Mortgage spreads keeping rates under 7%

HousingWire

On today’s episode, Editor in Chief Sarah Wheeler talks with Lead Analyst Logan Mohtashami about inflation, mortgage spreads and mortgage rates. The two also discuss what to expect next from the Fed.   Related to this episode:   Inflation is rising, but mortgage spreads have kept rates under 7%  https://www.housingwire.com/articles/inflation-is-rising-but-mortgage-spreads-have-kept-rates-under-7/   HousingWire | YouTube⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠  https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q   More info about HousingWire  https://lnk.bio/housingwire   To learn more about Total Expert click here.  https://www.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 the

00:14inflation data, what that means for the 10-year yield and mortgage rates, and what's happening

00:18at the Fed. Before we dive in, I want to thank our sponsor, Total Expert, for making this episode

00:23possible. Logan, welcome back to the podcast. The chart data is here live on inflation day,

00:30something that I will not be addressed as because Sarah Rilla will refuse to call me chart daddy,

00:35but it's okay. Inflation day, I'm here. Jobs day, I'm here. 10-year yield day, I'm here 24-7.

00:41Listen, the comments on YouTube alone are just gold on this. They're like,

00:46I should be calling, everyone wants me to call you this. Then there are people like, wait,

00:50why is Sarah Logan's boss? Yeah. Yeah. And why am I still a guest on this podcast? It's our podcast,

00:58you know? Why? Okay. So why am I your boss? So I'm the editor-in-chief. So I'm in charge

01:05of all

01:06the content. And so you are, you know, you're not a member of the newsroom. You're a different kind

01:11of employee for us. I'm technically not an employee. I'm a contract. I'm a contract.

01:16But I manage you and I also edit you. I think that's the main thing is that, you know, you're

01:21boss, but I'm basically, I'm basically the person who edits, edits your work and, and has you on this

01:28podcast, which I love, but I will not be addressing you as chart daddy. So I'm glad other people do

01:34though. It's great. It's great. Live and let live. Okay. We have a lot to cover inflation. Oh my gosh.

01:40Okay. So tell me about what you saw and whether you were surprised.

01:44So this is a very interesting day with my economic work because, you know, I do 10-year

01:49yield channels and spreads and mortgage rates and try to, you know, work off of that. And

01:55one of the reasons why I had 460 on the top end is that, you know, the growth rate of

02:02inflation was

02:02picking up toward the end of the year. And if the growth rate of inflation picked up and the labor

02:06data

02:07got better, then 460 on the 10-year yield, 6.75% mortgage rate is in play. That's very reasonable

02:15because the mortgage spreads are better. It's hard to get kind of above 7%. But today's inflation

02:23number, of course, headline inflation was hot, 3.8%. We're going to have a oil impact. And kind of

02:30remember, a lot of people were confused because they saw shelter inflation really pick up. And that's

02:35core inflation, which the Fed really cares about. But because of last year of the government shut

02:40down and we like didn't report anything, you know, it kind of skews the year over year data

02:46to a degree. So inflation is up, but the 10-year yield is now holding that 4.45, 4.46

02:54level for the

02:55fourth time. And, you know, with inflation and the labor data stabilizing, people would assume,

03:02why aren't rates or the 10-year yield higher? Just remember that, as always, 65% to 75% of

03:09where

03:10the 10-year yield and mortgage rate can range is still Fed policy. We have a lot of rate cuts

03:15in

03:15the system. Before the year started, they were looking to cut two to three more times for this

03:21year. That would have, you know, getting to 3.80% to 4% would have been a little bit

03:26easier. It's hard

03:27for me to get the 10-year yield under 3.80 with neutral policy at 3%. But in any case,

03:35as crazy as this is going to sound, the conflict is actually more important than the inflation

03:41and jobs data right now. Because, you know, we had a good jobs report on Friday, but the 10-year

03:49yield fell because the conflict was not ending. Inflation is up. Inflation now, we're testing this

03:54level now four times because the conflict is still going on. And, you know, now it looks like

04:00President Trump might want to try to wait out Iran for their economy to collapse. And a lot of people

04:05are like, well, they've been under sanctions for like four decades. You know, maybe they could

04:11wait longer than most people think. So inflation is up. The labor data stabilizing. But because the Fed

04:19has a lot of rate cuts in the system and they haven't guided higher yet, the 10-year yield is

04:24kind of holding that ground right there. And we're closer to the peak of the 10-year yield forecast.

