Let's Talk Housing Episode 84: 7% Rates Are Back

Hello, everyone. Welcome back to another episode of Let's Talk Housing. I am Brennan Thomas, economist and co-host alongside Steven Thomas, chief economist and founder of Reports on Housing. So today we are going to talk about 7% rates, a bunch of wonderful stuff going on in the housing market that keeps us so, so busy. But before we get into that, like usual, Steve, what is going on in your neck of the woods? Cross-country, flag football, soccer. And then, yeah, that's what it is. Non-stop. But at least we have a new driver in the house, our flag football player. She can drive. She got her license. And so that helps on, because we, our licensee, the one that had the license, driver's license, went off to school to run cross-country, which is fantastic, D1, that's fun to watch. So she's running cross-country, but that was our driver. Now we have a new driver in the house. So that helps so that he can, she can take her brother to school and back. And we're not going back and forth any longer. We just have Zeke around a lot of times, which is a lot of fun. So that's what we're doing. How about you? What's going on in your neck of the woods? Yeah, we've just been extremely busy over the past couple of weeks, and I can say months as well. Pretty much what we've been working on behind the scenes is something called Nerd Lab HQ. I think we talked a little bit about it last episode, but I'm just going to show off this shirt for the listeners who can't, I guess, see this in the video version. Go check it out on YouTube, or you can check out our social media posts because we have it all over there. We just released an interactive platform where you're able to go back and look at data in the past. You can go down into cities. You can really dig deep into the data. We make it very user-friendly. You can share things very easily with all your clients. You can pretty much make it your own, I guess, powerhouse for all the data. So it's been a lot of fun, and we've been keeping it sort of under the wraps until recently. And yeah, Steve, what do you have to say about it? I'm super excited. We just want everybody to geek out with us. We invite everybody to be nerds, so that's why we had developed NerdLabHQ.com, and all of our subscribers can go there, navigate there, for it's part of the subscription. So we're just adding more and more layers of value. Every other week, a report comes out. At the end of the month, a sole report, a lease report, and now they have access to information where they can dive into, get a lot more information at their fingertips where they can dive into the cities and see what's happened to inventory, demand, expected market time, solds over time. So a lot of fun. We're super excited about it. We just launched it this week, last week in September. Yeah, so if you guys are interested, you can go check out one of our latest YouTube videos. I did a tutorial pretty much showing some of the stuff for subscribers and what to expect, but you can also see all the things that are included with that sort of subscription. So you can subscribe today on our website, and yeah, there you go. So now let's get into the normal podcast procedure. So Steve, what has been happening in the last few weeks with real estate? And I know it's been a tough couple of weeks. So what has been happening with supply, demand, and expected market time? Yeah, so I mean, we'll talk about mortgage rates in a moment, but really the biggest thing that happened, the Federal Reserve met, and they met, and pretty much what they say is unanimously, you just can't quite read, when you read all the print, kind of sounded like it was unanimous. I don't know if it was, but there was a quarter point rate hike. And there was also forward guidance, which this is what Kevin Warsh wants to get rid of. It's called the dot plot. The dot plot talks about where they think interest rates are going to go for the rest of the year, which I'm okay with that, kind of, but I have a problem like he does. It also shows you where each of the members, there's 19 members, put where they think rates should be for this year, where they will be next year, where they will be even the following year. They don't have any clue as to where they're going to be next year, let alone even, they might be confused as what to do for the rest of the year. This year, there's a lot of data, and there's a lot of uncertainty that's out there. So Kevin Warsh wants to get rid of that, but we got those dots. And Kevin Warsh actually abstained from that, so there's only 18 dots, not 19. So they're all the voting members, and they say, this is where I think that the Federal Fund's short-term Federal Fund's rate, it's an overnight banking rate, it's not 30-year mortgage rates. That's the long end of the curve. This is the short end of the curve, overnight banking rates, so there's 18 dots. What they're saying is that they went once, that they're going to go a total of three more times, and so that's really what's happening behind the scenes, and you can already feel