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[00:00:05] Welcome back to the What's Your 1 More Podcast. I'm your host, Quinton Harris. You're dialed in for the next episode of What's Your 1 More, and [00:00:10] I've got with me this week, another outstanding guest. He's kind of become a pseudo standing guest [00:00:15] once a month, and I'm so happy he's decided to do that. Welcome back, Mr. Dan Habib to the show.
dan: [00:00:20] Hey Quinton, always a pleasure to be with you on the podcast, man. Thank you so much for having me.
quinton: Same here, [00:00:25] man. Glad to have you. All the knowledge you bring to our audience and, you know, this is a different week since you've been here [00:00:30] before 'cause it's post fed decision week. We've got a lot to talk about.
We kind of been waiting on getting this episode in [00:00:35] here and I just wanna kick it off. I mean, you know, I think the obvious is we had a fed rate cut, [00:00:40] and. They came with a little bit of, um, deflating, you know, moment for some people in the [00:00:45] industry and consumers as well. 'cause we hear rate cut, we automatically assume like, where's those lower mortgage [00:00:50] rates?
I think you're here to kind of enlighten us on, it's not just a cut. There's other things that could affect long-term rates, [00:00:55] but that maybe there's some, maybe there's some hope in the future for those things to get to where we're hoping they are. But why don't [00:01:00] you kind of break it down for us here.
That cut and the impact to the mortgage interest rates and maybe why we haven't seen [00:01:05] that fall off that everybody wanted to see.
dan: Yeah, well, I completely [00:01:10] see why people are saying out there, and seeing that it looks like, [00:01:15] at least if you're looking from the time of the cut till when we're recording, hey, the Fed cut [00:01:20] rates and mortgage rates have moved a bit higher.
But I do think that that's a little bit of a [00:01:25] myopic view, and I'll really break this down for you. But first things first, you know, listen, some listeners may [00:01:30] not be aware when the Fed is. Cutting rates or hiking rates. They're not cutting [00:01:35] long-term rates. They're not cutting the 10 year or mortgage rates.
They're cutting the Fed funds rate, which is an [00:01:40] overnight rate that banks use to lend to one another. But there's certainly. Indirect influences to [00:01:45] longer term rates like mortgage rates. Now getting back to what people are [00:01:50] seeing out there, if you just look from when the Fed cut on September 17th till now, mortgage [00:01:55] rates have moved a little bit higher, but you have to contemplate more than that.
[00:02:00] So markets are forward looking. Which means that when they price in that [00:02:05] something's going to happen. They move in advance of it. So you have to not just look at what [00:02:10] happened after the cut. You also have to look what happened before the cut. And on [00:02:15] August 22nd, we had fed Chair Powell at Jackson Hole, Wyoming, and that's where he first [00:02:20] really telegraphed that the Fed was going to cut rates on that day.
[00:02:25] Tenure was F 4 33 and you had mortgage rates, three eight of a percent [00:02:30] higher than where they were on the day that the fed cut rates. So. [00:02:35] The tenure, by the way, came down to about 4 0 3, actually dipped for a little bit [00:02:40] under 4% on September 17th when they cut. So what [00:02:45] happened? The markets priced in the cut, and even long-term yields, they moved [00:02:50] down by more than 25 basis points.
Then the day of the cut. [00:02:55] What happens? Well, they moved slightly higher that day. Powell, you could [00:03:00] say, and we can get into the press conference in his meeting, was maybe a little bit more hawkish than some [00:03:05] people would've liked. And we can go into the dots plots too, which will be, I think interesting. [00:03:10] But just sticking on this theme.
The day after the fed rate cut, we got some news that [00:03:15] bonds didn't like. And the other thing besides looking before what happens with rates [00:03:20] before the cut and just looking at the price movement after, you have to ask, is there any [00:03:25] coincident economic reports that are coming out that are pressuring the [00:03:30] bond market and pushing rates higher?
And of course, how is the rate cut being. [00:03:35] interpreted by the markets if it's interpreted as something that's inflationary. Well, the bond market could [00:03:40] also not like that. Now, I don't think it's the latter there, but if we look at the [00:03:45] coincident economic reports that came out, well, let's take a look at [00:03:50] Thursday.
The day after the fed cut rate, September 18th, we got a very low initial jobless [00:03:55] claims number. Now, the prior week before the fed cut. [00:04:00] We had 264,000 initial jobless claims. That's [00:04:05] people filing for unemployment benefits for the first time because they were let go. It came [00:04:10] down to 231,000, so lower than estimates.
And [00:04:15] even though this isn't showing job creations, it's certainly showing you a part of the labor [00:04:20] market. And let's face it, the fed cut rates because of a weakening labor market. [00:04:25] So while not fully negating that. Partially, this is kind of going contrary [00:04:30] to the Fed's reasoning for cutting rates because you saw claims fall and then the [00:04:35] day of recording here on the 25th.
Boy, we had a trifecta of [00:04:40] stronger economic reports that came out that also soured the bond market and caused [00:04:45] yields to move higher. You had initial jobless claims falling further to [00:04:50] 218,000. You had GDP that was revised higher in the second quarter from [00:04:55] 3.3% to 3.8%, and you had a very strong durable goods orders [00:05:00] report.