04:30But as always, Sarah, hug a mortgage spread, man. Okay. Where would we be if mortgage spreads

04:38were of the levels that we had like in 2023 or 2024 right now?

04:43So it's Wednesday, or excuse me, it's Tuesday morning that we're talking about this. And when

04:48we wrote that article yesterday to kind of frame the mortgage spread discussion, and the reason I

04:55really want to highlight mortgage spread, it's hard for me to get like mortgage rates below 5.75,

05:00even if spreads are getting better. But if we had the worst levels of 2023, today with 6.52%

05:10as the

05:10mortgage rate pricing of the day, we're at 7.67% in 2023 levels. I mean, we are, you know,

05:22if I take 2024 and 2025, which really was the spreads getting better, you're kind of in that 7.10

05:29to 7.30

05:30range, even to in that area with 2024 and 2025 spreads taking the worst levels. So we're over 7%

05:40easily with today's pricing. And the reason I say that is big deal, because we just do not

05:45operate well in the housing market when rates are above 7%, if you're looking for growth.

05:51And that's been the thing in the last few years, we get rates low, demand picks up,

05:55then also rates go above seven. This year, not the case so far. The high, I think this year was

06:01about

06:016.64. So hug a mortgage spread, you know, our weekly pending home sales data was multi-year

06:08highs purchase application has been mostly positive. That's mostly because the spreads are

06:13better and the rate curve is lower this year. So it's kind of weird to think about this, but with

06:18rising inflation, rising oil prices, a conflict in the Middle East, jobs data stabilizing, it's the

06:24lowest rate curve to start the first six months of the year. And that's all mortgage spread. So buy it

06:31a

06:31drink, get a selfie with it, take it out on a date, you know, get it a good Christmas present,

06:37whatever you guys want to do. Thank one because it could be a lot worse this year without the

06:42spreads improving. It could be so much worse. Okay, so let's look back to it was January, right? We were

06:48in Salt Lake City doing intercap event. That was such a fun event with Mitt Romney was actually on stage

06:56with you. That was such so much fun. Right before we went on stage, we found out that the Trump

07:01administration announced that Fannie and Freddie would be buying mortgage backed securities, which

07:07you at the time, you're like, this is a defensive move. This keeps the spreads better than they would

07:12be otherwise. What do you think about that move today? You know, in my Machiavelli mind, I'm thinking

07:18maybe they knew they were always going to go after Iran. And just they announced the spreads

07:24in January as a defensive mechanism, because if yields go up, because oil prices go up,

07:29at least you could, you know, soften the blow a little bit. But yeah, I mean, I thought it was

07:36a

07:36defensive measure more than an offensive measure. And, you know, and today, Kevin Warsh got confirmed,

07:42we're going to have a brand new Federal Reserve chairman. And oh, boy, Kevin Warsh's first year,

07:50wow. Talk about, you know, conflict. Austin Goolsbee is already talking about, you know,

07:57hey, listen, inflation is a problem. And not only that, service inflation is a problem.

08:02So and he's going to be voting next year. We talked about that in the last podcast. So

08:07we are going to have, I mean, get your popcorn, get your Coke. It's not going to be in those

08:14movie

08:15theaters where you have those super seats and just watch this civil war really take off because

08:21it's going to get very, very interesting with the Federal Reserve and Trump. Trump wants to take over

08:26the Federal Reserve. He wants to get people out of there and put his own people in. So they have

08:30enough votes, the battle for the votes out here. But now the question is, you know, some of the

08:35people that might have aligned with Kevin Warsh and Trump on rate cuts, do they become doves? If

08:41that's the case, he doesn't have enough. So there's a lot going to go on with the Federal Reserve over

08:45the next 12 to 18 months. And we're all here for it. But for now, the growth rate inflation's up.