it because we've had those elevations in interest rates, but we'll talk about that in a second. But you go, and you look to see, and so they did do the quarter-point rate hike, which was for us last week. You're going to get this on Wednesday, and when we drop this, it'll be two weeks ago that they pulled the trigger on a quarter-point rate hike, and that's pretty much the biggest move, biggest data point that's come out in the last couple weeks, because when this drops, the podcast on Friday is Jobs Friday. So it's pretty much jobs and inflation that runs things, and it's also the Iran conflict that's running things, and it's what the Fed has to say. So these are all the indicators that we're watching, and there was a manufacturing indicator that came out that shows that manufacturing is a little bit busier than what they thought, so the economy might be a little bit busier than what they thought, which adds more pressure on inflation, and that's why they're talking more and more about increasing down the road. Awesome. So we are now around 7.5%, unfortunately, and that comes after riding the line at 5.99% mortgage rates earlier this year for a 30-year fixed mortgage. So how much higher can mortgage rates truly go, and what will really move them from here, up or down? Yeah. So if people go, I remember when they were 8% back in 2023, that was with the 10-year treasury being a lot lower, and now the 10-year treasury is higher than that amount. As a matter of fact, it is so much higher that we would have had interest rates if we had that same spread, very, very close to 8.25, making their way towards 8.5%, but we don't have that. We have a much better spread, so that's why interest rates are a bit lower, and they made their way all the way up to 7.5%, which was recent. And so we went from 6% to 7.5%. Can it go higher? It's getting to the point where it's a pretty good return on these 10-year treasuries, and it just takes one hiccup in the economy, and there will be a flood to purchase bonds, 10-year bonds at that time, and mortgage-backed securities. Right now, they're all holding off, but if there's any hiccup in the economy where anything was showed that it was slowed down, you'd see that there'd be a lot more people that were entering the market and purchasing them again. They stopped. They've been selling them more than they've been purchasing them, and that's why rates have been going up. Now, why would they do that if the economy slows? There's that pressure because it's really high. The return's really high, so if you're going to buy a 10-year treasury, you want to get in when it's good and not that it's going to continue to go up. So what they're doing is they're trying to buy their time before it goes up any further, and then they're going to be in down the road. And when they get in, they'll get in, and you'll see that rates drop pretty quickly. And that's just because I think it's oversold right now as far as they're not buying them, but it's like they do it to extremes. This is oftentimes what happens, and that's kind of what is currently happening right now. And it's pricing in all of these future rate hikes as well. That's why we're at the level that we're at. Now, how high could we go? Shoot, I didn't think we were going to get to 7.5 as quickly as we did. As a matter of fact, you wrote down on here for your notes that we're around 7.25. We had to change it to 7.5. Why? Because we popped. We popped fast, and mortgage rates moved fast. But that was this major absorption of a lot of recent news. One of the biggest reasons that we've seen them go up is couple-fold. First, we heard from the administration that it doesn't look like the Iran conflict is going to be done until after the election, and that the Iran regime that's there right now is trying to take it to the current party that's in the House and the Senate and the presidency, and then try to make it really hard for them to come to the election. And that's kind of what the storyline was, but that was the first time that we heard that they're not close to a deal, that, uh-oh, it's way off. And so then that moved the economy really, really fast. It moved it. I mean, moved the rates really fast. Then we had, at the UN, we had both our president, Trump, as well as the leader, one of the leaders of Iran, get up there and pretty much say the opposite of each other. And that kind of spooked the markets even further, made it look like they were even further apart. So that was also another catalyst. And so oil was going up, another catalyst. So there's just so many. And then we had that PMI report on manufacturing that was really high, and that was another catalyst. It was just so many catalysts all at the same time. It was just mind-boggling. And that's why we've had an elevation. I don't foresee a whole bunch more, but a lot of people are going to forecast that. I'm not going to go out on that limb. I think we're at kind of an upper bounds right now. We'll see where it goes from here. So Compass CEO Robert Refkin said 42% of U.S. homes on the market saw a price cut in