All of those causing rates to move higher. But when you look at [00:05:05] this in totality. Long term rates usually respond [00:05:10] well to fed rate cuts, but sometimes there's factors, and we saw this last [00:05:15] year, you can have stronger economic data points that can cause the market to move higher, but what we [00:05:20] have seen this year and last year.
Once the markets found out the Fed was [00:05:25] going to cut and they telegraphed it, long-term rates move lower. And I think it's helpful, Quinton, to just [00:05:30] share a little bit of a chart here just so everybody can visualize this, because last year people [00:05:35] were saying the same thing last year, people said, well, the Fed, they cut [00:05:40] rates, but pull up the right slide here.
What rates moved [00:05:45] higher? And if you're a member to 2024 in September 18th, they cut 50 basis points. [00:05:50] Well, that's right here on the chart. But what nobody talks about is the three to [00:05:55] four weeks prior when the markets found out that the Fed was going to do this, cut, [00:06:00] mortgage rates moved down between five eights and three quarters of a [00:06:05] percent.
Then you could see the fed cut rates 50 basis points right here. What are mortgage rates [00:06:10] due for two weeks? They remain stable. Then right here on October [00:06:15] 4th, something important happened that caused mortgage rates to move higher. [00:06:20] Well, we got a blockbuster jobs number. You could see here we got the September jobs [00:06:25] report released October 4th, 2024.
Much stronger than estimates. [00:06:30] 254,000 jobs created. And going back here, we got the [00:06:35] November cut. Guess what? We had the same thing happen. We got the December cut. [00:06:40] December cut here, same thing happened. Blockbuster jobs [00:06:45] numbers. Now it's frustrating because we do know that the BLS, they came out with their [00:06:50] QCEW numbers and it showed that likely 52% of these [00:06:55] jobs, they don't give you the individual months at this point, but they overstated job growth by [00:07:00] 911,000 last year or.
They overstated job growth by [00:07:05] 52%. So these numbers that really roiled the bond market and I think is one of the [00:07:10] main reasons we saw yields move higher after the Fed cut were baloney. [00:07:15] And this is a long-term chart in correlation that I think best shows you that while it's [00:07:20] not in lockstep and while the Fed's not cutting short term rates.
There is a very good [00:07:25] correlation over time of the Fed funds rate, which is in blue and 30 year [00:07:30] fixed mortgage rates, which is in green, and you could see how the Fed hikes mortgage rates go [00:07:35] up, the Fed cuts, mortgage rates go down. Again. It's not perfect, it's not in lockstep, but there is certainly [00:07:40] a relationship there.
But we can't just look at the market movements after the fade cuts [00:07:45] and not talk about how they reacted in advance of the cut and pricing that [00:07:50] in. And also if there's coincident economic reports that are showing all kinds of strength in [00:07:55] the economy that would cause the bond market to sell off. Anyway, so I wanted to just [00:08:00] kind of break that down step by step, Quinton, and, you know, tell me if you have any follow up questions on that before [00:08:05] we go any further.
But one more thing, this is a chart of the tenure. You could see this is Jackson Hole [00:08:10] meeting August 22nd. Look at how much yields moved down in anticipation of the rate cut. [00:08:15]
quinton: Yeah, I think that's a wonderful explanation. I think there's a, there's [00:08:20] consumers and mortgage lenders and real estate agents have to [00:08:25] understand the market predicts or moves, as with the.
The way they think the Federal Reserve's gonna [00:08:30] react, and they're always trying to anticipate that. So when it does exactly what they're anticipating, [00:08:35] there's not this windfall of additional, you know, winds for us in the industry. And the [00:08:40] avail, the availability of information now is far greater than it was even a decade ago.
So we have a [00:08:45] lot more. Opportunity to understand and forecast, as you say, forward, think what's going to happen. [00:08:50] So when we get what we're anticipating, it's almost like a, a stagnant win. Nothing [00:08:55] really goes up or goes down, but then these job reports come in,
dan: think when, you know, in the [00:09:00] markets.
Right. And it's buy the rumor sell the news Yeah, that's right. Right. Which means that once it's, [00:09:05] you know, kind of made public that something's going to happen on a certain date. The markets look [00:09:10] forward and they react in advance of that. And a lot of times on the day of the [00:09:15] news, right, you see a sell off where people take profits and stuff.
So it doesn't always work in the way that [00:09:20] people think.
quinton: Yeah, no, that's a great point. I think that,the podium pal, as I like to call 'em when he gets up there, [00:09:25] unfortunately, has that way of shifting the markets. And when he gets up there, and like you said, slight more [00:09:30] hawkish. Then, what people were anticipating, you know, that's gonna, that's gonna occur the market.
And we got to [00:09:35] that 3, 9 5 on the 10 year. And I think we were all really excited in the industry about that [00:09:40] the mortgage backed securities market was moving in the right way. We were seeing some, you know, instant relief, if you may, and [00:09:45] then it was just evaporated immediately right after that 30 minute podium session.
dan: Well, rates are still, you know, [00:09:50] I mean, I don't think it fully evaporated. I mean, rates moved a little bit higher the day of the [00:09:55] fed meeting, but I mean. Minuscule. But then, you know, in the time since [00:10:00] then, we've seen yields kind of drift higher, but you know, they're still a bit lower than [00:10:05] where they were.
but everybody wants to, obviously these rates come down again, right to, to the, to the [00:10:10] low sixes, six and an eighth, you know, the six and a quarter now I think. [00:10:15] Those that were prepared and set up strike rates with their customers and weren't [00:10:20] reactionary, definitely capitalized on this drop a bit, but sometimes it can be short lived.
