Barry Habib on IMBs and margin compression

Sarah Wheeler: Welcome, everyone. This is Sarah Wheeler, Editor in Chief at HousingWire with the latest episode of our “Housing News” podcast. I’m really excited to welcome back our guest today, Barry Habib. Barry is very familiar to our audience and is a repeat guest here at “Housing News.” Barry’s bio spans a number of industries. He’s done so much. He’s the founder and CEO of MBS Highway with a deep background as a mortgage banking operator, strategist and advisor. He’s also an Amazon number one best-selling author for his book, “Money in the Streets.” And he’s a three-time Crystal Ball Award winner for 2017, 2019 and 2020 by Zillow and Pulsanomics for the most accurate real estate forecasts out of 150 of the top economists in the U.S. He’s a finalist for the prestigious Ernst & Young Entrepreneur of the Year for 2019 and he was named to the esteemed Mortgage Global 100 list for 2021 by “Mortgage Professional.” You know, he’s also, of course, the lead producer and managing partner of Broadway musical, “Rock of Ages” and there’s so much more. We could jump into it. But, Barry, so great to have you back on “Housing News.” The last time you were on was January to kick off the year, but it’s only been five months but I feel like there’s a ton to talk about.

Barry Habib: So nice to be back with you, Sarah. It’s always a pleasure. I think you guys do such a great job.

Sarah Wheeler: Well, thank you. When we talked in January, you mentioned the squeeze that IMBs were likely to feel this year because of some of the bigger players who can really drop pricing and squeeze those margins. We’ve certainly seen that. We’ve seen the two biggest lenders do just that, Rocket and UWM. So, how are the IMBs competing against that?

Barry Habib: So, it’s a big of a challenge, but IMBs always do very, very well and margins are compressing a little bit, but from higher levels. So, there was room to give, so that’s the good thing. You know, people hear things like margin compression, margin expansion, and it’s really quite simple. It’s just an issue of supply and demand, it’s the capacity that you have. When you don’t have a lot of capacity, then margins expand because the pipeline is difficult to take on more transactions so it gives you that pricing power. But, when things do slow down a little bit, and we are seeing, we’re actually seeing things slow down a bit, refinances are down a little bit, not crazy but they are. Purchases are still good, but the purchases are getting a little bit more difficult in nature just because now 25% of the market is cash buyers. That’s a lot. Just a year ago, that was 17%. And purchase applications on a year-over-year basis and sometimes it gets a little fuzzy to try and get that exact, because we had the shutdown and we had a big resurgence. But, if you figure they were down between 6% and 10% from last year, it’s a…and that’s counting for the fact that some of the differential is cash buyers. So, purchase application’s actually a little bit higher compared to last year, but when you take into consideration that a lot of that went into the cash buyer pool, purchases are doing well but they’re down a little bit. And that causes a little bit extra capacity, makes those lenders and IMBs try and fill that pipeline a little bit more by dropping margins a little bit.

Sarah Wheeler: You know, so let’s talk about purchase a little bit. You know, as purchase loans pick up, the referral relationships become so important and lenders added so many new team members over the last year, who might only have experience with refis. So, what does it look like now to shore up relationships with real estate agents, attorneys, financial planners and others?

Barry Habib: Purchase business is going to be always an important aspect because purchase over the next few years is anticipated to remain strong. And we could go through a period of time which refinance is still good, but they are gonna be more rate sensitive. You know, one of the things that drives rates is inflation. We know that inflation is risen, may continue to rise. But, if it does remain persistent, there’s only such a period of time that interest rates can withstand higher inflation.

There’s another really big thing that people should know about and I can’t believe we’re already talking about August, but between August 26th and August 28th, there’s an important meeting in Wyoming, in Jackson Hole, Wyoming, and that’s been the stage in history where the Fed has oftentimes made major announcements. There’s the possibility, once we get closer and we see what the data is, we’ll be able to zero in on it more, but I’ve got that circled on my calendar because that could be the day that the Fed does announce the beginning of a taper of the purchases. So, they’re purchasing a lot of mortgage-backed securities and that’s helping to keep rates amazingly low. Should they begin to slow down those purchases, that could add some upside pressure to interest rates.

