S2E37 – Are Mortgage Rates Headed To 8%?

Mortgage Rates and Bond Yields are Hitting The Highest Levels In Decades as The Fed still sees upside risks to inflation possibly leading to more rate hikes. At the same time, we are seeing a tight labor market along with strong economic growth. Will the FED continue to pause with interest rate hikes or continue to push rates higher? How will the fed’s decision affect the housing market in 2023 and 2024? In this episode, we discuss the idea of mortgage rates heading higher 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/joshlewiscmc ➡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: 

Are mortgage rates headed to 8%, possibly even higher, how could that affect home prices? In today’s episode, we’re gonna dive into mortgage rates in a little bit more detail. We’re gonna talk about what causes mortgage rates to go up, what causes them to go down, and what we’re likely to expect over the next couple of months, possibly even into next year.

Josh, we’re talking about mortgage rates here. Volatility at the moment, crazy in the market. Rates are reaching the highest levels we’ve seen in 23 years. Where do you wanna start? 

[00:00:47] Josh Lewis, Certified Mortgage Consultant: That is a great question. I think we’re more of the point of capitulation, we used that term a couple times today, but you and I read a ton.

We have a lot of excellent sources. We talk about reading smart people on both sides of any argument, whatever that may be, and seeing their points and perspectives. The flip side of smart people with good arguments is online comments. 

And whenever we see rates spike like this, Jeb, we get a version of the comment, “Told you guys. Rates are going to 8%, probably higher, nine or 10. And inflation’s going to the moon and the economy’s going in the tank.” 

So what we’re gonna do today is we’re gonna examine all of that because they can’t all happen. Probably any of them can happen, but they cannot all happen. We’re gonna talk about how we got here. What the path forward, either for higher rates or lower rates is. 

But I think a good baseline for everyone to start with, Jeb, is to understand what has to happen for rates to go to 8%. We’re not far from there. Now we’re around 7.5%. So if we look at that, treasury securities are the gold standard for bonds around the world. 

Mortgages are packaged into bonds sold as mortgage-backed securities, probably the second safest investment in terms of bonds. But they’re very different. And it’s important to know that treasuries, lead, mortgages follow. 

So we’ve always said, for the last 40 years, it’s been an average spread between the 10 year US treasury and mortgages of about 1.7%. Right now when you look at the 10 year treasury, the spread is about 3%. 

It dips a little lower, goes a little bit higher and it never is just consistent at 1.7. It’s gone as low as 1.3. It’s gone as high as 2.1, but about 1.7 at any given time. So as of today, we have the 10 year treasury fighting a battle here at 4.33%, which is an important technical support level.

The bears are trying to push it higher. The bulls are trying to push it lower. We’re looking at this and just keeps bouncing around. I look up, we’re up 10 basis points. I look we’re down 20 basis points. You don’t normally see that type of intraday volatility, but at 4.33% and a 3% spread, it tells us 7.33, 7.34, which is about where interest rates are.

So to get to 8%, you have to see the the 10 year treasury go to about 5%. So [00:03:00] we’re gonna go through all of the things that impact bonds, treasury bonds, mortgage bonds and what would have to happen for them to get there. And what we also have to see for mortgage rates to moderate. 

We’re not gonna get to into the discussion today, Jeb, is what does moderation mean? It doesn’t mean 2.75 or 3.25% on 30 year mortgages like we were at the end of 2021. But it does mean a good bit lower than where we are today. Eventually. 

[00:03:23] Jeb Smith, Huntington Beach Realtor: Yeah. And let’s take a minute here and talk about technical levels. ’cause I think a lot of listeners out there, your average homeowner, your average home buyer, seller, even real estate agents that listen to the show don’t understand technical analysis.

They don’t really probably care about technical analysis to some extent and nor should they in many ways. But 4.33% is a number you mentioned. Why at the moment is at a technical level? Because in the past we’ve said technical levels were 3.80 and 3.40 and 3.20. And so there’s all these technical levels that we keep talking about and why they’re essentially the line in the sand.

And so what happens when you hit that line, so to speak and come back down in this case. And or what happens when you pass that line and close above it? ’cause I think it’s important to give people an idea of what we’re talking about here. 

[00:04:10] Josh Lewis, Certified Mortgage Consultant: Jeb, one of our favorite analysts, Matt Graham is fairly dismissive of technicals.

He thinks technicals are witchcraft. 

