Why do mortgage rates need to cool down?

Brena Nath: I’m excited to have a frequent guest and common HousingWire writer with us, Logan Mohtashami. He’s HousingWire’s Lead Analyst and he’s with us here today on HousingWire Daily. You’ve heard him here before so I’m not going to go too much into his background, but he’s an expert on all things of data and housing, and so I wanted to touch on his article today. The headline is, “We need higher mortgage rates to cool the housing market.” We do a lot of deep dives into the pieces that you’re writing, Logan, so first off, thank you for joining us.

Logan Mohtashami: It’s a pleasure to be here as always.

Brena Nath: For this article, I wanted to set the scene. You talk a lot about how 2020 to 2024 will have the best housing market demographics ever recorded in U.S. history. To set the scene, can you kind of dive into what are the best housing demographics?

Logan Mohtashami: So economics is really driven by demographics but housing specifically. There’s a specific age where people tend to buy homes. And from 2008 to 2019, my working thesis is that demographics are just too weak to have demand really pick up during this period but when years 2020 to 2024 comes, it’s gonna be completely different. So we came from the weakest housing recovery ever to now, this period in time, and if mortgage rates are low, which they should be, you’re gonna have the best housing demographics during this period. But also, you’re gonna have the lowest mortgage rates. So think of it as King Kong and Godzilla, the two titans of housing that drives housing that drives housing historically, are both coming into this period in time. And there’s a problem with that. You can have unhealthy home price growth when you have these two titans coming in together. And this article is basically running in line with what I talked about a lot last year. Real home prices adjusting to inflation, which is the equivalent of rent, is unhealthy right now. And we’re now seeing the raw power of mother demographics right here, right. Demand is too good, inventory is too low, and you’re starting to get multiple bidding wars. This is not helping and one of the reasons I put a metric up, 4.6% nominal home price growth. If we go above this, it’s not good. We’re well more than double that, you know, from last year. So this is why the only thing that I believe can just cool and what I mean cool is give a little bit of breather, you know. Homes are selling at 21 days, you know. If it goes 28 or 29 days, it’s still buy but we don’t want to see these multiple bids, home prices accelerating kind of marketplace because it’s not healthy for everyone. And this was the number one concern I had for housing during this period and it’s happening, so, you know, I have to raise the red flag. This is not a good thing. Of course, it’s a first-world problem to have. Demand is too good but prices going above this trend, like, you know, this five-year period. If home prices are above 4.6% every single year and we get 8%, 9%, 10%, it doesn’t do anyone any good that this is happening right now. So that was my concern.

We’re now live. Everyone’s seen what’s going on in the marketplace and you’re starting to see some people go, “Hey, how come I can’t buy a house? I just get outbidded every single time now.” And this is not a specular demand. This is not like 2005 where you have speculating debt, a bad loan debt structure demand. Existing home sales only ended 2020 at 5.64 million. That’s only 130,000 homes sold more than 2017. We just have a lot of demand. Inventory is low. Housing tenure is still at 10 years and mortgage rates are artificially low, not because of the Fed or anything, it’s just because COVID is an unnatural economic event and it’s keeping mortgage rates lower than longer. And part of the AD economic model that we wrote for HousingWire last year is that the 10-year yield in years 2021 should get to 1.3%. It got there yesterday. We had a print. Rates are gonna rise because the economy is getting better. Inflation expectations are rising. Growth is gonna pick up. We have a really good growth year this year, working from the low. So rates are going up no matter what, just because the economy is finally getting off of COVID-19. And it will be a benefit to the housing market if this happens because right now, demand is too good, inventory is too low, and it’s an unhealthy housing market.

Brena Nath: What I thought it was intriguing about this headline. It’s a great headline. I might be biased on that but when it says, “We need higher mortgage rates to cool the housing market,” I think that’s something that looking at it, we obviously talked to the industry. We also talked to mortgage underwriters and real estate agents, but they’re also the people who are communicating with the homebuyer and user, and I’m sure all they’ve heard about for the past year is little mortgage rate, closed mortgage rate, which is fueling that demand because that’s the one piece of news that they often hear and get. So talking to, maybe just for a second, I’ll put it to the industry, talking to the homebuyer who sees a headline or hears like this and they get scared, you know, higher mortgage rate and really kind of setting it for that person. You mentioned it earlier, like, “Hey, it’s just a break. What’s the difference between 28 days and this amount of days?” How would you structure this for the industry as they’re talking to homebuyers or maybe how to set it into perspective of like, this actually just means that you don’t have to bid as high on your house or a higher rate actually might mean you don’t have to overbid on a house. What would you tell the end buyer what this means when it gets higher and they get scared about it?