But listen, it doesn't mean [00:10:25] that rates can't cycle back lower again. It means that the upcoming jobs report, which is gonna be [00:10:30] on October 4th, is really going to be critical. And listen, the last jobs report was important, [00:10:35] but I can't remember a more important jobs report with more future implications on the [00:10:40] path of the Fed funds rate, as well as the direction of mortgage rates than this one coming [00:10:45] up.
Because it's going to, if it's a strong report, which listen, I don't anticipate [00:10:50] it to be, but if for some reason the BLS, who we know hasn't been reliable, if they come out with a [00:10:55] strong print. It could take off any further rate cuts this year, [00:11:00] but if it's a weak report, I think it certainly solidifies at least one more cut, but [00:11:05] potentially two.
But the upcoming data's gonna be critical. And then of course we have a, you know, at the time of [00:11:10] recording here, a big PCE report that's gonna be coming out tomorrow morning, and [00:11:15] that's something that. Now the market's expecting the headline to go from [00:11:20] 2.6%. This is headline, PCE, personal consumptions expenditures to either two [00:11:25] seven or two eight.
I see estimates kind of in that range, and then the core rating is [00:11:30] expected to stay at 2.9%. Yeah. I'm not sure how much propensity there is [00:11:35] for a surprise to the downside. There's probably, I think the risks favoring [00:11:40] propensity for it to be the upside. You know, if it comes in around estimates, [00:11:45] you know, it, it still wouldn't look great optically for headline inflation to rise a bit.
But I don't think we're [00:11:50] gonna be hurt too bad if we get a number near estimates. Listen, the Fed has said that they're anticipating [00:11:55] inflation to be in the short term, moving a bit higher due to the temporary impact [00:12:00] of tariffs and. That's something that's certainly been a little bit of a shift where now you hear Powell and a [00:12:05] lot of other Fed members saying that they're more comfortable with thinking the tariff impact is [00:12:10] going to be short-lived, but that it may not be all at once.
Right. I mean, we have still [00:12:15] some big trade deals out there that have not been closed with China, India. So once you have [00:12:20] that set, the price goes up, whatever the tariff is. You know, that is one time, but the [00:12:25] impacts can be felt over a duration.
quinton: Yeah, and I think it's real important for our audience members to understand [00:12:30] that rates are still low in comparison to where we were a year ago, 18 months ago.
I know we're [00:12:35] all, as you mentioned, you know, aiming and shooting for the low sixes and in some cases we're there, we're still there as we [00:12:40] have this conversation right now and on government loans, we're below that. But I think that everyone's, like, it's [00:12:45] interesting when you know, you talk about strike rate, you call a customer and they're, oh, this is my strike rate.
And then you [00:12:50] call 'em with this wonderful, you know, opportunity. We're there. And some of 'em have the audacity to go, I think I'm gonna [00:12:55] wait. And you're like, okay. Your choice, your
dan: choice. Frustrating as it may be. [00:13:00] I would, I would show 'em. you know, and we have so many charts like this in MBS Highway that [00:13:05] you could share, but I would show 'em the short-lived nature of the opportunity.
Right. And [00:13:10] there's been a buying, marrying the home and dating the rate over the last few years has been a great strategy. [00:13:15] If you had a good loan officer that was prepared because there's been eight refinance opportunities, but [00:13:20] many of them have been extremely short-lived. Some of 'em a day. Some of 'em are weak, some of [00:13:25] them two weeks.
Thank you. Yes. But the opportunity has been there and you've seen some good levels of [00:13:30] appreciation as well. And there was certainly an opportunity here, but if customers get [00:13:35] greedy, we also have a great calculator, that shows you, hey, listen, if, what are you waiting for? An extra eighth? [00:13:40] So an extra eighth's gonna save you, you know, I don't know, 25 [00:13:45] bucks a month, whatever it is on depending on the loan amount, right?
And. If it takes three months to get there and you gave [00:13:50] up the guaranteed savings we could have give you, it's gonna take you two years to break even to save that extra [00:13:55] $25 a month. Right. So you need to explain to the customer and maybe use some tools and show [00:14:00] them some figures. 'cause you know, they're not thinking that way.
That, you know, if it takes three months to get there, even [00:14:05] if you're right, it's gonna take two years to break even. Look at these short opportunities in the past, [00:14:10] you might miss the opportunity, right? But we could save you $250 a month or 300 a month right [00:14:15] now.
quinton: Yeah, and that's a great point. You know those cost of savings tools you have, the cost of waiting tool, all those [00:14:20] things we use in our day-to-day to explain that exact same situation right there.
But just to [00:14:25] reemphasize, like for agents listening. You know, loan officers, cus consumers guys, it is low [00:14:30] as it, it's low as we've seen in quite some time. So this ideology of we, we didn't win, or I wish they'd have [00:14:35] been lower, they are low right now. And it's something that, that I'm excited about.
Which brings me to the next question. You know, Dan, [00:14:40] where's the Fed go from here? I mean, we know we got a jobs report. It's the blockbuster report October 4th. Nothing bigger than this [00:14:45] report that's gonna set up or let down the next fed, you know, o open market committee meeting. But [00:14:50] where do they go from here?