[00:04:17] Jeb Smith, Huntington Beach Realtor: But he uses them. 

[00:04:18] Josh Lewis, Certified Mortgage Consultant: He uses them. And you and I have talked how it is always a fundamental trigger that moves the market, but it is amazing how those fundamental news events, data show up at critical support or resistance levels.

So the 4.33% level is a pivot going back, what did we say? It was a couple of years. A number of years. So it can be a pivot, meaning a point that proved to be support or resistance, strong support or resistance in the past, and that’s what we’re looking at right now. 

It can be a Fibonacci level. There are a few others, but those are the key ones. You don’t need to know what they are. They’re not important. And Matt Graham is correct that the fundamental will be the thing that causes us to either break through 4.33 and go higher. Or bounce off of that and go lower. 

[00:05:02] Jeb Smith, Huntington Beach Realtor: Yeah. Now, and with that said, above 4.33% there are other levels. So what happens is these levels are support and resistance. It’s important to understand just because you pass 4.33%. Now that level becomes support on the way down or on the way up, however you’re looking at it here.

So it’s a lot to throw out at you. But knowing that if you pass above this 4.33% line and depending on when you listen to this episode it comes out about a week from when we’re filming it. We could be beyond it. We could be well beyond it. We could have hit that level and actually come back down, which is ideally what we would like to see.

In today’s episode, we’re gonna talk about that in more detail. 

[00:05:40] Josh Lewis, Certified Mortgage Consultant: And we’re really not gonna go in the weeds on this, but before we leave the technical analysis and the weird behind the scenes stuff we were talking before the show, and I think the reason why we’re seeing this crazy volatility, not only are we at that important pivot at 4.33 and seeing whether we’re gonna go higher or lower, we also have an unprecedented amount of short interest in the bond market.

Meaning lots of [00:06:00] people have made very big bets that yields are going to go higher. So with that, Jeb, you have a theory that you can tell us a little bit about, which is accurate, that we have light trading here in the summer. It’s easier to manipulate the market and we have this big short position of people, I think traders want to see yields go higher so they can make some money. You wanna go through that seasonality and how that impacts. Yeah, 

Traditionally speaking, so as somebody who studied the stock market had a mentor in trading options for a long time and study technical analysis, understand it all, is that during the summer, summertime is a choppy time in the market. For stocks, for bonds, for everything.

And the primary reason for that is because a lot of the big traders out there, they take off from trading during the summer. They go to the Hamptons, they go on vacations, they’re doing other things versus watching the market religiously like they do during the fall and in the spring markets.

And so what you have is less experienced traders driving the positions out there in the market. And so in those times, it’s easier to control positions in some regards because you have less active traders in the market. And so we’re coming to the end of that, right? Where kids are heading back to school, you’re starting to get into that fall season of the market.

I’m not sure, calendar wise, if it’s Labor Day that this all starts again, or what have you. But we’re coming to the end of the season, so to speak, where the professionals, the money managers, the market makers are back in the market and kind of dictating where things go.

So it’ll be interesting to see if that’s accurate or if I am part of the whole witchcraft that you mentioned a moment ago. 

I think you’re definitely a wiccan witchcrafter, so that’s gonna be my theory. But Jeb why don’t we start with what are the things that have led rates to go higher? In the last 60 to 90 days, we’re up at least a half percent.

We held in the upper sixes for two, three months. And over the last, like we said, 30 to 60 days, we’ve made that push up into the low sevens. Now closing in on the mid sevens and there’s some data there that’s causing that. We will go into detail on what the Fed does and doesn’t control here, but what is the Fed looking at and what is their objective?

[00:08:02] Jeb Smith, Huntington Beach Realtor: They’re looking at everything, in theory, right? So they’re looking at inflation, they’re looking at employment, they’re looking at what’s happening with job openings, just everything, right?

They’re looking at all of this data, they’re looking at shelter data and CP I, I mean everything. They’re really taking a broad view of all of this information. But, some of the things that they want to see or need to see in order to slow what they’ve been doing in the past is to start to see some breaks in the economy.

And so what’s happened on the flip side is that the economic data is coming in really strong based on everything that’s happened in the market, right? So you have to realize coming outta the pandemic, just flooding the economy with money. And, after a time when there were job layoffs, people at home, all of these different factors playing into the market.