Logan Mohtashami: Here’s the thing. When I think about this period in housing, it was last year, last February 2020. This is before mortgage rates collapsed. Housing broke out last year so even with 1% higher mortgage rates, demand was already picking up. So we’re below 3%, you know, we’re 2.75%. The longer this stays here, the worse it will be for housing. So when I talk about higher mortgage rates, you know, the 2021 prediction, you know, if the 10-year yield, which it should, rise up to between 1.33% and 1.60% and then eventually, you know, if things rose and pick up, we get a 1.90%. We’re only talking about 3.375% to 3.625%, okay. The housing market is not gonna collapse. It’s not gonna do anything. In fact, you know, some of the better sales numbers actually came in with higher mortgage rates. All this does is it relieves some of the stress that we’re seeing, hopefully. I’m hoping it does because I’m not sure yet. I talked about all this in the past that when a 10-year yield gets about 2.62% or when mortgage rates get above 4.5%, housing cools down. That’s a positive. The last dislocated market we had was in 2013. We had an inventory hangover, home prices were going up 10%. I was like, “Why is this happening?” Demand is not that good. Mortgage rates went up and cooled the market down. We want an equilibrium. This is a good thing.

Second of all, if you’re a homebuyer, think about it. You just don’t have to deal with 10 other people buying the same house, right. We need breathing room, Sal. It’s a benefit because this means the economy is getting better and, you know, people would be able to walk the earth so this is not, “Oh, will the Feds need to raise rates because house…?” No. It’s nothing like that. This is just a function of growth is gonna get better. Inflation expectations are gonna get better. And we don’t want a 40%, 45% housing market having multiple dips. We just want a little bit of breather so everyone can relax and not feel because I’m hearing more discouragement, you know. People trying to buy a house and they get outbid. They simply get outbid every time. You don’t want that. What that means is that people are just gonna stay in their homes longer. We want a more functioning housing market.

So when I framed this from 2.75% to 3.375% to 3.6% being the highest level maybe this year, that’s not…housing’s gonna collapse. That’s just we need breathing room, right. This is too hot, right. So we want higher mortgage rates, just because it’s gonna be a good thing and the economy’s getting better. It’s coming. So when it happens, don’t think of it as a negative. Think of it as a positive. You as a buyer are not gonna probably…and this might not be the case. It might not even happen. Three percent, 3.5% mortgage rates might not even create that breather. But we can’t continue this every single month for the next few years. It is just a very unhealthy stage and hopefully, I’m hoping it just cools the market down a little bit so we don’t see multiple bids on the few inventory that’s out there.

Now, inventory’s naturally gonna rise because when we’re going to spring usually, the fall and winter inventory is the lowest so we’re gonna get a little bit more inventory and hopefully, this cools…the price goes down. Like the number one thing for me is to see that year over year, home price data go down like we saw in 2013, 2014, and even in 2018 and ’19. That is the best positive. And I wrote about this in 2019. I thought the best thing that happened in housing in 2019 is that real home prices went negative. Nominal home prices didn’t go negative but it cooled the market down and look what happened, you know. The United States housing market is the most outperforming economic sector in the world and it always falls back to demographics and mortgage rates. Mortgage rates are just historically low. So some people are right. “Oh no, why do you want the rates to go…?” No. Rates are gonna go up no matter what I say, the Fed does or anything, right. Economy is gonna get better. You’re spoiled beyond belief below 33%. So if 3.25% or 3.5% kills you, then you’re a marginal homebuyer. That marginal homebuyer can’t buy that house. You’re gone. Less activity for this one house because the demand is there. As I always say, it’s the Hungry Hungry Hippo game in the 1980s. Right? You put that ball down. Everybody’s trying to, you know, eat the ball. We don’t have a lot of balls out there, right. We don’t have that kind of inventory in home price growth right now. It’s unhealthy.

Brena Nath: This episode is going live tomorrow, which will be February 18th, which is coincidentally, also my 8th year anniversary in the mortgage and real estate industry so excited to have my 8th anniversary with you, Logan. I know you and I have been talking…

Logan Mohtashami: Oh, congratulations.

