Logan Mohtashami on Fed day and mortgage rates

HousingWire

On today’s episode, Editor in Chief Sarah Wheeler talks with Lead Analyst Logan Mohtashami about Fed day, mortgage rates and new home sales.     Related to this episode:   Why new-home sales are disappointing, despite beating estimates |  https://www.housingwire.com/articles/why-new-home-sales-are-disappointing-despite-beating-estimates/HousingWire  HousingWire | YouTube  https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q     Enjoy the episode!   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 stories. Hosted and produced by the HousingWire Content Studio.

Transcript

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

00:10Day, mortgage rates, and new home sales. Logan, welcome back to the podcast.

00:14It is a pleasure to be here, Sarah. By the time this podcast comes out, it's Fed Day.

00:22Fed Day. Okay, let's talk. What is Trump trying to do with the Fed? He's had all sorts of things.

00:26What do you think we're going to see tomorrow?

00:28So, there's an interesting discussion today of Nick Tremaris from the Wall Street Journal.

00:35Remember, Nick is the outlet of the Federal Reserve to the media, to the world, to stock

00:41traders. So, Nick came out with a talking point about, you know, in 2018 and 19, when Trump went

00:50into the trade war, tap dance, inflation was low. Inflation expectations were low, right?

00:58So, it was a better backdrop. There was corporate tax cuts, and the Fed thought, well, if the trade

01:04war becomes inflationary, we'll try not to raise rates because that'll be a recessionary. And Nick

01:10made the point that it's difficult now because inflation has taken off. And if costs rise,

01:18people ask for more wages. So, our thing for the last two years is labor over inflation.

01:26Wage growth has to go back down to 3%, you know, for the Fed to feel comfortable. So, for Nick to

01:33bring that out one day before the Fed meeting, you know, it's kind of like a nudge, I think,

01:40that the Federal Reserve was like, hey, listen, you had this better backdrop back then. It might

01:47not be the best because of the memory of people asking for higher wages. So, it goes back into

01:53my wage thing that they need to suppress the labor market and wages to make this work for them,

01:59where I don't agree with that premise, but that's kind of like the push. So, it'll be interesting

02:04for the Q&As about all the questions they're going to ask about Trump, trade war, you know,

02:14what's going to happen. Like we already saw a snippet of what we've talked about on November

02:197th, 2024. Trump declares 25% tariffs on Colombia, you know, all these sanctions,

02:26everything by the end of the day, it's over. We're going to get a lot of stuff like this,

02:31even the watered down version of the tariffs. Now, instead of 25% universal tariffs, we're

02:36starting at 2.5% and it's going to go up every single month. This is just how he operates and

02:45it's going to be interesting to see the dynamic between the Fed, Trump, and what the market

02:50perceives this to be. So, one thing that I'm at the Mortgage Bankers Association IMB conference,

02:58been really great so far. One of the panels today, they were like, you know, Trump could

03:04absolutely bring down rates as opposed to like going through the Federal Reserve,

03:08he could change the MIP, right, for FHA loans. Okay, so this is another discussion that came

03:14out today that confused people because people said, people thought that FHA was going away.

03:21You know, there are people tweeting out because they think if the insurance goes away, FHA goes

03:25away. FHA, if you remove the insurance, which I don't know legally if that can be the case because

03:34of the 2012 FHA Solvency Act. So, this is out of my wheelhouse, so I'm not sure, but I know the

03:41FHA Solvency Act, which was passed by Congress, had some kind of mandates to it and that would,

03:50you know, if he removes the FHA, at least for that product, that goes down. It's not the

03:58conventional loans or the big bulk of loans out there. That is one way, but that has been

04:04discussed. Some people are confused by it because they think that FHA is going away. That's not true.

04:08It's just basically removing that insurance cost. Okay, so you think tomorrow, no change?