So, this is why we know how sensitive refinances are, people on the refinance side need to be thinking about things like debt consolidation as a tool because that will help you weather those storms in case interest rates start to move up. Doesn’t take that much of a move up in interest rates to slow refinances down significantly. But, your question’s more geared towards purchases. And purchases have their own challenge as well. As mentioned, 25% of the purchase market are cash buyers. Well, that cuts mortgage people out of it, doesn’t it? And again, when you compare it to last year, where it was 17%, that means 8% of the mortgage market on purchases is vanished without a structural change to what’s happening between buyers and sellers. Just the nature of who’s buying homes.

Now, you add to that the fact that some of these larger players are coming into fold where, you know, independent mortgage bankers and your traditional loan originators can have some loss of transactions to more call center approaches. You know, they’ll feel the pinch from that as well. So, what do you do? I’ve always believed that you can achieve exponential growth by alleviating points of friction. It’s, you know, what I’ve done in my entire life is to try and look at ways to alleviate points of friction and the result has always been a period of exponential growth.

And so, what are the points of friction right now? Well, the points of friction are that people feel that there’s fear to purchase a home because there’s a housing bubble. Realtors need that help to show them why, at least for the present time in the next year or two, it doesn’t appear that way. Too much demand, not enough supply, forbearance not an issue, affordability, as we discussed in the past, is very strong. There are so many different things that those who have taken the time to gain expertise, can help that realtor alleviate that point of friction, and then gain favor with them.

Then, you have discouraged buyers. Discouraged buyers happen almost every day because somebody looks for a home this weekend, next weekend, the weekend after and they’re unable to consummate a transaction because it’s difficult. Let’s face it. It’s hard out there, right? Homes go quickly. You have to go over asking price. There’s not a lot of inventory to begin with, so buyers can easily get discouraged and then they might say, “Well, maybe I’ll come back in six months from now.” But, what we have to be able to do is, as an expert, as an advisor, is demonstrate to them why waiting six months would make the situation even worse. Because during that period, there is a chance that interest rates would go up, especially if the Fed begins to taper.

There is going to be a very high probability that we’ll see continued appreciation, so that means you’ll be paying more for your home with a higher interest rate. So, while it is hard work and while it means you might have to increase your offer more than what you would want to do, there’s probably a wise decision from, you know, we have to look at it individually, to stay with it and to not get discouraged.

And then, there’s the, you know, big issue that’s going on now with over 50% of transactions having multiple bids above asking price. This is a huge problem because even if you have the desire to want to go over asking price, your loan-to-value can be affected due to the fact that the lender will either go to purchase price or appraised value, whichever is lower. And if you bid too far above asking price, the appraisal may come in short, and that means you might either have to come up with a higher loan-to-value, potentially putting you in an MI situation, adding to cost, or you might have to come up with additional cash. Because maybe you could go to a 90 or 95, but that might not be enough, so you might have to come up with additional cash just to get to a 90, 95 to make up the difference between purchase price and appraised value.

So, we have to get creative and one of the things that, you know, we’ve been trying to show people what they can do is, you can, to some extent, create some money almost out of thin air, just by being wise and being creative. So, since this is a point of friction, how about if you said to your real estate agent, “I know everyone’s looking for the lowest rate. But, instead of taking that 3% rate with 0 points, what if we took 3.375%? Why would I take a higher rate, because at 3.375%, I can get you a lender credit on this $400,000 mortgage of maybe $5,000 or $6,000. That’s $5,000 or $6,000 less that you have to take out of your pocket for closing costs, and more that you could put towards the purchase of the home, which will, in some cases, allow you to win the home.” And now, of course, your payment goes up a little bit because the rate’s higher, but that’s an area perhaps that the customer is willing to do, and is able to do and qualifies for, as opposed to, “I just don’t have that $5,000 or $6,000 in order to do this.”