And a lot of people out there calling a recession for the better part of a year and a half. Me being one of those people thinking there’s no way that all of this money gets pushed into the market [00:09:00] and then essentially gets pulled away. While a lot of people have chosen not to go back to work, some people are expecting, Hey, the government should still support me to some extent. I’m not going to work. 

And I look at that and go something has to break here. You can’t have all of that happen, and then all of it taken away. All of a sudden there’s no recourse to some extent. And on top of that, you’ve got the Fed hiking 12 times in the better part of 18 months, taking rates up to 5.5%, right?

So you’ve got money becoming more expensive for businesses, credit cards, anything that’s tied to short term rates, right? So cost of money is going up. There’s less money out there in the economy. We know that savings that were saved during the pandemic are essentially going to be gone, per the Fed, as of the end of the third quarter. So the end of September, that money is gone. 

And so I look at all of these things and go, you have to have a slowing economy. It is slowing Josh, but not in a meaningful way, and because of that, we are where we are. Right? And you can go in and say what the Fed controls and what they don’t control. We’ve talked about it many times.

But the reality is the data on paper looks really good. And we know some of this stuff is lagging. We know the effects of raising interest rates 12 times hasn’t necessarily had its full impact on the market. It takes time for that to hit, takes time for all of that to flush out the system.

The problem is the Fed doesn’t look at forward looking data. They look at what is happening right now based on the data that they have and many times data that’s two, three months old. 

[00:10:36] Josh Lewis, Certified Mortgage Consultant: A hundred percent. So from that perspective, the, remember the Fed has a dual mandate. Price stability, which means keep inflation under control and full employment. So we’re at full employment and the funny thing is they’re trying to push employment to a worse level. So unemployment to higher levels. We’re at 3.5%. They would like to see four and a half, five point a half percent unemployment because that ultra low level of unemployment leads to flush consumers who spend money, which pushes prices higher. 

So you can see there’s a balance here of what they’re shooting for. And I will go back and say, it is very easy for us to sit here, us, you at home, us talking, any expert anywhere, talking on tv, writing for a newspaper to say, Hey, the Fed, they’re idiots. They don’t know what they’re doing. 

These guys are all PhD economists. They may not have much real world experience, but they know numbers and they know statistics way better than you and I do. And they have access to the greatest data in the world. No one has better data. So you can quibble and argue with what they’re doing, but not with the logic that goes into it because they’ve thought it through.

Jeb, what does this mean? We are the educated home buyer here in the grand scheme of things. Why would someone be listening and wondering what’s happening with the economy and therefore treasuries and then mortgage rates? It impacts affordability. 

There’s only three things that go into affordability. Home prices. Interest rates. Income. So interest rates are probably the biggest, most volatile [00:12:00] component of that, the thing that can correct and change the most over time. So if rates go to 8%, what does that mean for affordability? 

And does that just mean we have continued lower sales? We just saw existing home sales Jeb an annual pace of 4.07 million, about as low as we’ve seen going back to the late nineties. But what does it mean if we have interest rates go significantly higher from where they are right now? 

[00:12:22] Jeb Smith, Huntington Beach Realtor: If I’m being honest it’s hard to say for sure. We know some things are gonna happen, right? We know that there’s gonna be less transactions probably in the marketplace. Does that mean we’re gonna drop from 4 million home sales to 3 million? No, it doesn’t. 

You’ve already flushed out a good amount of the buyers that are moving because it’s nice to move or because they’re in that early infancy stage of home buying and the payment was really attractive because of low rates. Those people are gone. You’re now dealing with the people that are moving because they need to move. 

Or the people that are just not affected by rates. They’re cash buyers. They’re comfortable with the payment. They aren’t worried about necessarily the rate that they’re paying as much as they’re looking at the payment. I think most people are looking at the payment more so than anything else.

But there’s this mentality out there that you are looking at your rate, you’re looking at your home price, you’re looking at all these things and all of those things are important. I don’t want to say that they’re not, but the reality is, can you afford the payment? Does it make sense to you? Can you continue to pay it? Do you have a longer term time horizon? 

These are all the things that we talk about all the time. So those are the things that we want to make sure we get across, but, To get back to your question, higher rates means less transactions in the marketplace, in my opinion.

Basically slower demand is what it means. So less transactions taking place. And with that, you’re likely to see some markets, depending on how much inventory they have, those are the markets where you’ll see home prices adjust more to the downside. We’ve had an inventory problem for the better part of three years.