04:16No change, but forget about the no change. It's the Q&A about everything that's going on, especially

04:23when Fed Waller came out and said, maybe, hey, listen, we might cut, you know, four times this

04:30year. I'd be curious, you know, we're going to get a lot of Trump questions. I'll be more curious to

04:35see if Ebony brings up the rent inflation because not only did the BLS rent index really fall,

04:43also the CoreLogic single-family rent index fell. So, the Q&A is going to be very interesting,

04:50not just for Trump's involvement in here, but also, you know, because rates had gone up so much

04:57so fast, was Waller trying to talk the market down? And is there a level to where the Fed just goes,

05:03okay, financial conditions are getting too tight because we go back to 2024 and what Fed President

05:10Lori Logan talked about from Dallas, she said, if the 10-year yield and mortgage rates go up,

05:16then we can be less restrictive because that is financial conditions getting tight. So, there's a

05:21lot of things in play for this Fed meeting, not just the relationship between Trump and the Federal

05:26Reserve. Yeah, although that's the backdrop, right? That's the backdrop. Well, let's talk a little bit

05:31about the tariff. You said last time there was like a tariff tap dance. You talked about how

05:38the Columbia tariffs came and went in one day. That was exciting. Right now, there is a deadline,

05:44I think for Sunday, right? Or Monday for Mexico and Canada and things like that. You think that's

05:52all just going to go away? Treasury Secretary Bissette came in and it looks like they're going

05:58to do universal tariffs starting at 2.5% and then moving up. So, remember the whole thing, don't

06:06fall for the big trade war thing. Everything's going to be tactical. This is a tactical move

06:12to try to get deals done. The whole let's just tariff everybody right away. Listen, this is the

06:20third time now, third year that we see this operation. We can't be surprised that he flips

06:27within 24 hours. So, how the market responds is going to be a little bit more interesting now. So,

06:35if there is going to be a universal tariffs and it's going to increase, then you're going to have

06:40to wait to see what kind of deals they want. And then we take it from there, which again,

06:45the only issue with that is that business investment about what are we going to do?

06:53Or the counter to that is that business doesn't believe he's going to go through with it

06:57and just operates as normal. Last time in 2018-19, business investment really fell

07:03and the stock market was down 20%. So, it's one of these things that if you're running the same

07:10playbook and everybody knows you are, how do they act this time? Do they just ignore it? Do

07:15they go forward? And that's again, you know, Republicans used to always say, how can business

07:20make any choices or plans if they don't know what the government rules are? So, in this case,

07:28you know, they're trying to water it down to give a little bit more breathing room for

07:33maybe leverage deals to go forward. That's kind of how my read was this week.

07:37Let's talk a little bit about the stock market this week and what that means to the bond market

07:42and what that means for mortgage rates. So, of course, Sunday, you know, bond yields fell.

07:48The AI concerns that there was a $2 trillion of, you know, market caps were wiped out,

07:53whatever, you know, that's just everybody was crowded into the AI trade. So, a lot of people

07:59just got out of that. So, in traditional senses, the money goes into the bond market from the

08:05stocks as a flight for safety. Pricing was better, but not too great. We're talking on

08:12Tuesday, 10-year yields up, maybe one or two basis points. There's no change. The compression

08:17of volatility and the spreads are acting really good when the yields go up. Not as great when

08:24yields go down, but you could see it's been, there's a cap to how high rates can go unless

08:29the 10-year yield really takes off or we have some kind of event. That's just traditional

08:33money, you leave stocks, goes into bonds, crowded trade. Everybody went for the safety first.

08:39Remember, when all hell breaks up, the U.S. bond market and the U.S. dollar, the only place people

08:45go to really. So, let's talk a little bit about the tracker and how this relates to what you're

08:51looking at every single week. So, again, call. My home price forecast is a lot lower than everyone

08:58else's, especially Apollo. Apollo had like 10.8% home price growth. So, what I'm seeing right now

09:04is what I'd like to see. New listings data is coming up, right? We're showing year-over-year

09:09growth. We're going to get over 80,000. And remember, 80 to 110,000 is the norm between

09:142013-19. During the housing crash years, it's 250 to 400,000. So, we're seeing a good positive

09:21trend so far on inventory. The pending contracts data is still weaker, higher than 2023, but

09:27slightly lower than 2024. So, the elevated rates are impacting. It's been impacting the data for

09:33some time now. It's just now it's a little bit more clear. The growth rate was slowing down. Now,

09:37it's slightly negative. Again, last year at this time, mortgage rates from 6.75 to 7.5

09:44created 14 negative purchase application data, 2 positive, 2 flat. So far this year, we're

09:502 and 0 positive out there. We're early in the season. So, it's just, for me, it's always keeping

09:56track of all this data and how the forward-looking data looks like in this cycle.

10:03And it's just a little bit more unique because after home sales crashed, we're just basically

10:08we're not going anywhere, right? Go up a little bit, go down a little bit. So, we're hovering

10:12around here. So, the firmness in the data that we saw toward the end of 2024 is very encouraging.