Is it, Is it all hindering around jobs or is it, is that, is it [00:14:55] labor over inflation as we've heard people say? Like what is it at this point?
dan: Yeah. Well first let's just look at [00:15:00] like at the September 17th meeting, this is one of those meetings where the Fed releases what's called [00:15:05] their SEP or their summary of economic projections, and part of that is the DOTS [00:15:10] plot chart.
So there's 19 Fed members. 12 of them vote, but all [00:15:15] 19, they anonymously put a dot on this plot here and [00:15:20] it shows where they think the Fed funds rate should be this year, next year, and [00:15:25] so on. So for this year, one thing you can see that I can't remember [00:15:30] seeing a greater, version of the vision is how divided the Fed is.
So you [00:15:35] have one Fed member, and I can take a couple guesses on who this would be. Maybe Schmidt or Cook, but [00:15:40] they actually are putting that, they want the Fed funds rate a quarter of a percent higher than where it [00:15:45] is after they cut. Now, I don't think they actually wanna hike, but this is their way of still voting in [00:15:50] line with the Fed chair, but showing their dismay for the cut at the meeting.
But then you have [00:15:55] six Fed members that want no more cuts. This issue. You have two that want one cut [00:16:00] and then you have nine that want two more cuts and then you have one that wants 125 [00:16:05] basis points of cuts. And we know that's Steven Moran. We know who that is. We like that. no. You know, he [00:16:10] obviously is the outlier there, but the median okay, is two more cuts this year.
Now [00:16:15] there's two more meetings this year, October 29th. December 10th, you know, the [00:16:20] markets are still pricing in, you know, at least a cut at one of the meetings. I haven't looked [00:16:25] recently at the percentages to see if two are still being priced in, but to your question, everything [00:16:30] is going to rely on what happens with the jobs data, in my opinion, because [00:16:35] the inflation data, you know, I don't anticipate to see it go crazy.[00:16:40]
And even, and there is a little tolerance there for the inflation data to move a little bit [00:16:45] higher because the Fed is anticipating some higher reads temporarily due to [00:16:50] inflation. But the whole reason why the Fed went from pausing for several meetings to cutting is [00:16:55] because they have a dual mandate.
They've been focusing more on inflation, but now the risks to [00:17:00] the labor side of their mandate, maximum employment. Have really kind of gotten [00:17:05] a little more out of whack and more concerning. So, you know, you have to remember, the [00:17:10] BLS was reporting really strong numbers, and now the average job growth over the [00:17:15] previous three reports is only 29,000 a month.
June was negative 13,000, August was [00:17:20] 22,000. The unemployment rate has been edging up a little bit and [00:17:25] something that you hear the fed members say all the time is how the break evens have moved down. [00:17:30] So what are they talking about? Well, the breakeven jobs is [00:17:35] essentially how many jobs need to be created to keep the unemployment rates [00:17:40] stable.
And what they're saying is, is with all of the immigration changes. [00:17:45] The supply of labor has come down, but at the same time, there's no hiring [00:17:50] happening either. But theoretically, if they both fall in unison, the unemployment rate [00:17:55] remains the same. But you can't ignore the fact that there's no demand for labor and no hiring going on [00:18:00] because.
If all of a sudden you start to see an uptick in layoffs, the [00:18:05] unemployment rate can go up and it can go up quickly and just look at this chart. This is why [00:18:10] it's so important to follow the unemployment rate because this goes back to like 1945 [00:18:15] and the blue lines, the unemployment rate, these vertical lines are recessions.
You could see in most [00:18:20] cases when you bottom out on the uniment rate and it starts to turn higher. It [00:18:25] happens quickly and a recession usually occurs as well. Now this time, [00:18:30] and this is what we would call usually like a v bottom, right? Right. You could see it kind of looks like a V and [00:18:35] you know, some of these could be a little bit more W ish, right?
But this is a little bit [00:18:40] interesting and it's a little different where you could see, unlike in these other, [00:18:45] market cycles. The unemployment rate, it hasn't yet at least made that huge move [00:18:50] higher. It's just been kind of slowly aching higher. Now, does that mean this time is different? [00:18:55] It could, but it also could mean that we could have a sharp rise like this coming, which is why, [00:19:00] listen, it's important to.
Really make sure you're [00:19:05] getting ahead of labor market weakness. 'cause things can turn very quickly. And the reason why the [00:19:10] Fed has the ability to cut and I think cut more is because they're restrictive. So I think this [00:19:15] is an important concept. It may be a little technical. Okay. But. You hear some [00:19:20] Fed members saying the Fed is close to neutral.
Some saying like, [00:19:25] we have, you know, room to cut a for a few more times before getting to neutral. Some like Steven [00:19:30] Moran who says we could cut a ton before getting to neutral. So what does that mean? So [00:19:35] the Fed funds rate, it could be one of three things. It could be accommodative, [00:19:40] which means it's adding, like economic activity.
It's supporting economic activity. It's [00:19:45] accommodating the economy, right. Means you borrow more money growth, right? You could have it [00:19:50] where it's in restrictive territory, which means it's really clamping down on economic growth. [00:19:55] And you could have it at neutral where the Fed funds rates at a level where it's neither helping nor [00:20:00] hurting the economy.