Since essentially the pandemic happened. Inventory has continued to become less and less year over year. So at the moment, I think we’re sitting somewhere around 497,000 active listings on the market nationwide. So when you look back at 2015, Which was a quote, more normal time in the market. I think you’re looking at 1.2, 1.3 million homes on the market during that time. 

So a lot less inventory to choose from. And that does a couple of different things in this environment. When rates go up, less people are gonna be putting their homes on the market for a number of reasons. One, again, we talked about affordability in the past. People just not being able to or want to make that move because prices or monthly payments are more expensive. 

And also that with less inventory on the market you have those would be sellers, potential sellers that, that want to move, are okay with the rates, okay with the payments. But looking at the inventory and going there’s nothing out there for me to make that move, to make me want to put my home on the market or to keep my home and buy another [00:15:00] home.

Therefore, there’s just less of that happening. And so it just creates this spiral inventory being the key driver of everything that’s happening here on top of rates. And I think Josh, a lot of people have been cheering for higher rates, secretly, if they’re not homeowners.

Because they believe that higher rates lead to lower home prices or a crash in home prices, and that is going to give them this golden opportunity to come into the market and buy what they’ve missed out on for the better part of three years, five years, 10 years, depending on what they were waiting on.

And they think that’s the magical formula when in all reality, higher prices are just gonna make things less affordable or higher rates rather, gonna make things less affordable and higher prices too. But… 

[00:15:47] Josh Lewis, Certified Mortgage Consultant: That is the number one fallacy. And I will say, I’m not gonna speak for you, but I’ll say for myself, if we go back to one of the live shows from 2021, I said, “Hey, rates can’t go much above 5% ’cause it impacts affordability and home prices will have to come down.”

That was the mindset. You can look at affordability, that you always have plenty of willing demand, people wanting to buy homes. But affordability impacts the amount of able demand. How many of those people actually can go out and qualify for the mortgage to buy that house. 

So there is no doubt that interest rates going from 2.75 to 7.5% has drastically reduced the amount of able demand. Not willing demand. Still lots of people out there that are not homeowners, that want to become homeowners, they just cannot qualify for the mortgage. 

What we failed to account for was the decrease in supply. We went through the numbers on the live show last week that it is astounding. The average DTI for a homeowner right now, debt to income ratio for a homeowner is 20%, and the average payment, I think was $1,400.

You have to go back and look at it. When you hear that and you go 20% of household income going to the principal and interest payment at $1,400, those people are rock solid. You’ve said many times, people do not sell to become renters. Very rarely do they sell to become renters. 

[00:17:01] Jeb Smith, Huntington Beach Realtor: Or homeless for that matter?

[00:17:03] Josh Lewis, Certified Mortgage Consultant: Or homeless, yeah. They’re either gonna post up and stay put because they have an amazingly affordable payment, or they’re doing so well that they’re not afraid of the new payment, or they’re forced into moving cross country to be near a parent to be near a new job. So what we’re seeing is really low transaction volumes, which leads to stable prices. Low sales volumes. 

So that is the dynamic we’re seeing. Much as you pointed out, we have enough buyers that are well qualified and sort of immune to the low affordability that it’s keeping prices not shooting up, most of the year over year figures are slightly positive. A couple are slightly negative, but pretty much at zero. Month over month, coming through the spring buying season, they’re almost all positive.

So affordability as it is impacted by interest rates is unlikely to change prices. Now ask me again if rates go to 10 or 11 or 12%, what that does? We don’t have any distress. We don’t have any forced sellers. So we don’t have [00:18:00] additional supply coming. Supply will continue to decrease if rates go higher and prices are likely to stagnate.

Does that mean coming down 3%? Does it mean going up 3%? Could be either. We don’t know. But with that, Jeb, you wanna talk about what are the things that we need to look at that will dictate the future direction of interest rates and whether we make a run at 8% or get back down under 7%? 

[00:18:19] Jeb Smith, Huntington Beach Realtor: I think inflation being one of the key components, right? We’ve talked about inflation, we talked about what’s the Fed looking at, right? So they’re looking at inflation. Inflation has fortunately come down from the height of what, June of last year at 9.1%. 

Headline inflation to I think we’re sitting somewhere around 3% today based on the latest numbers. We talk about core inflation and we can get into detail there, but the reality is they’re looking at inflation, and inflation is moderating.