I’m not saying that this works 100% of the time. Of course, it does not. But, what if it works in 30% of the cases? Well, that means that you’ll be getting 30% more transactions and making 30% of those realtors a lot happier, and just introducing the concept and being creative and being smarter than your competitors. This is what your referral sources need. So, I know it’s a long answer but you ask me, like, how do we deal with purchase? How do we get more referral sources? Alleviation of points of friction almost always invariable leads to a period of exponential growth that, and that’s what we’re looking for. You know, linear growth is what most people do, and linear is one, two, three, four, five, six, seven. You know, if I took 30 steps in linear, 30 steps gets me across my office. But, if I take 30 exponential steps, that gets me around the world 10 times. So, if we can think how do we begin to grow our business exponentially, we put ourselves in the position of experiencing these periods that brings to levels that we never even imagined. And it really ensures and protects us during more turbulent times.

Sarah Wheeler: Yeah. I really like that example because I feel like it’s really taking the role and being a trusted advisor to the consumer at this time. Consumers are very frustrated. They are losing out and, you know, at the same time, you and I know that, I mean, your work, other economics work, things are just gonna go up. If you wait six months, you’ve actually done yourself no favors.

Barry Habib: Well, Sarah, I just wanna clarify that. So, you know, thank goodness we’ve made some good predictions in the real estate market for many years. I’m confident in the next year, in the next two years that prices will go up. Beyond that, it starts to get a little bit cloudier. We’re currently experiencing year-over-year appreciation of 13%. Our forecast at the beginning of the year, we ended last year saying, “We’re looking at 2021,” and while most people were thinking that the housing market would be flat, some people saying down, some people…we were one of the more optimistic ones saying, “In that 6% to 7% range,” and then later on in January, we revised that to our official entry for this year was 8.5%. We might come in short on that. It might be greater than that because if we look back over the past 12 months, the rate of appreciation has been 13%. Who knows where we finish this year off, but it more than likely will be greater than even our estimate of 8.5%.

That is a lot of appreciation and you begin to pull forward appreciation to today. You start to steal from the future. We’re combatting that right now in a couple of different ways. We’re still affordable, rates are still good, but if rates do start to rise, that’s gonna create a little bit of hesitancy. I don’t think that there’s a bubble right now. But, I think that if people are unwise in their purchase, they can create their own individual bubble. If a home is worth $400,000 and the seller has got it up there for $430,000 or $440,000, not uncommon today, and you bid $480,000 or $470,000 or whatever it is, also unfortunately, not extremely uncommon today, you’re paying $70,000 more. You’re paying almost 20% more for that home and it might take years before that home reaches that level. And then, if you hit a soft patch in between now and then, it could take even, you know, a considerable period of time that you’ll be in your own housing bubble.

Now, there are circumstances where the home’s value might reach the level that you’re overpaying in three months, in six months, and that’s more than likely pretty tolerable. It’s a couple months ’til you close anyway. So, those are likely much better decisions, good decision. We created the only tool that’s out there that allows you to do that evaluation of when will the home achieve a level of value to where I’m paying for it so I know how long I have to wait before I’m out of being upside down and into positive territory. And this will allow you to evaluate it, but it means that there are certain homes that maybe are worth chasing up to a certain degree, and there’s certain times where you need to be able to have restraint and patience and take the emotion out of it. I know all decisions are emotional. We’re fooling ourselves if we think they’re not. Every decision we make is emotional and then we try and rationalize it ourselves. But, we’re human. Human beings make emotional decisions.

So, this where having a tool that allows you to see it and make the evaluation might allow you to put the brakes on it and say, “Wait, I gotta wait six years before the home is gonna be worth what I’m paying for it? As bad as I want it, let me know what I’m getting into before I get into it.”