September, the highest share in nearly a decade. Is housing heading into a deeper buyer's market? Because I know we talked about the entire nation we could describe as more of a slight buyer's market. What are we seeing right now? Yeah, if you're looking at the nation as a whole, it's still what I refer to as a slight buyer's market where negotiations favor buyers. And you hear all these different stories that this is a really good week coming up for purchasing. It's the best week coming up from the next week. When this drops, that's the week. This is the week when you hear this. And what that is, is spring is gone, summer's gone. We're now into fall. It is officially fall. We've already hit the fall market as of September 1st, but now it's getting darker. It's getting darker a lot earlier. And it's just, you could feel the shift in the season. Now it feels like, uh-oh, we missed the market. So if there have been homes that have been languishing on the market, they might be a little bit more forgiving, a little bit more generous in the negotiations. And that's why this points to a really good week that is coming up. But as far as it being a deep buyer's market, boy, I really, I love that you, that they talk about these kinds of things where it's 42%. Okay, so it was 42% last year and it's 42% this year. What's the difference? This year it's at 42.1% of all homes across the United States reduce the asking price at least once. And last year it was 41.5%. So when you hear that it's the highest in the decade, it sounds like it's way off the charts. It's not. And year over year, it's going to look a lot better because last year we dipped below 6.5% on September 3rd and then we kept on, we stayed below 6.5% until we got to February of this year where it got to 6%. So much more favorable mortgage rate environment. So there, as a result of rates being higher, buyer demand diminishes. And if you have buyer demand diminishes, that means not as much pending sales activity, which means more homes that languish on the market. They're sticking, staying on the market. If rates were down, more of those homes would actually go into pending sales status. But because pending sales status starts to go down, we have buyer demand that's going down. These homes are languishing. So a bit more negotiations, a few more people that are languishing on the market. And that's why we see the slight buyer's market, especially for the remainder of the year. But it doesn't mean that we'll have plunging prices or anything like that. Sellers are unwilling to even go there if you haven't figured that out so far. That's what's materialized since we've had high rates. We've been above 6% since August of 2022, which is 49 months, straight months. So we're just stuck at these higher rates. Have we been to 7.5% before? I think you said it was what, April? I believe it's April of 2024. April of 2024, when we were at 7.5% last. So we're right there, we're where we were in April, but we were there before. And we were even higher than that before. So we were there in 2023, we had interest rates that hit 8%, yet we still did 4 million homes for the year, just like 2023, 2024, 2025, looks like 2026. For the remainder of the year, we could be shy a couple hundred thousand closed sales, but that doesn't mean this gigantic drop. It just means a little bit more sluggish for the rest of the year. So can the housing market survive more Fed rate hikes? So I know that we talk about rates already bake in future rate cuts, but if inflation remains sticky and the job market remains resilient, it could be a concern for the direction of mortgage rates and the direction of the housing market. Well, even where we're at today, now they're pricing in five rate hikes. So we've already had one, that means four more. Prior to this week, they had pretty much it was three more because they did one, so a total of four. Now it's at five. And this is just the market is right now overreacting. They're kind of having a tantrum. It's kind of like that toddler that you see in the grocery store where the poor parents are, they're dealing with this kid that's kicking and screaming. That's kind of what we're dealing with here with the market. They're way overblowing things. They're talking about debt. They're talking about the debt crisis and now no one's going to buy our paper type of thing. And yes, they will, but I'm not going to argue back and forth. I'll show you down the road when it does come back down again. It's just this overreaction, this overarching leap that everybody does. They kick and scream and until after a while they move past it. But right now, this is the story that's happening. Everybody's trying to digest a longer Iran conflict than they even anticipated before. And it just got even longer. And you could hear it with the leaders that they're just both digging in their heels. But then we're recording this on Friday the 25th. Now there's all of a sudden this olive branch that appeared, helped out the stock market, but the bonds weren't buying it. The bond markets are still having their