They’re looking at job openings. We talked about that. Less job openings in the marketplace you think would be a good thing. But the problem with job openings is that it gives employers an opportunity to pay more to get employees which in theory produces wage growth. Which is something, believe it or not, the Fed actually wants to slow, right?

Not only do they want unemployment higher, they really want wage growth to slow as well because when people are making more money, they go ahead and use that money in the economy to drive prices up and driving prices up creates inflation and essentially is counterproductive for what they’re trying to accomplish.

So if you notice, in the latest job numbers last month we saw unemployment actually go back down. I think it’s sitting at 3.5%. We saw wage growth go up again, 4.4%. But we actually saw job openings decrease a little bit during that same period of time. 

So what we need is we need job openings to go down. We need unemployment to go up, need inflation to come down. We really need bad economic data. Is that fair to say? We don’t wanna see a bad economy, right? I don’t wanna see us go into a recession. 

But the reality is, I think it’s coming whether it’s now or Six months or a year from now.

That’s the reality. So the quicker we get into it, the quicker we can come out of it. And it doesn’t necessarily work that way, but that’s what the fed’s looking at, right? They’re looking at data and data driven decisions. They’re making their decisions based off data. And so with that, Josh, you have some Fed members still talking about the possibility. We got the Fed Minutes from last month, about a week ago, and the idea out there was still, Hey, listen, if inflation isn’t moderating or continues to spike, we are prepared to continue future rate hikes. 

And so what we need is a more dovish fed in order to take the volatility outta the market. The Fed has been very transparent in, in what they are planning to do, and they’ve more or less followed through with that. To, to some stuff. 

[00:20:46] Josh Lewis, Certified Mortgage Consultant: Here’s what they’ve done, Jeb. They’ve claimed we are data dependent. We’re gonna go where the data takes us. But then on this topic of inflation, they’ve been very wishy-washy about what they look at.

So what scared the ever living bejesus out of everyone last year [00:21:00] was CPI spiking to 9.1%. Okay? So then they said we really prefer PCE because that is a better measure, less volatile than CPI. Earlier this year, they said we wanna look at the super core. So core strips out food and energy, ’cause they’re volatile and not directly impacted by fed actions.

So they said housing is lagging. All of our measures pick it up late. So while it’s decreasing, it shows that it’s still increasing. While it’s increasing, it shows that it’s moderated. Part of the reason why the wizards at the Fed kept stimulating the economy when inflation was getting out of control in late 2020.

So from that perspective, They’ve moved the goalpost. But let’s just say, take ’em at their word that they’re doing their best, they have the data. What they really want, they don’t want a bad economy. They don’t wanna worsen the economy. They want a Goldilocks economy. 

So they’re saying 3.5% unemployment. That’s great. It’s great that 96.5% of people have a job, but it can lead to a little bit hot wage growth, which can lead to inflation. And say, okay, inflation core in the threes. Our target is 2%. And you may be saying at home why isn’t it 0%? I don’t like prices going up on anything. If as a consumer, the prices are gonna go up 2% a year, you are unlikely to delay major purchases ’cause in three years it’s 5% more, 6% more. 

In five years, it’s 10% more. So you’ll make that buy now. If it’s at 0%, you say, ah, what do I care? I’ll buy whenever I absolutely need it. And if you actually have deflation is the worst of all because you get no growth in your economy. ’cause if you know that the new truck you need is 2% less next year and 5% less in three years, you hold off, there’s an incentive to not buy things. 

So inflation gives people enough of an incentive to act. Keeping it moderate in that 2% range means that it doesn’t get out of control and become problematic and raise prices too much over the long haul.

So that is their objective and what they are looking at. So depending on the measures, so we just talked about different measures, CPI, PCE and Core and Super Core, which also strips out housing. We also, Jeb, have to look at what timeline are we looking at. 

The preferred measure is year over year. If we look at year over year, the numbers are down, but not where we want ’em to be. But if we look at 90 day, a three month moving average, a six month moving average, they’re down in the twos for the number that we’re looking at. If we look at super Core over the last six months has been under 2%.

So it’s not to say that, hey, the Fed should stop and declare victory. It’s saying that there are numbers and all of them are lining up to show that we are trending in the right direction, and yet it probably will be difficult and take a little bit longer than expected to get down to 2%, but it is interesting that in light of that, over the last 60 days, We’ve seen rates accelerating when inflation is moderating.

