thoughts there, Jeb? 

[00:22:18] Jeb Smith, Huntington Beach Realtor: No I agree. I think interest rates are a piece of the puzzle. They’re not the entire puzzle. They make up a large percentage of the puzzle because Of how much they impact housing affordability. Everybody talks about lower house prices and we’ve talked about on the show. Yeah, it’s nice to get a house as inexpensively as you possibly can, but a lower interest rate will typically impact your monthly payment more than a lower house price.

[00:22:44] And what I mean by that is, if an interest rate drops from 6% to 5% and a house price drops from. 600,000 to $540,000, so it drops 10%. You’re going to get a lower monthly payment by that mortgage rate, dropping 1% than you are by that house price, dropping 10%, and chances are, you’re not going to have an opportunity where you see both, right?

[00:23:10] Everybody wants the best of both worlds. They want lower house prices and lower interest rates. And I think it’s important, Josh, to point out why that’s not likely to happen. And it’s largely due to inventory. It’s largely due to other factors outside of just the couple of things we’re talking about here.

[00:23:29] But Josh, when I say, I want lower house prices. I want lower rates. In fact, we had somebody comment the other day and said essentially that exactly that. They said exactly that both worlds. What’s the response to that? 

[00:23:42] Josh Lewis, Expert Mortgage Broker: It’s not gonna happen because affordability drives demand. So demand is way down.

[00:23:49] So if we, even if we have rates go down to 4%, does that take at current prices, affordability up to levels where demand absolutely spikes? No, but it absolutely does increase. We talk about California, we’ve got about 17% affordability. If rates were to drop from 6.75 to 4.5, we’re probably about 25, 26% affordability.

[00:24:09] Still means three outta four households can’t afford a median priced home. But, We have 50% more families that can. We increased the demand by 50%. So is there an equivalent supply coming to market for those people to buy so that prices don’t get pushed higher?

[00:24:26] There would be some additional supply coming to market. Of sellers saying, Hey, we’ve outgrown our home. We would like to buy a new home, and I’m willing to take on a four and a half rate where I wasn’t willing to take on a six and a half rate. So much like I just said, my belief for interest rates is slow and steady improvement for a longer time without these big drops or, massive improvement. 

[00:24:47] I think we’re gonna see the housing market go the same way. As it improves, we’ll get a little bit more demand. We’ll have a few more sellers. We’ll see some increase in the volume of sales.

[00:24:58] But anyone that’s expecting 2020, 21, 22 volumes anytime soon, I think they’re going to be disappointed. We’re going to see lower levels of demand due to affordability, regardless of what happens with interest rates. So I don’t expect a huge spike in prices. I don’t expect a huge drop in prices.

[00:25:17] So it goes back to Jeb, what we’ve always talked about. You need to be buying when the time is right for you. Cuz I don’t see a recipe for a big change one way or the other. 

[00:25:26] Jeb Smith, Huntington Beach Realtor: No I agree. I don’t like being a pushy type of salesman saying, Hey, listen, If you bought, now you have the best of both worlds in the sense that if rates go higher, you’ve locked in a rate that is lower than a potentially future rate.

[00:25:40] And on the flip side, if rates come down, you’re able to refinance that mortgage in theory, assuming you have equity and all of those things, and take advantage of the new rate. So by doing something now versus waiting to see what the market does, you’re essentially putting yourself in the best position possible. Now, That comes out really salesy saying, Hey, Jeb, you’re a real estate agent, you’re just pushing people towards home ownership. 

[00:26:03] And we’ve talked about it, Josh, we’ve talked about what you should do if you prepare if you’re not going to buy a house, how to prepare to do that. And if that’s your direction, your end goal, great, go for that. But this podcast is really all about the idea of promoting home ownership, what it’s about, why it’s important.

[00:26:21] And so I think, Josh, you nailed it. Buying when it’s the right time in your life. Having money in the bank, having savings, doing things because it’s the right time for you and not worrying about all the craziness and everything else going on. Josh, You’ve said a couple things today that are a bit conflicting in the sense that, you said that you saw a Red economist saying that rent shelter data could potentially go up.

[00:26:47] I’m talking about the idea of it coming down and you’re under the mindset that Another gentleman that we follow, Barry Habib, who’s been, a interest rate predictor for a long time. Very accurately mind you, is also under the belief that we’re gonna get lower rent, shelter inflation data coming.

[00:27:04] So that in theory should lead to lower rates. So what does someone do in this position? If they’re saying, you know what Josh, I’m not buying until I know certainty of the direction of interest rates. So where do you think rates are headed? How do you think that, that differs, that inflation number differs potentially with, shelter data going up or coming down or, what are your thoughts on that?

[00:27:31] Again, I didn’t I didn’t have time to dig into the article that popped up over the weekend. It was from a very bearish website that always finds negative slants on every piece of data to say that interest rates are going to get worse and housing’s going to get crushed. But we talked about many times on the show.

[00:27:46] You don’t stick yourself in a cave and only listen to people who agree with you. You want to hear from the other side. So I did save the article. I will go back and dig into it. I have not yet. But over the next couple of months, absolutely likely to see improvement. Likely to see improvement in interest rates, but I will go back.

[00:28:03] And you look at, again, we follow multiple people. I’ve got at least four people that I trust that no bonds way better than I do. But let’s talk about two of them here, that they don’t disagree with each other. They’re focusing on two different things. Barry is looking at the measures of inflation thinks they will come down and that will bring rates down.

[00:28:19] Logan is saying until we get unemployment above 4%, we’re gonna have a really hard time breaking 3.3 on the 10 year treasury. So that would be what I would be looking at most closely. I think over time he has proven to be more correct. The Fed has been really good at ignoring reads of CPI, ignoring the clear calls that they’re looking at lagging data like you talked about.