So right now. All Fed members will say even after the cut, that [00:20:05] we're still at least a little bit restrictive, but why is there this variance between how [00:20:10] restrictive we are? Well, the way you come up with how restrictive the Fed is you take the current Fed [00:20:15] funds rate, which after the cut, it's in a range between four and four and a quarter.
The effective Fed [00:20:20] funds rate is four and an eight, 4.125. You subtract out the Fed's favorite measure of [00:20:25] inflation, core PCE 2.9%. And then you take out our [00:20:30] star. Now, what the heck is our star? Well, without getting too deep into it, [00:20:35] this is what you add to this where it [00:20:40] essentially, based on things happening in the economy, gets you to your level of restriction.
But [00:20:45] it's a level, it's our star is something that has different interpretations from different [00:20:50] people. A lot of people think it's at 0.75, but people like [00:20:55] Steven Marin think it's closer to zero. And th that's why even at their [00:21:00] 0.75, which a lot of fed members like the New York Fed President think it is.
Even [00:21:05] with that, you could see the restrictions still about half a percent. So that means that you could still cut two more times for [00:21:10] 25 basis points to get to neutral, where you're not really juicing the economy. [00:21:15] So still have room and. Here's an adjustment I did because [00:21:20] some people like Steven Miran not only think the neutral rate is a lot lower and closer to [00:21:25] zero, but they think that inflation should be adjusted because of the temporary impacts of the [00:21:30] tariffs.
So Core PCE is 2.9%, but even fed Chair [00:21:35] Powells that he thinks the tariffs are accounting for about four-tenths of that, or maybe three-tenths, but let's just say [00:21:40] four-tenths, which isn't real inflation that the Fed is supposed to look through. [00:21:45] Because it's going to be short-lived and it's a one-time price increase.
Shelter should also [00:21:50] be adjusted because shelter, if you look at realtime readings of blended [00:21:55] rents versus what they have in these PCE and CPI reports, they're not even [00:22:00] close to reality. And if you were to make an adjustment and put some of the numbers in there, they're [00:22:05] lagging behind. They're looking at data over the last 12 months.
You'd have a [00:22:10] three 10th adjustment. So if you were to take these adjustments, core PCE wouldn't be 2.9, [00:22:15] it would be 2.2. Now you just make that adjustment and boy, you could hike, [00:22:20] you know, five times almost. And if you were to go ahead and do a lower R Star, [00:22:25] closer to zero, like Steven Moran, Moran thinks.
You have even more room to cut. So that's why [00:22:30] there's, you know, differing views on how much room the Fed has to cut before becoming [00:22:35] accommodative. The fear is if all of a sudden you cut and you become accommodative, well now you can cause [00:22:40] inflation again, as long as you're in at least a little bit of restriction, theoretically, at least you're still [00:22:45] clamping down on inflation and economic activity a little bit.
So [00:22:50] I know that's a little bit technical, but I wanted to just kind of share that with you. but. I think [00:22:55] the bottom line is, is I've never seen such an important jobs report [00:23:00] that's what's gonna come out on October 3rd. 'cause that's really gonna dictate what the Fed does. It's gonna [00:23:05] dictate where the direction of mortgage rates goes.
Boy, if we get a real crap number there. [00:23:10] You're gonna see the bond mar market rally, you're gonna see much greater odds of fed rate [00:23:15] cuts at both October and December. Be priced in. And if that happens, [00:23:20] you'll likely see mortgage rates like they did before this rate cut look forward, [00:23:25] price it in, and move lower in advance.
Now what happens after [00:23:30] future cuts? I mean, you certainly could see another scenario like we just saw, where you see some really strong economic [00:23:35] data that causes things to go the other way. But I think it's an important concept to realize you can't just [00:23:40] look at the market movement right after the cut.
You gotta say, Hey, did it move in advance of it and price [00:23:45] it in? And was there any economic data that came out that maybe caused the market to be [00:23:50] upset?
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dan: one other thing I just wanted to say [00:24:50] is that. If we compare rates right now to where they were at [00:24:55] this time last year, they're actually still higher even before this recent run up.[00:25:00]
And the amount of activity we're seeing is much, much higher. [00:25:05] New home sales. I mean, we just got a print on new home sales at 800,000 that was the highest level since [00:25:10] January of 2022. Even though rates last year at this time were lower, [00:25:15] and if we look at the mortgage application data from the NBA Refi's end [00:25:20] purchases, refi's making up about 60%.
Two weeks in a row. Now, we've had some really strong [00:25:25] numbers, the highest since 2022. If you look at this area on the chart, this was last year when [00:25:30] rates came down to around 6%, but yet you're still seeing a much higher [00:25:35] amount of volume of applications, at least for those two weeks. Why? Well, I think it really [00:25:40] speaks to the pent up demand.
So many consumers didn't take advantage [00:25:45] of that back then and listen back then. last year it was only a, you know, few week [00:25:50] opportunity that you could refi. If you didn't have a mortgage professional you were working with that was really on it, you [00:25:55] probably missed it. If you tried to get greedy and save an extra eighth or whatever, you missed it.[00:26:00]
And the purchase market, it takes longer. For that process [00:26:05] to happen with a refi rates drop, you get solicited or your relationship for your mortgage [00:26:10] professional calls you, yes or no? Do you want a refi? You can save money right now with a purchase rates drop. Then you [00:26:15] start the shopping process in most cases, and then what happens?
