How inflation is going to impact mortgage rates

HousingWire

On today’s episode, Editor in Chief Sarah Wheeler talks with Lead Analyst Logan Mohtashami about how inflation is going to impact Fed policy and mortgage rates.   Related to this episode:   Inflation jumps to 3.3% in March as energy leads CPI surge  https://www.housingwire.com/articles/cpi-3-3-march-gasoline/  HousingWire | YouTube⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠  https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q  More info about HousingWire  https://lnk.bio/housingwire   To learn more about Total Expert visit totalexpert.com   The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate.

Transcript

00:09Welcome, everyone. My guest today is lead analyst Logan Motoshami to talk about those inflation

00:14numbers and what that means for mortgage rates. Before we dive in, I want to thank our sponsor,

00:19Total Expert, for making this episode possible. Logan, welcome back to the podcast.

00:24It is wonderful to be here. I am in Boise, Idaho. This is my third time here. And you are

00:31in what,

00:32San Antonio? San Antonio, here for a auto mortgage event. Yes. And, you know, for a change, you know,

00:40of course, the ceasefire and everything. And by the time this podcast comes out on Monday,

00:44who knows what's going to happen. But this is actually going to be an economics discussion,

00:50not so much tied to the war. And we've had some inflation data last week, and it's not heading

01:00in the right direction. And of course, some of the energy stuff is now oil related. But the question

01:06is, you know, can rates stay elevated longer than people think? Because we're not making any progress

01:14with inflation. The jobs data, because the Federal Reserve has really lowered the bar for what they

01:23deem to be acceptable. And this doesn't mean rates go back up to seven or eight or 8%. But it

01:30does mean

01:30that, you know, we could probably stay a little bit higher than what people thought. I know some

01:36people thought, you know, when wars comes into place, you know, rates can maybe go down. But,

01:41you know, the inflation data is not helping the Federal Reserve or the White House.

01:48Okay, so explain that a little bit. What did we see in the inflation data? And how

01:51is that data influenced by what was happening with the war? Is this all pre-war?

01:57So, before the war started, Powell basically said, we see goods inflation picking up about half a

02:06percent to one percent. He was 100 percent correct. If you look at the PC inflation, which what they

02:11track, the goods inflation is accelerating. That's all tariffs. Don't let anybody else say anything

02:20otherwise. That's the embedded cost that, you know, foreign countries aren't, you know, taking all the

02:27hits or companies. But the Federal Reserve said, listen, we think this will kind of wind itself out.

02:34And one of the reasons why I thought rates could go higher early in the year obviously wasn't the

02:39war. But if the Federal Reserve has a very, very low bar for jobs and inflation is above target,

02:47you know, the 10-year yield between 430 and 460 is not out of the question. We were in that

02:53bull pattern for so long. And we were under four percent before the war.

03:02But the Federal Reserve really wants to get the word out that the labor data

03:10means we're probably not hiking or anything like that. But

03:15inflation is going the wrong way. And now the war has come in, and that's going to put embedded

03:21inflation for some time. And obviously, oil prices are still 98, diesel prices. So we have to get things

03:27going, right? This is why I thought it was strange to have this event during an election year, because

03:34you can't control everything in this kind of war with the Middle East. And things take so slow getting

03:41back online that it is something to ponder for the rest of the year, that if we do get just

03:4930 or 60,000

03:51job growth and inflation is still sticky, you know, maybe it's harder to get those last two rate cuts

03:59into the system. And, you know, that just means that we're testing how the housing market reacts to,

04:08let's say, 630 to 660 rates, where the sweet spot was really six and a quarter and under with no

04:15volatility.

04:16You know, imagine the entire year that way, you know, not getting below 5.75% or anything like that.

04:24The setup was good, but it becomes a little bit more tricky because the Federal Reserve has said,

04:32PC inflation, we know it's going to rise, but we think it's going to run up. And now you've got

04:35the

04:36war impact and now the input cost from that. So it's a tough spot to be in.