So above and beyond inflation. What else is moving and impacting interest rates right now since inflation tells us that interest rates shouldn’t be dropping like a stone, but probably should be moderating right now. 

[00:23:52] Jeb Smith, Huntington Beach Realtor: We talked about treasuries a moment ago, but before we do that I want to just mention like there’s a percentage of the population that says, Hey, [00:24:00] inflation hasn’t moderated at all. The prices are still really high. Understand inflation is price growth.

High prices aren’t inflation. So just because a price goes up and stays at that price doesn’t mean inflation is still there. That’s just the new price. That’s how inflation works. So just, be clear out there.

But Josh, before we jump into that, let’s talk about stagflation because there’s a percentage of people that believe, hey, we’re going to have economic growth and inflation basically happening at the same time. Is that something that is a possibility? 

[00:24:34] Josh Lewis, Certified Mortgage Consultant: So let’s give the simple definition of stagflation. It’s a cycle of slow growth, high unemployment, and high inflation. We just talked about unemployment. Due to demographic factors, the boomers are retiring in Mass. Gen Xers right behind them were a little bit of a baby bust. Millennials behind them are yet another big generation. But in terms of population growth, our population is still expanding in the US but it is growing at a much slower pace.

So because of that, if you look, you talked about the Jolts report, the job opening and labor turnover. When we look at that, there are almost two jobs for every unemployed worker. So if we had 0% unemployment, we would still have 4 million jobs unfilled in the United States, and none of these metrics are perfect, but it tells you where we’re at.

So are we likely to have high unemployment? And if we doubled, we’d be at 9%. We, or 7%, we still wouldn’t be within a mile of the 12% that we reached during the Great Recession, which everyone wants to talk about. Hey, it’s coming. Everyone’s gonna lose their jobs, they’re gonna lose their houses. This is how prices are gonna moderate and we’re gonna have interest rates stay high.

And it’s like a fever dream of someone who sat back and said, what are all the things that would have to happen for home prices to crash and me to be able to buy a home at a really affordable price? For all of those reasons, those things are unlikely to occur. Stagflation, could you have slow growth and high inflation?

I suppose. It would be led by the things we had back in the seventies that our government had no control over. With oil we had no energy independence. The current administration put your politics aside, they are very clearly anti-fossil fuel. So we went under the previous administration that was pro-fossil fuel and we had incentivized getting our own fossil energy here in the US. 

The answer’s probably somewhere in the middle is where we need to be pursuing, but it would take oil and energy costs getting out of control and that trickling through all of the other things in the economy. It would take food getting much more expensive.

So we’ve seen a little bit of that with the war in Ukraine, but it’s moderated. It seemed to be somewhat overblown. So for all those reasons, we are very unlikely to have inflation continue outta control while we are having slow growth. 

I think we are going to get slow growth, but I also think inflation is absolutely going to moderate over time for any number of reasons. The three primary ones being demographics, an aging population that is less productive and growing at a slower rate that’s [00:27:00] deflationary. At least disinflationary. Technology is deflationary or disinflationary. All of those things come to bear here and tell us that inflation should be under control.

The last one that people like to talk about, Jeb, deficit spending. We have monster spending post covid, massive government debt. Interest rates are going up. Tax receipts are decreasing. That’s inflationary.

Over time, academics have thought that all the way back to the eighties. When I was a kid, Jeb, we had the debt calculator in New York City and they would things share the thing rolling over and we were almost like $2 trillion of debt. And now we dream of the day when we only had $2 trillion of national debt. 

But it’s always been a thought there that this borrowing is going to be inflationary ’cause who’s going to buy these bonds? They’re gonna demand higher and higher yields. What the academics have proven over time is that the money to repay that debt comes away from productive purposes.

We showed a chart a few weeks ago that 88% of the federal budget goes to non-discretionary spending. So only 12% can be allocated to productive purposes. So if we have growing debt and higher interest bills on that, it has to come out of that 12% and go over to the non-discretionary to pay our debt back.

That’s meaning it’s coming away from productive purposes and is likely to lead to slower growth going forward. So I’m a hundred percent on board with slower growth. I think inflation will moderate. It’s definitely taking longer than all of us think. But 2, 3, 4 years forward, we’re gonna be back to that pre pandemic, one and a half to low two percent inflation rate. 

And then the last piece, high unemployment, I guess you could make a theory that AI’s gonna put half the population out of jobs, but the reality is it augments their ability to do their job and makes them more productive. 