Brena Nath: …a lot for those eight years. I remember when I started, I think it was early 2013, we had the mortgage rates go back down and there was a huge revive boom. And so I think the point you stressed a lot during those interviews like, they’re historically low, even if they go a little bit, when you look at the grand scheme of things. And I think I personally, continuously, like we bought a home this year, we’re a walking statistic about following these demographic changes as a millennial. And so I wanted to, knowing that I’m part of this statistic, I’m someone who bought a house. We paid over the listing price. We did get into a bidding war. We had this appraisal gap, which feeds right into home price growth. And so, you say the fact here that nominal home price growth goes above 4.6% is a bit too much for your taste and that right now, we’re running at 9.5%, according to the S&P CoreLogic Case-Shiller Index. So if you had to, once again, kind of put that into perspective for people in the industry, even if a homebuyer, what may be a homebuyer isn’t thinking about right now or the industry to help put into perspective, like that is a huge amount and what is the impact to the industry that home prices are sitting right now at almost 10%. That’s a huge amount. And I know personally, I witnessed that in our own homebuying journey.

Logan Mohtashami: You know, for many years, a lot of people said, you know, “Housing is underperforming because home prices are too high.” And then one of the reasons why I kind of go after the student loan debt crisis people is that. Then they said, well, student loan debt crisis is preventing homebuying as well. Millions and millions of people buy homes a year. If home prices were too high, we wouldn’t have this year’s data, or last year’s data, or 2019 data, right. If there is an equilibrium between home prices, and mortgage rates, and demand, and it’s very rare since 1996 in America to have home sales under $4 million. If home prices were too high, and mortgage rates too high, guess what. Inventory rises. We’ve had this happen before. Demand slows down and there’s a fine equilibrium. This is different, right. Mortgage rates are abnormally low for a longer period because of COVID. COVID is an unnatural event. So when we see 10% or near 10% growth, because the Case-Shiller Index lags actually. My concern is that it’s gonna get worse this year, you know, once the data catches up to it. We could be having 11%, 12%, 13%. Over time, this sticks, right. People think that there’s gonna be a dysfunctioning marketplace where home prices are just gonna crash and become… No. People just stay in their homes longer. So this kind of price growth, if it happens for this five-year period, years 2020 to 2024, just is a sticky housing inflation. And you don’t want it.

And we were spoiled, like, we were spoiled from 2018 to 2019. Home prices were rising but they weren’t going anywhere too fast. And I don’t think people understand the raw power of demographics and mortgage rates together because when this is here and this is not like a stock. A lot of people think that the housing market is like a stock market. You know, they think it’s like the bubble speculation, where all these investors are coming in, willing to put… No. People buy a home and they want to stay in there. And like the fanatical housing bearers think that well, if home prices stop growing and people have negative equity, they’re gonna sell their house. These people are lunatics, right. These people are all on another planet, right. People buy a home as shelter, right. Who cares about the real estate investors and their YouTube accounts. Majority of homebuyers buy homes to live in it, right. Their kids are gonna go to school and everything. So that sticky inflation is there. So the longer we have rates this low, with this massive demograph patch in here, it’s just not healthy long term. So if home price as the rate of growth comes down, it is the most positive thing. Just like our road in 2019 is the most positive thing because millions of people are gonna buy homes anyway, right. So that’s my concern. That’s why, you know, I believe mortgage rates are going to go up. That was a call for 2021. And when it does and if you see a little cooling down… Naturally, the housing data is gonna cool down just because the function of COVID made it look too hot on the data, it’s gonna be fine. Now, relax.

We have so many, like, fragile people in housing. Like one little thing goes wrong and they think, they immediately go to the crash. We have to lose this mindset because we’re tougher than that, right. This housing bearer is just not fragile. Like every little thing, it’s like everything is a crash. It’s not a crash. It’s just the rate of growth is too hot right now so embrace the higher mortgage rate story when it comes. Whatever the market does, market’s gonna do on its own and it’s gonna be fine. But this is not good. This is the one thing I wrote about that I worry the most about and it’s happening so I would be lying to everybody if I thought, rah rah shish kaba, yeah. Home prices are going up 10%, yeah. No. No. This is not like 2018, 2019 so that’s why I wrote this because when it does happen, when it’s cool down a bit, it’s fine, right. This is the way.