08:51The conflict is still kind of running the show here. Labor data has stabilized. But as long as

08:57the Fed doesn't guide higher, you know, 4.60 is the peak I have this year. And I said, it's

09:03going to

09:04take a lot to really get it over there. And we'll see how the next few weeks turn out with

09:09this

09:10conflict. People are used to looking at the inflation data to think where the Fed's going.

09:16You, over the last couple of years, have talked about labor over inflation, that you feel like

09:20that's more important. In this environment, it seems like labor and inflation maybe are,

09:25you know, less important than what's happening in Iran. Would you say that?

09:30Currently, right now, because, you know, one of the reasons I had that March 21st, I said,

09:36if the conflict is going past March 21st, something went wrong. It just, it doesn't seem

09:42plausible to me that when everyone is complaining about inflation and you still have tariffs and

09:48the Supreme Court shot down the tariffs, and then you raise the tariffs to 10%, the Supreme Court

09:52shots that down. Now with beef prices and copper prices, with all that, you would start a conflict

09:59conflict that you're not 100% in control of. Like, you just don't know. Things could get really

10:06bad out there. But because this has lasted longer, and now we are in kind of the, you know, how

10:12the

10:12Romans used to like surround the castle, you know, and just wait people out until they lost food.

10:18We're sitting here now, possibly with the tactic being, and we don't know, maybe they, maybe a deal

10:24gets done. This might be a few months before we get this. And it's just with diesel prices and food

10:31prices and everything, and we're going into a midterms. Oh, we don't know. We just don't know

10:37at this point. Of course, there's not fighting going on. I think that's the reauthorization from

10:43Congress might be part of that. But for right now, nothing really gets cleared up until the conflict

10:50is over. And then oil prices, you've got to remember, oil prices were $56. Real wages are

10:58now negative now because headline inflation has gone up so much that it's outstripping 3.8% CPI

11:04versus 3.6% wage growth. Now wages, I mean, real wages are now negative. For a while there,

11:13that was something the White House talked about, that your real wages are growing. So

11:17it just seems like, I don't know, not maybe something I would have done in a midterm election.

11:23But in this case, we are here. And until the conflict is over, I think a lot of the economic

11:29data takes somewhat of a backseat because we just don't know how worse it could get. Or

11:34maybe 48 hours, they get a deal done, and we've seen what happens. Bond yields typically go down,

11:39oil prices typically go down. It's going to take a little bit longer for oil to get kind of flowing

11:43again with a supply out there. But still, every day that goes on just gets more and more iffy.

11:50We've talked about inflation a lot. And it's specifically that Trump would want to see like

11:55gas prices at a good level. Starting last year, we talked about that. Today, I think about how the

12:02effect on the housing market. And it seems like something really hard to track in the data. But

12:07like, I'm just going to say anecdotally, it's anecdotally, but I am, I'm a person who lives

12:12by myself, I go to the grocery store, and I cannot believe how much I'm spending at the grocery store.

12:17If I had my four kids still at home, if I had all of those teenagers in my house, I

12:23mean,

12:23at what point does that sort of inflation, can you see it in the data? And when it comes to

12:29like

12:30buying houses, or from your perspective, is this all too short term to have an impact?

12:35No, I, to me, the housing market revolves around the 10 year yield. I've never seen,

12:43I've never seen food inflation, really. Now, you can make an anecdotal theory if you really wanted

12:50to say, well, if you are moving to an area where you need to drive 90 minutes to work, and

12:58gas prices

12:59are up, do you change your for your job? I don't, you know, I mean, a job's a job, you're

13:04going to

13:04have to pay the pay the gas costs. So I think there's more important things that goes into a

13:11home purchase or selling a home and buying another home than where oil prices are for this week.

13:17But I mean, when you think about grocery prices over the this whole year, grocery prices and now gas

13:23prices together, those those are some of the biggest expenses people have.