04:41So if I'm sitting out here, I'm, I work in mortgage or real estate. I'm like,

04:45what should, what does this mean for, for rates? What is like your rate, your rate range goes all

04:51the way up to what? Seven and a quarter. I mean, does this mean 5.75 to 6.75. I

04:59shaved a half a percent

05:00off this year because the spreads got better. So you keep that range, but you know, people that thought

05:09rates could go a lot lower, Kevin Walsh is going to cut rates or all that stuff. I think there

05:15needs

05:15to be a reality check that inflation was an issue before the war. And now we have the war,

05:22the war is still going on and the Federal Reserve has basically given dissertations and paperwork

05:29that say, we are okay with very, very low job growth in terms of taking that next step forward.

05:37And you know, that was, that's what I thought the early part of the year would be. And then when

05:43the

05:44goods inflation starts to dissipate, the Federal Reserve will get those last two rate cuts into

05:50the system. Now it's like, you know, boy, there's the goods inflation. You know, the Federal Reserve

05:57said, okay, you know, the 10 year, the CPI inflation report came out. It was a little bit hotter than

06:02people thought, but the 10 year yield didn't do much, but it's still kind of in that 430,

06:07right at the tip of the bowl. So it is, it is something to ponder going out where

06:14labor over inflation, the labor data was so soft and wage growth is going softer that the Federal

06:20Reserve will get those last two rate cuts in. But we saw data yesterday from the Atlanta Fed that,

06:25you know, wage growth is picking up from job switchers. So there's a lot of moving parts that are

06:32things to keep an eye out going out because I think so many people are into, okay, the labor

06:37market's breaking, the feds behind the curve and this, but the data in the last 30 days has

06:45definitely made things a little bit more interesting because now we have to deal with

06:50the input and inflation for more. I think that wage growth number is really interesting because

06:55you've always say that the, that's one of the things that Federal Reserve really cares about.

06:59They want to see wage growth come down, right? So the fact that wage growth went up,

07:04even in some sectors is not good news for them. Well, here's the, the BLS jobs wage growth that they

07:11get out every Friday, it's three and a half percent. So that has seen a noticeable decline. The Federal

07:17Reserve also came out with another paper saying that, Hey, listen, it looks like, you know, inflation's

07:22running at 3% because wage growth is higher for the service people. Not a lot of people remember

07:28this, but when service inflation and wages were really kicking up higher for, for service workers,

07:35you know, uh, uh, Christopher Powell came out. I mean, uh, Christopher Waller came out and basically

07:41said, Hey, listen, we have to attack the labor supply. Wage growth is too strong. Attack the labor

07:46supply. Attack the labor supply. So they've gotten their wage growth on the BLS jobs report is, but

07:52now it's like, you know, now we have to keep a little bit more eye because I truly believe this

07:57with every fiber and myself that if wage growth got the 3% and under the fed, the fed changes

08:03there too.

08:04Um, but now that inflation is up wages, basically now inflation is running higher than some wage growth

08:12data. It's a very, it's a very complicated year now, uh, because now we have to deal with the war

08:18inflation until we get things back going again. And, you know, ceasefire here deals here, Lebanon,

08:24Israel, all these things, you know, who knows, but time, right. You know, you're, you're, you're,

08:31every day that goes by, it just, the, when we don't get ships going, it just takes longer and longer.

08:36So it is something to ponder going out for the rest of the year, because I,

08:40I truly believe like a lot of people just saw the, well, the labor market's breaking,

08:44the fed's behind the curve and we're going to do this. But if the federal reserve is telling you,

08:48like, Hey, listen, 30,000 plus is okay. And we have inflation picking up before the war.

08:54And now we're going to get the war inflation. It's, it's something to be very, very mindful

08:59for the jobs data going out for the rest of the year that you can have very little job growth.

09:04But if wage growth isn't decelerating even more, the fed might, you know,

09:09the last two rate cuts that were supposed to happen this year might be

09:14strung out a little bit longer out in the future.