tantrum. They're going, we don't believe you. You've been talking about putting together some sort of a peace agreement for months and months. Both sides have. We haven't put together anything. So that's kind of where things are at. And they just are sharing my last name, Thomas, your last name as well. We're just doubting. Doubting Thomas until we see boats floating back and forth with oil on them through the Strait of Hormuz. So that's kind of what we see out there currently right now. And I'm not super duper concerned that it's going to continue to go up at a much higher clip. It's already priced in a pretty severe increase in short-term rates. In an article from CNBC, they said nearly 10% of borrowers opted for riskier mortgages last week as rates soared over 7%. So they're referring to adjustable rate mortgage applications. So Steve, are people really, I guess, taking a risky mortgage or is this different than 2008? Because this seems like they're trying to give the same sort of vibe as it was back then. But is this just another headline is what I'm trying to say. Super clicky headline. I'm so glad that you included this because I actually heard it. I hear a lot of the loud, especially loud ones. Sometimes you find these things, nuances where I didn't see that. But I actually saw, I heard Repkin say what he was saying. I was shaking my head while he was saying it. And the same thing with the CNBC article that came out. Yeah, it looked very clickbaity. And it was. I knew it was because prior to the Great Recession, what led up to it was subprime products. It was no money down. It was very low money down. You didn't have to have very high FICO scores. We have high FICO scores now. Loose lending standards. It was awful. They are adjustable rate mortgages. There were teaser rates where it would be. We'll start you off at 2%. You qualify in that 2%. But then after you own the home for six months, it starts to go up on a monthly basis. It was going up so fast. You pick payment plans, but all those different adjustables. There's so many different products that were out there. They're not even allowed anymore. There's no way that you could even get anybody to purchase one of those adjustable rate mortgages from yesteryear. These adjustables that they're talking about today, they are five-year fixed, seven-year fixed, and 10-year fixed. They're not the adjustables that I just mentioned. A lot of people don't even know that they used to exist. They used to, you get an adjustable, and then after a while, it would start to, it was pegged to a certain index. And if that index all of a sudden went up, guess what happened to your payment? It would go up on a monthly basis. I just said the adjustables they're talking about, five-year fixed, and then it adjusts to the prevailing rate. Seven-year fixed, adjust the prevailing rate. 10-year fixed, adjust the prevailing rate. And you can imagine, if you do a five-year, it sounds a little riskier, in quotes, and that is it. So after five years, it adjusts. That's the risk. However, there's a lot of people that are planning on owning, and they're going to own it for maybe four, five years, and then at that point, they're going to go sell anyways. There's people that exist in that realm. How about the people that are using this home as a starter home? They moved from another area. It's smaller, but they know they're going to purchase something else. Well, yeah, it sure would make sense to lock in on a lower rate, which is what you get with a five-year fixed, is it actually comes down, and now you can get a rate, or it could have, in the sixes, and you just did a five-year adjustable. Doesn't sound like the doom and gloom that led up to the Great Recession. It sounds like a much smarter decision, and a lot more of context behind it is it is explained as to exactly what will happen five years down the road. So it was a very click-baity article, and so glad you brought it up. All right. Well, thank you, everyone, for tuning in to another episode of Let's Talk Housing. If you want to learn more about what's going on in the real estate industry, in the economy, anything like that, subscribe to our YouTube channel. We'd love to have you here, or subscribe to us on any of the listening platforms that you are listening to currently. So thank you so much for tuning in. And if you want to get access to Nerd Lab, the wonderful interactive platform that you can really just take the data into your own hands, and you can use it however you want, you can share it. It's very, very user-friendly, like I was saying before. You can subscribe to our housing reports, reportsonhousing.com, and you can get access to both, and a bunch of other information that we provide bi-weekly, monthly, all that sorts of stuff. So wonderful information there. If you have questions you want us to answer on this podcast, or if you want us to make a video on that, leave it in the comments below, or you can reply to us on social media, and we will get back to you. So we will see you very soon, and have a fantastic rest of your day. Thank you.