10:18And again, mortgage rates go down to 6%. Everyone's forecast is wrong. It's just we

10:24have enough data to be very confident about that now. Well, and everyone's forecast is

10:29wrong in the best way possible. We will see more business. That's what it takes. That's

10:35what it takes for homebuilders. That's what it takes for everybody else. And it's just because

10:39the new home sales report came out. New home sales beat estimates. New home sales are basically

10:45at 2019 levels. That would amount to 5 million roughly existing home sales right there. That's

10:50how you get near 6 million. That's what we did in the last decade. But builders again operates

10:55in a sub 6% mortgage market world when they need to. What was not encouraging about the new home

11:03sales report is that we're not going anywhere. And because we're not going anywhere in the new

11:09home sales report, the inventory is starting to build for them, completed units for everything.

11:14And this is why permits are at recession level. So, that was really the, and it was a good

11:19question. People asking, well, new home sales beat, why aren't permits growing?

11:24They're not really going much. You know, those charts that we put, if you just look at them,

11:27ebbs and flows and just hovering, right? We're not, not much. We're not, we're above the

11:32lows of 2022, but we're not really growing sales enough to get the builders confident.

11:38But they're completed units of sales now at 118,000. For them, that's a lot. Their total

11:45inventories are still moving higher. So, they have a lot of like 260,000 homes that are still

11:50in construction, right? They're going to be finished. And then they have 108,000 new homes

11:54that haven't even started digging dirt. That's the highest level ever. So, you put that together.

12:00This is why, this is how I explain why housing permits are so low, right? At recession levels,

12:05the builders, they're just managing their backlog and what they have right now.

12:11So, hopefully that makes sense because a lot of people saw that headline report. They didn't know

12:16that the last three months were revised lower. And if you put it all together, it's not much

12:21happening, but supply is growing on them, especially in the South. The South was such a big

12:27area for the builders to grow. And when you start getting active inventory in the existing home

12:32sales market grow, and then new, you're not pulling the trigger to be building a lot of homes.

12:38Like we wrote about in 2021, when rates rise, the March of Dimes is not here. They're going to pull

12:44back, make sure they could get their products sold. Absolutely. Let's talk a little bit about

12:50existing home sales. What do you see there? Well, I mean, last week's existing home sales

12:56beat estimates, but that's a little bit old at this point. So, I know back-to-back reports

13:03existing in new beat estimates, but to me, it's the forward-looking data that we started to see

13:07in summer, but really October, November, December. Right now, by the time it's going to be a few

13:13months before our pending contracts data hits the sales data. So, what we're seeing is we're not

13:18seeing the strength that we saw toward the end of 2024. Higher rates are doing their thing.

13:25It's slowing demand. Again, there's nothing crashing. There's nothing blown up higher,

13:30but we have a rate range where things tend to slow down. And this is why we're going to take

13:34an eye on purchase application data. Again, that looks out 30 to 90 days. So, we'll see if we have

13:40another positive week. We start stringing out more positive weeks for purchase application data,

13:44then eventually that hits the pending sales and the existing home sales report.

13:51Here we are. It is the end of January, pretty much. Are we where you thought we would be as

13:56far as rates, as far as- I am very happy about the inventory data. So, I mean, I think for some

14:03of us who did not believe in the mortgage rate lockdown, that inventory can never grow. It's

14:08another positive sign. The rate stabilization is good in terms of whenever bond yields go higher,

14:17the spreads are acting really good now. So, we would not have 8% mortgage rates in 2023 if the

14:23spreads were this good. But the Silicon Valley banking crisis ruined that whole thing. And it

14:29just shows to me more and more that rates just get down towards- if it's sub 6% rates, a total

14:35game changer. But just getting down there, we can get the growth in sales. And again, we're working

14:40our way back to normal. Normal is a good thing. What happened in 2020, 2021, 2022, and in 2023,

14:47not good. You can't have too many people chasing too few homes. The pricing mechanisms don't work.

14:53Now that we're working our way back to normal, it's a better, it's a healthier marketplace for

14:57the future of housing. Housing is going to be here for the next 100 years, right? You can't

15:01have this little short bursts of price inflation without consequences. Logan, thank you so much

15:07for joining me today. I know we have short time today. We will talk to you again in a few days.

15:11Thank you so much. Thank you.

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