Rates have to stay [00:26:20] down through that process in a lot of cases for it to make sense for you to continue through with the [00:26:25] purchase. So I'm hoping, and I think it's certainly plausible. That we have a more [00:26:30] extended period of attractive rates on a relative basis, and we can [00:26:35] see a lot more purchase activity.
Certainly recently saw a lot more new home contracts signed, in [00:26:40] the August report. And boy, that's before we, even saw the big decline in [00:26:45] September. And this slide shows you household formations. This is one of the best [00:26:50] indicators for housing demand. You know, you have a household with. Mom, dad, [00:26:55] and child, one family living in one home.
The child gets older and moves out [00:27:00] of the house to either buy a rent. You have the same family, but now you have an additional household or a [00:27:05] married couple living together in one household. They got separated for whatever reason, one moves [00:27:10] out and now you have an additional household. So. It's your demand component.
It's been averaging [00:27:15] 1.8 million per year. It's a volatile annualized number, but over the last five years, [00:27:20] well recently that looks like it's taken a dive and it's closer to like 1.3 million. So what the [00:27:25] heck happened here? It shows you that there's a lot of building pent [00:27:30] up demand, which is why drops in rates.
You're seeing a lot more [00:27:35] activity happen, but we need to see that happen on a sustained basis.
quinton: Yeah, no, I tend [00:27:40] to agree with you. I mean, that application curve that you showed represents the minute those [00:27:45] rates have dropped. Even in that significant little bit of window that we got there, applications went up through the roof in the [00:27:50] last two weeks, and I think I, I, I heard.
Some really a lot of important things, but two things stuck out to me [00:27:55] that was that take advantage of your window of opportunity. If your mortgage professional contacts you and says, [00:28:00] Hey, listen, we've gotten to a strike rate. We're in a zone that you wanna be at. Don't question it. [00:28:05] They're not trying, they're not.
They're not trying to sell you just to sell you. It's because it's an agreement that you guys have had verbally of a [00:28:10] rate range you wanna be in. And it's there. To your point, sometimes it's there for a very limited window and that's not a [00:28:15] sales pitch. That's a fact over the last 18 months. We're hoping that window extends [00:28:20] a little bit longer if we get a jobs report that's not favorable.
And October 3rd, October 4th [00:28:25] will be that date for us to look at. But as those reports come out, your mortgage professional may be reaching out to you [00:28:30] on the fifth or the afternoon of the fourth going, Hey, listen, we're there again. And I'm not. I'm not pulling your leg like [00:28:35] this is it, it could be here.
And if we get any other future, you know, positive information, it could evaporate again. [00:28:40] So take advantage of that opportunity and waiting on an eighth is could cost [00:28:45] you thousands of dollars and years of repayment just for waiting to get that better. Eighth number. And [00:28:50] again, you know, for my mortgage professionals that are listening to this, if you're not using NBS highway, you're not taking advantage [00:28:55] of those calculators they have, which are just endless tools.
we use all the time. They're wonderful [00:29:00] and, they're constantly evolving and improving over there. It's awesome. there's just great things to use over [00:29:05] there to really share this with the person instead of trying to just speak it to 'em. You can share it to 'em in a link to where [00:29:10] they can see all the data and see exactly what you're referring to.
dan: Quinton, this is a pretty [00:29:15] good illustration I think of, you know, marrying the home date. The rate over the last few years has [00:29:20] been a good strategy, but you need to have had a mortgage professional that was really watching this and [00:29:25] on it because these highlighted yellow areas. these were all [00:29:30] refinance opportunities, but you could see in some of them, you know, the board there a day, right?
A [00:29:35] day. Yeah. a co, you know, a week,a couple days a week. Right? So, and by the way, [00:29:40] rates pretty similar in some of these scenarios. because the mortgage spread or the spread between 30 or [00:29:45] fixed rate mortgages and the 10 year has narrowed, which is a good thing for us for mortgage rates, but you [00:29:50] could see the fleeting nature a lot of times of the opportunity.
So as you said, smartly, Quinton, [00:29:55] if you have the opportunity, if you could save a few hundred bucks a month, you know, that's real. if [00:30:00] you're waiting for a little bit of an improvement, it may not be there for you.
quinton: Yeah, no, that's [00:30:05] exactly right. You know, and for our audience, Dan. First take, you think the job [00:30:10] number's gonna come in?
I mean, obviously you don't have a crystal ball. If you did, it'd be a whole different situation. But you have [00:30:15] a gut feeling that they're gonna come in. Well, here's
dan: what I think I, so if we look back to [00:30:20] 2024. and you know, you can't, this is a very short time period, a week or so after the fed cut.
Right. So [00:30:25] it's certainly way too early to see what's gonna happen with rates going forward here. Right. But [00:30:30] if we look to 2024, I showed you the chart before where the market's moved [00:30:35] down in anticipation. And then they were stable after the 50 basis point cut [00:30:40] on September 18th, but then we got that Monster [00:30:45] 254,000 job creation report, October 4th for the month of September, and that really [00:30:50] started sending rates higher.
And then we got another one, November, another one December. So. [00:30:55] I don't think that we're going to see that happen this time around. [00:31:00] You know, if we were to look at the last few jobs reports, they were very weak. So I definitely think [00:31:05] something's changed there. And you know, we know that the BLS has been reporting numbers and then [00:31:10] revising them lower, but the initial reported number for September was 22,000.