[00:28:43] So I think over the next six months, seven months, remainder of the year here, the thing that I’m gonna be watching most closely is the employment figures and also employment is just a precursor to wage inflation. So watch the wage inflation, watch how employment impacts that. And if we do hit a recession, we will see a tick up.

[00:29:03] So the Jolts data that we saw today, Jeb is interesting. And then it says there’s more job openings. What we’ve also been seeing is that the work week has been increasing. For people. So you’re getting conflicting data inside of all of these reports.

[00:29:17] In that, what employers generally do is they stop hiring and they have the employees that they do have work more hours to get the work done. So we also have some thoughts that with current work from home, remote jobs, a job may be posted in 10 different states instead of just in Southern California or just in Tampa, Florida.

[00:29:35] And so you’re getting incorrect reads on how many jobs are actually available. So this is the actual definition of the fog of war. We’re in the middle of this. Everything we’ve said today is accurate. And they’re all open to interpretation and debate. And we follow smart people that take all sides of it.

[00:29:54] So I think we have a really good handle on what the issues are, but only time is gonna tell how they play out. We can think in terms of what are the odds of this to happen this way? We got the NBA finals coming up. The odds are the Denver nuggets are going to win. Is that a guarantee? No, people wouldn’t be shocked. Someone’s gonna run off to Vegas and fed a hundred thousand dollars in the Miami heat to win because it is a possibility. 

[00:30:16] So is it possible that rates go to 8.5%? Yes. Is it probable? No. Is it possible that rates go to 4%? Yes. Is it probable? No. So what’s the most likely thing to happen? From my perspective, we’re likely to trade sideways with a trend down, and eventually we’re going to get a recession.

[00:30:32] It’s going to pop unemployment up over 4%. We will see the treasury below 3.3. We’re not gonna see it back at. 1.1 or 1.2, whatever it was during Covid. But that should be the direction of things going. And whether that takes one year, two years, three years, the trend should be for lower interest rates.

[00:30:49] No, agreed. And I was gonna touch back on that whole rent, shelter component. Just because as a real estate agent, I’m out there. I have clients that have rentals, right? Property management, you have rentals. I can tell you personally over the last year rents have moderated. They haven’t decelerated.

[00:31:07] So my clients aren’t getting less for the property than they were a year ago. But last year we, we were asking for crazy numbers on rent and it almost seemed like almost too much. But yet we had a ton of applicants wanting those properties. Now, when a couple of those came up for renewal this year and we had move out, we essentially came back in with the same number for monthly rent because we’re looking at the numbers going, it doesn’t look like things have increased that much in this area. 

[00:31:36] So we kept it the same. We still had a ton of people looking at it. Now, could we ask for a little bit more? Possibly, but not like we did last year. Last year. We were really stretching those numbers and we’re able to get it. 

[00:31:46] So I feel like that shelter component again, it is moderating and it is going to really reflect in the inflation numbers. But again, that’s just one piece of that inflation puzzle that at the moment the Fed is again paying some attention to that.

[00:32:02] But they’re also paying attention to all of the other things that we talked about today. And ultimately, why I think rates could remain higher for longer just because they’re giving so much weight to so many different components, and so many of those components are still showing, quote unquote growth in the economy.

[00:32:19] With that Josh any final words on interest rates today? 

[00:32:22] Josh Lewis, Expert Mortgage Broker: Hopefully this was insightful. There is not an answer. No one could come on this show or any other show, CNBC, a podcast, in the media and say this is what is going to happen with interest rates. My livelihood depends on this.

[00:32:34] When rates go lower, I do more loans, I make more money. So would I like lower rates? Yes. What I would like and what we actually get are two different things. So hopefully you gotta look inside our heads of what we’re looking at, what we’re trying to analyze every day. This is truly what I believe and what I would expect.

[00:32:51] But as a prudent professional we’re watching the data every day, watching the reports that are coming in, watching the analysis from people that we know and trust and know their biases and trying to project where it’s going. So next month we may feel a little bit differently. We might think, Hey, rates are gonna come back down faster.

[00:33:05] We might think, hey, they’re gonna stay higher for longer, but right now I don’t see the Fed cutting anytime soon. I don’t think that has a huge impact on interest rates. They may want to hike another time or two. But that’s based off of lagging data. So we’re likely to see what we are seeing now throughout the rest of the year with a bias towards lower rates as the spreads between treasuries and mortgage backed securities moderate. 

[00:33:27] So as you’re making a decision, again, Jeb, tie it back into when the time is right for you. This shouldn’t be dictated by interest rates. There were people during Covid who got forced into making a decision sooner cuz prices were going up and rates were amazingly low. It’s not that market.

[00:33:41] You have time to determine what’s right for you and your family. 

[00:33:45] Jeb Smith, Huntington Beach Realtor: No. So with that said, what are your thoughts on rates? Leave it in the comments below. Let us know where you think rates are going, why you think they’re going that direction, and we can have a conversation. But until next time, we appreciate you watching.

[00:33:56] We appreciate the support. Adios

[00:33:58] and 

[00:33:58] Josh Lewis, Expert Mortgage Broker: Vaya con Dios!.

[00:33:59] Thanks for listening to the Educated Home Buyer. Want to connect with us or to a local expert in your area? Please reach out at the educated home buyer.com/expert. If you found any value today, please be sure to rate and review us on your favorite podcast platform. In addition, we ask that you share it with your friends and subscribe to us on YouTube and make sure to follow us on social media.

[00:34:24] Thanks again for listening.

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