[00:28:38] Jeb Smith, Huntington Beach Realtor: Yep. Agreed. And so with that, Josh, let’s get back to the kinda the premise of the show. Are mortgage rates headed to 8%. I’ve been wrong about rates. I’ve looked at the factors that we’ve talked about here. The factors that we mentioned earlier and said that the rates can’t continue to go up. The Fed can’t continue to hike the Fed funds rate because the interest that they’re paying on their own debt is going up.

And already we’re, fiscally irresponsible as a country to start with. How are we ballooning our debt and trying to service that debt with everything going on. So with the idea that there’s no chance, right? I’ve been wrong. 

That said, you just try to do the best you can with the information that you have and try to make educated guesses based off the information out there. And there’s a reason that people don’t predict rates, right? They primarily look at the 10 year treasury yield, right? Like Logan Mohatashami from housing Wire. He doesn’t predict rates. He more or less looks at the 10 Year and makes predictions based off that. So with that said Josh, where are we headed?

Where do you think we’re headed? Are we headed to eight? Is that, is it a possibility? Is it something that could realistically happen in 2023? And where do you see rates going? 

[00:29:48] Josh Lewis, Certified Mortgage Consultant: It could happen. We just, we gave the formula. You have a 5% 10 year treasury and the current 3% spreads. So could that happen? Absolutely. I don’t think it’s gonna happen. I think that would be some level of a ceiling there. Kind [00:30:00] of a worst case. 

I also think if you look Jeb, we talked at our, our mid-year forecast for what was gonna happen in the second half of the year. We talked about all of the forecast, mortgage Bankers Association, NAR, Freddie Mac, they all have really good economists that forecast this.

And the numbers were, Hey, we expect to end the year in the mid fives to mid sixes range. Pretty much across the board. No, no one said, Hey, 7.5 to 8%. And yet 60, 90 days later here is where we are at. So in looking at everything, I do expect the inflation numbers to moderate through the rest of the year.

I expect we’ll see slightly worse jobs numbers, which will make the fed happier but not happy. Because it’s not going to break in a way that’s going to push them to say we’ve totally got this under control. So long way of saying Fed’s probably out of the game in terms of rate hikes. Say 60% chance that there’s no more hikes, 40% chance that they hike one to two more times.

But absent a big shift, they’re also not likely to enter the market and start making cuts. The most aggressive analyst and forecasters are saying, March of next year. I think March of next year is aggressive. It may be middle of next summer before we see a fed cut. So until we start seeing things break that way, there’s not a great reason to expect a move lower in interest rates.

So this is a wide range, so it’s not gonna be super valuable to you. But if you ask me where do we end the year, we’re four months, three and a half months away from the end of the year. 

That’s a crazy thing to say here, we’re three and a half months away from the end of 2023, Jeb. We’re getting old. Or at least I am. You’re you still young and youthful. 

But we look at that with three and a half months left in the year. Where are we at? Where are we likely to end the year? I’d say somewhere between seven and seven and a half with eight, eight and a half a possibility. And also you could sneak back into to the high sixes.

But a lot has happened over the last 60 days so when we say there’s 115, 120 days left in a year, then absolutely a lot could happen the other way. But I think we’re going to see more of the same ’cause there’s not enough data coming. And some of the things like CPI and PCE, you can reverse engineer. They’re going to improve, but they’re not going to improve as much as it would need to make a big break to the downside.

And the market is having to adjust to all of the additional supply from the government having to issue more treasury securities. So until that stuff breaks one way or the other, I don’t necessarily think we’re going to see a move to lower interest rates. 

Bottom line, what does that mean? It means we’re at, if we’re not at, we’re near a peak in interest rates and we will see improvement. But I thought we would see, when we did that mid-year forecast, we would see a slow grind to lower interest rates throughout the remainder of the year ending in the low sixes. I think we’re probably gonna see a slow move sideways with a little bit of a grind lower and you’re probably somewhere around 7% at the end of the year. 

[00:32:51] Jeb Smith, Huntington Beach Realtor: You don’t know what you don’t know and so instead of forecasting what’s happening here, I think the economic data continues to [00:33:00] get worse. And not worse in a way that everything just falls apart.

But I think a slow, like you, you mentioned that grind lower. I think that’s what happens with employment numbers. I think that’s what happens with wages. I think that’s what’s gonna happen with a lot of data out there. Consumer debts at a trillion dollars, credit card spending is at all time high.