So let's [00:31:15] see what happens with that figure. Maybe they revise it higher, who knows? But. We know that they've had [00:31:20] issues. Some of it's response rates, some of it's that they're using more imputed data than ever. But [00:31:25] I don't see anything out there that is showing me that there's this pop of hiring. I still [00:31:30] think it should be a weak report where we see weak job creations.
So that [00:31:35] means that, you know, when we get the September jobs report on October 3rd, I think [00:31:40] we're gonna see a weak level of jobs created. That's one part. There's the revisions, which [00:31:45] is another part. And then the unemployment rate, which most people don't realize. It actually [00:31:50] comes from a separate data set within the jobs report called the household survey.
So [00:31:55] it has its own job creation number, not the same as the headline figure. And then it has the [00:32:00] labor force, right? And the number of employed people. So the unemployment rate is a ratio, [00:32:05] the number of unemployed people divided by the labor force. The labor force, [00:32:10] the number of unemployed people has been going up, but the labor force has been affected by [00:32:15] immigration.
So you know, if. All of a sudden we, you know, start to [00:32:20] see some changes there. You could see more unemployed people, but you could still see the [00:32:25] unemployment rate remain stable. Now, something that's interesting, so I don't know if the unemployment rate's gonna go up [00:32:30] from four three, the current level and the previous report, it was four two, it went up to four three.
I don't know [00:32:35] if we're gonna see that go up to four, four or not. My forecast for the end of the year is around four five, [00:32:40] but I do think that it's something we have to watch closely. And Austin [00:32:45] Gouldsby, the Chicago Fed President. You know, something that I like that I'm seeing is a couple fed [00:32:50] members, Bowman Gouldsby, starting to talk about how the Fed's data dependent.
[00:32:55] That means that you're always gonna be behind the curve 'cause the data is backward looking, right? So we need [00:33:00] something that's more real time so we can really look forward. Almost like looking through [00:33:05] the forward front windshield of the car instead of the Fed. Always looking through the rear view mirror [00:33:10] and out the back.
So the Chicago Fed came up with a new [00:33:15] indicator, brand new, another data point for us that we like Quinton, that we could take a look at. It's [00:33:20] called Churn, which is the Chicago Fed. Unemployment rate [00:33:25] now cast. So essentially it's not like published on a site yet, [00:33:30] but they've released some samples of it and he got on CNBC and spoke about his [00:33:35] expectations for the jobs report and what they do, which sounds pretty interesting.
We're gonna be able [00:33:40] to benchmark their, you know, their report pretty soon and see how they did. Right. But instead of just [00:33:45] looking at the BLS data. They're also looking at ADP, which is actual [00:33:50] payroll. So you know, that's pretty good data to look at as well. BLS has a lot of modeling, birth, death [00:33:55] ratio, a lot of things at SKU stuff.
Right? And then they're also looking at data [00:34:00] from Indeed, job posting sites, and even things like Google Trends. How many people [00:34:05] are searching for unemployed or searching for jobs and things like that. Right. They're [00:34:10] taking a more realist, more holistic, real time approach, and every week they're gonna release [00:34:15] estimates.
But their estimate for the September jobs report, which will be released again [00:34:20] October 3rd, is that the unemployment rate remains stable at 4.3%. Let's just say they're [00:34:25] right. That's okay. But if we get a really weak job creation number, that'll be good, and that will [00:34:30] help things. And I believe we'll see a nice rally in the bond market.
And I also think that [00:34:35] we'll see higher expectations for further rate cuts this year. Now, boy, if the unemployment [00:34:40] rate went up, forget it, it'd be a party, but I don't think we need to see that. Now, on the flip [00:34:45] side, if for whatever reason we see some higher revisions to the previous months, we see a stronger than expected [00:34:50] job number.
The unemployment rate declines. We're in trouble. You could potentially kiss [00:34:55] fu future rate cuts this year, goodbye. And you will likely see the bond markets sell off [00:35:00] in a bad way.
quinton: Yeah. Yeah. That'd be a bad thing. well, bad thing in a sense of that's not what we're looking for here. [00:35:05] That's something I wanted to add to that dot plot map, they don't release that every meeting.
it's on a what [00:35:10] every other meeting and traditionally speaking. Is it, is it not accurate? There we go. Okay. I was [00:35:15] gonna say, I thought I read 76% of the time. It's not accurate. Not accurate at all. Okay. Not accurate at all. So I guess [00:35:20] where I'm going with that is their opinions change every 60 days, and you could see that fluctuate quite a [00:35:25] bit over the next 60 days.
If this job report comes in a very unfavorable manner, we could see a lot more of that [00:35:30] divide, become more on in sync with one another, and that, that would be a win for all of us. [00:35:35]
dan: For sure. Yeah, no, I mean, those things, they bounce around like you wouldn't believe. I mean, there were [00:35:40] years where before the year.