13:26Yeah, but if you're, if you're talking about housing, the disposable incomes, like if you look

13:31at the, the amount of money that we actually spent on food and gasoline is actually lower than what it

13:36used to be in previous decades. So because of wages and dual household incomes, shelter costs,

13:43you know, either you want to rent or own a house, the 10 year yield has more of a mortgage

13:48rates have

13:49a more of a better live variable that moves with home buying and home selling. Like we're going to

13:53have, we had, I always say it this way, we're, we had near 5 million total home sales in 2023,

13:592024 and 2025 with the second biggest, most unaffordable time in history. And this year,

14:05we're going to be a little bit higher than the last few years. And the peak in the last decade

14:11was

14:11around 6 million. So we're missing a million people that are probably mortgage buyers in there.

14:17And a lot of them are first time home buyers, but that to me is just the affordability of housing

14:21as a

14:21shelter. I don't, you know, food prices and, and, and, and, and gas prices to me impact renters

14:29more than they do home owners and home buyers because home owners and home buyers tend to make

14:34more money. They have more financial assets. The top 20% of the country who are mostly homeowners

14:39are doing well and they're spending money on DoorDash and buying tickets and airlines. I don't think

14:45that, that impacts as much, but renters, especially single household renters, lower income, uh, single

14:51household renters that impacts that more than, than, than home buying and home selling to be buying as

14:57well. So again, just a continued affordability challenge for first time home buyers, right?

15:02First, first time. But I think to me that the stress really comes from renters, single household

15:08renters, because if you think about inflation, inflation is the same for everyone to a degree in terms of

15:13food prices and energy, but the lower income scale, the more you pay, you know, for that,

15:20because your wages are, or your total incomes are much different than a homeowner. So I've,

15:24I've always thought that home home homeowner, first time home buyers are renters right now.

15:28Rent renters, but in a sense, uh, renters get disproportionately hit with food inflation and

15:35gas inflation because they make less money. And that's why they're, they're getting hit just at

15:40the time when maybe they want to be buying houses. No, I don't think that's the case. I think

15:43low income home buyers are never, I think one third of one third of society are lifelong renters and

15:48they're never going to be home buyers. That, that group tends to get hit harder with rising gas prices

15:52and rising food prices because their wages don't really, or total income doesn't really, uh, match

15:59homeowners and home potential home buyers to your question out there. So that's why, I mean,

16:05Jerome Powell says this a lot too, in, in, in, over the last few years that disproportionately the lower

16:10income bracket gets hit harder during inflationary periods, uh, because more of their total income

16:16goes into, to, uh, food costs and energy costs. It's true. Unfortunate. Um, okay. What else are you

16:22looking at this week? Well, it's, we have still have a lot of, uh, uh, data left, but to me,

16:28I,

16:29it's the tug of war with the 10 year yield right now. We are at a very, very key level,

16:33uh, uh, kind of four 45. We we've held it now for four times. As I'm talking to you right

16:39now,

16:39the thing hasn't moved for like two hours. I want to see, does this break? Does this go higher?

16:44Cause I know a lot of bond traders are like now thinking maybe the, maybe the bond yields are

16:49like, Oh my, maybe the next move is a hike, you know, cause we're getting to levels where boy,

16:54you, the fed, either the bond market is saying, Hey, the fed, you're behind the curve or the fed's

16:59going to have to guide something higher. Cause there's a reason why we're staying here. Cause

17:02there's a lot of rate cuts. So the rest of the week, I want to see, do we hold this

17:06level again?

17:07Uh, and, and do we have any kind of positive news from the, from the conflict? Uh, uh, and then

17:13we go

17:14into the weekend and all these weekends, uh, uh, going out, but we also have PPI inflation coming

17:19out as well and see how that reports and see, see how the bond market reacts to these, uh, new

17:23data

17:24lines and, and statements from fed governors, especially those that might be new voters next year.

17:29Never a dull moment. Logan Motoshami, never a dull moment. So glad that you're here to keep

17:34us up to date on all of it. And we will talk again soon. Pleasure.

17:40Pleasure.

17:42Pleasure.

17:43Pleasure.

17:47Pleasure.

17:48Pleasure.

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