Like those things are gonna continue to get worse. Unemployment is going to continue to soften which is going to give the fed more and more reason to move sideways and hopefully start to change their language in what they’re looking for, meaning less volatility in the market.

And with that, you’re likely gonna see rates come down. Now is that gonna be this year? Is it gonna be next year? I think I would like to say we’re at the peak of rates this year. It’s hard to say, but I do think as the Fed starts to cut, which is gonna happen sometime in 2024, after you start to get some job reports and the idea that the growth in the economy is slowing.

 So, again, if you’re out there at the moment and you’re buying a house, understand that home prices aren’t going very far. And I think that’s really important to note. Higher rates just mean your house price is less affordable. Doesn’t mean that you know your house price is going to drop by 20, 30%.

That’s not realistic because of the lack of inventory out there in the market. And we already know there’s enough demand out there to keep up with inventory. That’s why we’re seeing competition in the market right now. That’s why we’re still seeing people buy houses and do the things that they’re doing. 

If rates go higher, is it gonna change? Maybe a little bit, but it’s not gonna go away entirely. And I think that’s really important to know. So know if you’re buying a house, again, it’s one of those things if you get rate quotes, lock your rate if you’re comfortable with the payment. You might not like the payment, but if you’re comfortable with it, just lock.

Don’t play the game. Don’t worry about, could you get an eighth lower. That ends up biting you. Lock your rate. And then don’t expect to be able to refinance in six months. It might take a year, it might take two years for you to be in a position to refinance. 

And if prices were to go down, if there were was a flood of inventory, which I don’t expect to happen, but if there was, you could be in a position where you’re not in a position to refinance. These are all important things to note. 

So anybody out there telling you, marry the house, date the rate. Great slogan, but the reality is, afford the payment. Have a longer term time horizon. Make sure you have money in the bank. Make sure you’re comfortable with all of these things.

You don’t have to be happy with them. Just make sure it’s comfortable. So Josh that said, it’s my thoughts. 

[00:35:32] Josh Lewis, Certified Mortgage Consultant: Absolutely. Make decisions for the long term. We’ve seen, over the last 18 months, as things have changed, people saying, Hey, I’m gonna do a two one buydown and I’m going to refinance before we really get to any adjustments. 

I’m gonna have the seller pay cost. Well, Cool. It’s not free money ’cause the seller also would’ve reduced the price of the home. As Jeb said, some loans do not require an appraisal. If you were to see a dip in home values, FHA/VA/USDA, the [00:36:00] primary ones that if rates drop regardless of what the value of your home is, you are able to refinance that assuming you’ve made timely payments and still have good credit.

So if you’re considering a conventional loan versus an FHA, and you’re concerned about dips and prices in your area, it could tip the scales towards the FHA. During the last downturn, the government came back in and said, Hey, we will come up with a program where you can refinance a Fannie Mae or a Freddie Mac loan if you’re underwater.

If we saw a big dip like that, they might do it again, but you wouldn’t want to count on it. So make decisions over the long haul of what is right for you. I think anyone who can afford a home and it is the right time for them and has a long-term time horizon is going to come out just fine.

Interest rates are high. They are impacting affordability and impacting the pace of appreciation. We are undersupplied in most markets throughout the country in terms of homes available to buy. Absent lower interest rates, sellers are not going to choose to sell. They have record levels of equity at record, low interest rates. They’re not going to be forced to sell. 

So we have an impasse, a stalemate, so to speak. So buy when it’s right for you. Make the best decisions for you. Plan for the worst and hope for the best. I think better days are ahead, but for the foreseeable future we’ve got gridlock in interest rates, gridlock in home prices, and we’re likely to see more of the same until we see significant changes in the economy and employment and all of that fun stuff.

[00:37:22] Jeb Smith, Huntington Beach Realtor: Agreed. There was a percentage of people out there, Josh, a couple of months ago, waiting for rates to improve. I’m not buying until rates improve. Guess what? Home prices have gone up. Rates have gone up. It’s that much more affordable now. Not pushing you to buy a house, but just understand, you can’t control those factors.

You gotta buy when it’s the right time for you. Be comfortable with the payment, everything that Josh said, which brings us back to our slogan, which is buy right, borrow smart, and build wealth. Until next time, adios! 

[00:37:51] Josh Lewis, Certified Mortgage Consultant: Amigos. 

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