Brena Nath: So we’ve talked about home prices. We’ve talked about, right now, mortgage rates. The last kind of third part of the equation that you also touched in the article is inventory. So theres’s two kinds of parts I wanted to dissect on inventory. First one kind of ties into you as conversations that you and I have had and it’s on how people are staying in their homes longer. I’m talking about from 1985 to 2007, people were housing tenure for about 5 years and right now we’re sitting at a 10-year timeline. You published content on the impact of work-from-home, you published content on the impact of COVID and how people aren’t dating so they aren’t gonna meet, they’re not gonna have children, and what that impact on the housing market is. So can you dive into when it comes to inventory, the impact of the 10-year timeline? Do you see that changing at all, especially taking into account the past coverage that you’ve written about people and how they’re looking at houses right now?

Logan Mohtashami: So one of the things that I believe would be the case this decade that wasn’t the case in the last decade is that I do believe people will move more. Forget COVID and the work-from-home model for a second. Naturally, when people have kids, if they live in a small enough house, they will move, right. You move because of your kids. You move because of your jobs. You move because you want your kid to go to a better school. Whatever it is, there’s a reason for it. Back in the previous expansion, you know, there was too much debt. I mean, a lot of people didn’t even have to sell an equity to move their house.

Now, remember we’ve been building bigger and bigger homes for many decades and family sizes are smaller. The question is who needs to move. Now, the baby boomers moving down, that’s a different subject. But the moving up, I thought this period of time would be the case where people should start moving and the housing tenure should be flat or even go negative.

Now, the work-from-home story, that is the most exciting thing I’ll ever have in the housing market. I mean, because a lot of people, they live near their work. And if they can actually… Now, they live in a small home, especially if they live in a condo. They want a single-family house. If they can just move to a cheaper area, that is like one of the more bullish things I could ever think of. I’m just very cautious about this, just because what happens in a crisis typically stays in a crisis. I do think there’s gonna be some people who would work from home. I just don’t believe it’s gonna be as big as some people think. There’s certain jobs that it fits that model. And then there’s a lot of jobs that it doesn’t. So we’ll see how that works out but again, housing tenure should not go up, should not go from, you know, 10 years to 15 years during this decade.

But, you know, inventory is just one of these issues because we’ll never build enough homes to suffice everybody’s needs. Everybody keeps on saying, “We’re gonna build that up. We’re gonna build…” Mature countries do not have construction booths, right. We’ve built up so many homes in the last 100 years and the baby boomers are gonna pass away eventually. They don’t take their homes with them. Those homes are there. So the builders are very mindful of demand. Right now, it’s excellent. The HMI data is very confident, monthly supplies all, but while rates do rise, builders are gonna pull back a little bit so construction is not gonna save us. Higher rates will just cool things down because we’re abnormally low right now. It’s not like home sales can’t grow. We have pre-cycle highs and demands with pre-cycle lows and inventory. Home sales can grow. The problem is the inflation that comes with it. When you have the best housing demographics and the lowest mortgage rates together, it creates an unhealthy home price growth gain.

Brena Nath: Well, so the other side events, so that’s great information, especially when it comes to the tenure time and I think that is something a lot of people have been thinking about, especially as people stay updated in their own [inaudible 00:19:04.448] So the current one, I think, that also falls into with the inventory is you also touch on forbearance. I know yesterday, I think right as you were writing this article, the Biden Administration just announced that extra extension until June, which I think a lot of people are predicting that’s not gonna be the last extension that happens. So looking from the forbearance and the foreclosure side of the perspective, you said we can’t count on ending forbearance to free up a kind of inventory, so how can you, not just expand on that but just kind of set the scene there for the people who, I’m sure there’s a lot of people who are like, the naysayers are saying that it’s gonna create a huge inventory thing, so what is the reality there?