They said that they were gonna, you know, hike once and they hike like, [00:35:45] so, you know, it's,it's never accurate to not supply chart, but you know, it's because they [00:35:50] are data dependent and as the data comes out, they change, you know, their minds, but [00:35:55] it's more accurate the closer you're looking. So like if [00:36:00] we're, and the Fed futures are very accurate, the closer you're looking to, so you know, [00:36:05] if we're getting like a couple weeks here before, you know, like a week or two weeks [00:36:10] before the October meeting, when we get there, usually what you [00:36:15] see happen priced in is what's gonna happen.
quinton: Yep. Yeah. Well the countdown is [00:36:20] on to October 3rd, October 4th. All eyes are on that report. And if you got anything from this podcast, I [00:36:25] think it's the following things. Number one, that's gonna be the date that changes a lot of the Fed's mindset and decision [00:36:30] making. And then don't wait on it. Like if the rate's there and you've got an opportunity to take advantage of that with your mortgage.
dan: T [00:36:35] do it. And I got one more thing, Quinton. you know, do you guys have a good [00:36:40] arm product? We do, yeah. You do. Okay. So one thing, especially for the [00:36:45] consumers, 'cause I know the mortgage professionals listening know this, but for the consumers out there, a lot of people, [00:36:50] they hear about adjustable rate mortgages and they're like, whoa, I'm not going near that thing.
Right? [00:36:55] But let's just use a seven year arm, for example. The rate is fixed for seven [00:37:00] years and then there's some adjustments that occur now. Even in the [00:37:05] most draconian scenario because of the savings you're gonna have in mo in a lot of [00:37:10] cases with the seven year arm. Like for instance, I'll give you my example.
You know, I just [00:37:15] refinanced my property in Florida, and I got like a five and [00:37:20] three quarter rate on adjust rate mortgage, certainly much lower than I could have gotten on a 30 year fixed. [00:37:25] It's fixed for seven years. But then there's certain caps in lifetime caps on the [00:37:30] adjustable rate mortgage, so it can't just go up into eternity, but it [00:37:35] has to be mathematically.
Better than the 30 year fix based on the savings that I'm [00:37:40] having for nine and a half to 10 years. So, and that's if [00:37:45] like, you know, rates just skyrocket. Okay. So when's the last [00:37:50] time? Ask yourself that you've been in the same home with the same mortgage. For more than nine [00:37:55] years and if we look statistically it's single digit percentages of people.[00:38:00]
I did this personally for myself because it was the best rate I could get, [00:38:05] and I know over the next seven years, eight years, nine years. [00:38:10] I'm gonna have an opportunity to refinance to a lower rate. Markets are cyclical, you know, [00:38:15] this isn't gonna go on forever. Right, right. We're seeing the stock markets at all time high after all time high.
The wealth effect is a [00:38:20] real thing. I think over that period of time, it's safe to say we're probably gonna see a recession during recessions. [00:38:25] Interest rates always decline and decline significantly. So that's not an option for, it's [00:38:30] not like, you know, it's not necessarily the choice maybe for everybody, but it's something you should [00:38:35] consider and ask your mortgage professional about.
What are your thoughts on that, Quinton?
quinton: No, I agree. I mean, you can't, I mean, there's gonna [00:38:40] be certain states that refinances are more expensive than others, but even in that scenario, I mean, if you can lock in a rate and [00:38:45] you have those protective caps as you mentioned there, you know, you can't lose on that.
I think the [00:38:50] downside of an arm and the only downside of an arm. Is that not [00:38:55] everybody can offer those arms because for various reasons. Number one, there's limited [00:39:00] margin available in them. Some lenders don't partake in 'em. Some programs like FHA, you're not gonna get what you're [00:39:05] describing because they don't have that type of arm feature.
They do have one, but not in that length. So depending on what loan you [00:39:10] qualify for and that conventional jumbo margin, there's a great, excuse me, program, there's a great opportunity to [00:39:15] do. Those seven year arms. And you know, I also think a five year is not bad as well either in this [00:39:20] market, if you can do the five, you're gonna get a little bit of, a little bit of a cheaper rate.
But [00:39:25] again, in five years, you know, markets are gonna cycle. You're gonna have an opportunity to take advantage of that. And all those [00:39:30] loans come with no prepayment. So it's, you can do it. it's a great win there if you can take advantage of. [00:39:35] So agree. Yeah, that's a great opportunity. So Dan, as always, man, thanks for being on the [00:39:40] show.
Dropping complete great industry knowledge on everybody, but more importantly, customers. You know, real estate [00:39:45] agents, I can't say this enough, I know it's sound like a broken record here, but the rates are in a window. They're an opportunity. [00:39:50] Take advantage of them, lock 'em in, whether it's a refi, get your pre-approval, get your, contract, [00:39:55] and lock these loans in because.
I, I guess I'm living on the, I'm living on the edge here that these windows of [00:40:00] opportunities, they're getting shorter and shorter because we don't get 'em longer than maybe 48 to seven two hours right now. [00:40:05] And this is no sales pitch. This is a reality. And we talk about it all the time.
The window of opportunities there, take advantage of it. [00:40:10] Don't miss out. Well, Quinton,
dan: thanks
quinton: for having me, brother. It's always a pleasure. Absolutely. Guys, if you like what you're hearing, [00:40:15] please subscribe to our podcast on YouTube. Check us out, on Apple and on Spotify. Leave us a review. Leave us a, [00:40:20] a ranking there, five stars, greatly would appreciate that.
And, guys, till the next episode, we'll see you What's Your 1 More.
[00:40:25] I got one more shot. I'm gonna make it one more chance. [00:40:30] [00:40:35] [00:40:40] I'm.