09:18So just to be clear on your, for your forecast, and obviously you did the forecast before we knew

09:24there was going to be a war, you don't, you don't forecast over 7% rates, mortgage rates.

09:29I don't, I don't change my forecast unless like, like something really crazy has to happen. I know

09:36the war might be something really crazy, but that's the, the faster the war gets done,

09:41you know, you get that out. My thing is always about the labor market more than the war. Like

09:46the labor market is more important to me than Kevin Walsh or anything else.

09:50So if you look at the history of economic cycles, every single year rates move kind of in a range,

09:56right? That's, they don't stay constant. But this year, it was really good before the war started

10:01that under six and a quarter, no volatility spreads are better. But my, my concern going

10:07out for the rest of the year, if the fed is starting to signal that low job growth is acceptable

10:14and the inflation data doesn't get better faster because they really counted for the PCE inflation

10:20to start getting those tariffs off. And now we pass it on to war inflation. Oh, it just makes it

10:27a

10:27little bit more tricky. Uh, um, and I think that's part of the reason why the 10 year yield didn't

10:31really move that much. The federal reserve has told everyone, listen, we're going to look past

10:35through this. And by this, you know, second half of the 2026, that inflation will run itself

10:41of course. So the faster we get things going, get ships moving, get diesel prices down,

10:47get that embedded inflation out of us. We can just work with the original premise that the

10:52federal reserve thought we'll, we'll look past this, but I'm, I'm keeping an eye on wage growth,

10:57you know, because if for some reason that firms up, that's something that was not in the playbook

11:04for 2026. Uh, uh, so I'm going to be a little bit more mindful on that wage growth data.

11:10Any other economic data you're looking at right now? Well, you know, one of the things

11:14going out for, you know, now in the future is how does this war impact retail sales?

11:21How does the war impact consumption? Um, because one of the things Nick Tamera has told everyone,

11:28because I know this is what the federal reserve wanted everyone to know if the war is over and oil

11:33prices fall, then we don't really have to worry about demand destruction. Well, the ceasefire is

11:39technically on, but oil prices haven't fallen down. So that's another variable where, you know,

11:45the federal reserve says our dual mandate is employment while employment's really low, but

11:49can this war shift the service sector demand off and then you get more layoffs? No, it's, it's, it's,

11:56it's that, that, that is something that I'm going to keep a little bit more eye on, on the consumption

12:01data, uh, uh, going out there and in the investment data. Uh, but, uh, um, the, the war did complicate

12:08things due to the timing, right? I think if, if there was no war, obviously you don't have embedded

12:13inflation or you're not talking about energy prices, but, uh, we would have said, well,

12:19goods inflation is picking up, but the federal reserve told us we're okay with that because it

12:24should dissipate in the second half of 2026. But now I'm a little bit more mindful that

12:29with diesel prices and transportation costs and everything, you know, things go, I'm going to give

12:34you guys a very good example. I have somebody that comes in and clips my cat's nails and she just

12:41said,

12:41you know, she's raising the price because of gas, you know, she can't, she drives around.

12:47For real? Oh yeah. So she said, you know, I'm going to have to increase the price because

12:53the cost of gasoline, that's what higher gas prices do. And then when you think about diesel

12:59prices, transportation, that's so much of food is good. Those things get to go up and that's why

13:04energy shocks. You have to be a little bit mindful that if they have a little bit of duration,

13:09especially with diesel. So it's just the timing of it was, was, was not the best, but

13:15we are here. So we have to deal with the data by Monday. I don't know what's going to happen

13:20over

13:20the weekend. We have the supposedly talks with, with our, with our around, but anything that

13:27progressive forward gets us good, but boy, we really need to see the goods inflation start to

13:35tick down, especially in the second half, because the federal reserve basically said, Hey, we will look

13:39past this, you know, because we think it's a one-off, but if that doesn't occur,

13:45Kerr points, it's going to be a really interesting second half with the fed. And when Kevin Walsh