Logan Mohtashmi: Here’s the thing. And I mean this with all honesty, too. The housing bearers in America, on a historical basis, might be the worst group ever because… I always say this. I could get a six-year old trial. I could take them off the [inaudible 00:19:59.714] and go, look at the census data. Do you think there’s gonna be a lot of people buying homes? They’ll all say, “Yeah. That chart looks like a lot of people are gonna buy homes.” The forbearance crash pros, right, you know how they call them. For some reason, they thought that…you know, forbearance, when there was a peak, a little around $4.8 million. These people thought unemployment rates will get to 30%. We had like over $10 million loans delinquent during the housing [inaudible 00:20:26.584] but except, home sales were running at $7 million back then. That kind of demand cannot be sustained, right. Because these are not economists or data people, they’re just professional [inaudible 00:20:35.926]. You’re working from $5.3 million home sales in 2019 going to 2020. The amount of demand that would need to fall to create an inventory spike would be under $2 million. That’s never happened. It didn’t happen in the housing crash. So forbearance, it’s different because these people actually qualify for the loan. These are not like 2/28 interest on these loans, options on. If they get their jobs back, they’re gonna stay. They’re not investors, right. Even the investors themselves are home. These people who are talking about, “Don’t buy a house. Home prices are falling 30%, why would you buy a house?” You didn’t even sell your home last year. You’re going to get your own logic, right.

So forbearance, it’s probably half of what it really is, you know, about $2.7 million roughly. It’s probably half of that, in terms of people that are probably stressed. So over time, there’ll be some people that will foreclose very small. There will be some people that will be forced on. I’ve already personally seen some forced selling. Didn’t do anything to the data, right. So don’t expect this to be the saver. Forbearance in itself would solve my number one concern. If for some reason, the government says, “Hey, you guys are all on your own, you know, no more forbearance.” Demand is so good it would actually cool the rate of growth plus prices. I just never believed it would be that case just because when these jobs come back, the incomes come back. It means their fixed loan debt because these people actually qualify for a loan. They’ll keep the house. They’re homeowners, they’re not investors. And not even the investors unloaded their property out here so that was completely overblown. That’s why I harp on the forbearance crash bros, right. Their crash was supposed to happen last year. And now, they want seconds. So on a two-year period, on a historical basis, you’re never gonna get a group that has whipped more than this. So inventory is abnormally low because demand is good, mortgage rates are low, people are living in their homes longer. Bad recipe for home price growth which was always the number one concern here, so the only thing that could solve this, a little bit higher mortgage rates, hopefully. I’m not even sure if 3.375% or 3.5% is gonna do that, so I’m just, like, crossing my fingers. I wrote last year, I said, “Watch the housing data when the 10-year yield gets to 1.94% and higher. That’s 3.75%.” The rate of growth of some of these hot data lines should change. So I’m just hoping that we get a little bit of a breathing room because we don’t want 10% home price growth every year for 5 years. It just does not do anyone any good.

Brena Nath: We talked about a lot of different important topics during this podcast. Logan, it’s always a pleasure to hear advice on our HousingWire Daily and even on the coverage that you have on this [inaudible 00:23:18.172]. I just wanted to ask you if there’s anything else you’d like to add. I actually wanted to give you a quick second to just tease some things that people can look for coming from you ahead. I know there’s some big report coming out so just to wrap, a teaser of like what can people expect coverage from you for the end of this week.

Logan Mohtashami: Well, Existing Home Sales is gonna come up Friday. You know, the HMI data came out today but [inaudible 00:23:38.921] confidence is still very high. It’s even higher than I thought it would be but data is moderate. But just remember, Existing Home Sales data will moderate. It should, right. It should get back down to 6.2 million and maybe even lower. We have this huge gap between what Existing Home Sales closed at in 2020 which was 5.64 million to this, you know, 6.7 million number that we have right now. This will converge. When it converges, people are gonna freak out. Why? Because they’re not data people. Purchase application data right now, forward-looking is up 13.1% on trend for this yearly growth. That’s already 2.1% higher than my peak rate of growth for this year. A lot of housing data is completely out of whack, just because of what COVID did to it. So what I’m trying to do is gonna try to guide people this year because after March 18th, we’re gonna have all these COVID lows and the year-to-year data is gonna look crazy. We’re gonna have to make 60%, 70% year-to-year growth. We’re not growing that fast. So try to guide people. That’s what I want to do this Friday when I go on Bloomberg. Try to guide people on what to look for. And so far this year, the forward-looking housing data is stronger than I thought. That’s the main takeaway point so far and we’ll go over that on Friday.

Brena Nath: Looking forward to it. And I know our audience watches your coverage closely so once again, thank you so much for your time, Logan, and appreciate all this insight.

Logan Mohtashami: My pleasure.