13:52eventually comes in and takes over that job, but we'll see when that happens. I, I, I, I have no

13:59faith that Kevin Walsh will get approved. I know you're skeptical about this process

14:03at this point. I would not, if I was him, I would, I still haven't seen him. I have not

14:07seen any

14:08pictures of Kevin Walsh. We're going to put him on milk cartons and wanted signs or whatever. But for a

14:13guy

14:14that was always, you know, uh, getting out there, you know, now he's just in the background. So, uh,

14:20it's, it, it became a more complicated year than it needed to be, but here we are. And our job

14:26is to

14:26talk about it every day, but, uh, after inflation week and some of the things that's happened, you

14:32know, I know a lot of people thought, well, why isn't the 10 year yield higher? Well, the federal

14:36reserve did tell us they're going to look through this, but now we have this other issue here with,

14:40with embedded, you know, I'm in Texas. So we traditionally have very low gas prices compared

14:45to, especially where you are in California, all of that. And I drove down to this event and we're

14:51very close to $5 a gallon, which for us, $5, that's like normal for us in California.

14:57I know, but for us, it's a shock. And I, you know, you and I've talked before about the fact

15:02that energy

15:03costs are something that people see every day. And then that's why it was one of the things that, uh,

15:08president Trump would have on his, you know, on his, like, here's, here's the three things

15:13he needed to do if he wanted to do some other things. And one of them was lower mortgage rates,

15:18lower gas prices, right? Uh, the dollar, right. And which one am I missing there?

15:23So yeah, the Trinity impact, uh, uh, yeah, for, um, November of 2024, I thought there's three things

15:30that the white house wants. They need a lower dollar. They need lower energy prices and they need

15:34lower mortgage rates. If they're going to do this trade war thing, those three things,

15:39because we're a consumer nation every single day, they see low gas prices, they see lower mortgage

15:44rates. And when the dollar gets slower, they can export stuff, you know, uh, uh, make more money.

15:49I think president Trump used those exact words. We can make more money with a dollar lower. They

15:53cannot have a strong dollar, high energy prices, uh, and higher mortgage rates, and then do this trade

15:59war, a hundred percent tariffs, one hour, reduce it to whatever, you know, that stuff is. So, um,

16:06that's gone on the energy side. The mortgage side is still, we're still at the lowest rate curve

16:11for the start of the year. Right. Uh, uh, so that that's different, but, uh, of course this happened

16:19and, you know, a lot of other presidents have declined to go attack around just for this issue.

16:26Uh, but because it's an election year, it just, it makes it a little bit more, uh, uh, problematic

16:33in terms of, we got to get things get going again. You can't have the straight of home who's not

16:39working for six to nine months, man. The whole global economies are, are, are, are, are running

16:45off of that. Uh, so hopefully by the time this podcast comes out, something positive happens where

16:50it's a firm deal. And I think a lot of parties are kind of in the same thinking, okay, we

16:55can't,

16:55we, we can't hold up the entire world economy for, uh, uh, this, something has to get done.

17:01Well, Logan, thanks for being on this every single day. Um, so appreciate you. I know we'll talk soon.

17:07Also, everybody talk soon. And you know, I got, I got this mug, this mug says labor over inflation,

17:13right. And, um, for the first time, I mean, you've had one like that, but this is new merch from,

17:19uh, I got a, I got a brand one from PMR mortgage. Uh, yeah. Labor over inflation, but, uh, it

17:25is,

17:25it, it, it, it did get more complicated this year. And, uh, for all of you that are going to

17:30go to the

17:31gatherings. Oh, I'm going to have a wartime inflation economic presentation. That's adjusting

17:35to everything that just happened in the last six weeks, because some of the things, the dynamics that

17:42were very, very positive to start the early year have dissipated to a degree. And I'm just hoping

17:47that we can get things back going again. Yes. We want to see everyone there. Logan,

17:52thank you so much. We will talk soon. Pleasure.

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