So, Sarah, these are really important times for us to look at this marketplace, which is hot, hot, hot, but we don’t wanna put ourselves in a position where we create our own housing bubble on our own home, because the market itself is not in a housing bubble. Sarah, there’s a lot that we talked about here. Could we start to see interest rates rise if the Fed starts to taper? It’s quite possible. Even though with the summer months, could rates rise a little bit based upon higher inflation? We’re seeing 3.5% core rate of inflation, how can you have a mortgage rate that’s below the core rate of inflation? You typically don’t see that unless it’s believed to truly be transitory and the rate of inflation’s gonna come down. Now, I think it will. We take a look at the last CPI report, it was up significantly, up 0.90% in just one months. That’s, like, mind boggling. Wow. But, when you break it down and you see that much of it had to do with the reopening, in other words, ticket prices to sporting events were up 10%. Airlines up 10.2%. You had hotels up 9%. And then, you have what’s going on with semiconductors, causing autos and computer prices to rise 5%, computers…I’m sorry, 10% on autos and 5% on computers. That is what most of the gain and inflation is.

So, we break that down further. What does that represent in the economy? It’s 7% of the economy. Not insignificant, but it’s a segment. The remaining 93% only rose 0.3%. So, if this indeed transitory, then yeah, rates will stay good. But, what if it starts to spread? What if it starts to stick? What if wage pressure inflation starts to come to be? So, there are components of this that might push interest rates a little bit higher and that could be a bit of a problem.

Now, I do think that there’s also the possibility we see a recession maybe in 2022, 2023. Remember, 80% of the time when the Fed starts tightening cycle, it leads to a recession. So, you know, we called the last recession, we got it right. You know, we were out there and we put our necks out on the line and said, you know, “There’s gonna be a recession beginning of 2020,” and sure enough, we got it in January. That, by the way, is two months before all the lockdowns that occurred. So, yeah, we hit a recession based upon true facts of the economy, not because of the lockdown. Certainly, that exacerbated it, but we were headed there anyway, when you look at the key indicators like we do, like the Case Freight Index and so many others that led us to believe that there was a recession in the offing. Most people don’t realize that, you know, when the unemployment rate reaches its lowest point, that’s when you’re headed for recession, not when it’s high. I know it’s counterintuitive, but I think that we’re set up for recession in 2022, 2023, which means we will see much lower rates, and perhaps at that point in time, another resurgence in real estate prices.

Sarah Wheeler: Really interesting to think about a recession, what that does to rates and then what that does to prices, because, you know, we’ve been talking about the fact that the only thing right now that can seemingly cool prices is either more inventory, which, you know, it’s not going to materially get better. It’ll get some better this year, but there’s not, like, a huge bunch of inventory coming. Or, you know, rates going up a little bit. So, let’s talk about inventory.

Barry Habib: By the way, Sarah, you bring up such a good point because inventory is really at the crux of this issue. So, you have two things. It’s the, you know, the famous chart that I’ve been showing for 16 years, which shows births from 33 years ago and what we know is that over the next three years, we’re going to get more first-time home buyers coming in. When you look at the birth rates from 33 years ago, there was actually a huge upturn in 1988, ’89, ’90, ’91. There was a huge upturn in births, just a real big in spike, that probably gonna result in more demand.

Inventory, people say, “If you can have somebody sell your home,” the only problem is that person selling their home will more than likely purchase a home, so it’s good. It creates activity, but it doesn’t create an addition of inventory. It says, “Okay, now I’ll have more choices to buy a home,” but that person now becomes a competitor because they need to buy a home because they need some place to live, so they become on the market as a buyer, so it’s net neutral. Really, a lot of the inventory is going to come from builders that are going to be building homes. And the reason why we’re not seeing a lot of that is the costs to construct have gone up quite a bit. You know, just the lumber increase alone, according to the National Association of Homebuilders, adds $36,000. So, it makes us have a more difficult time producing homes where they’re needed most, and that is in the lower end.

Clearly, the lower the price, the lower the margin. And if you’re a builder, you can’t blame them, there is also extremely good demand on the higher end side. So, as a business person, as a fiduciary to your stockholders, you want to try and maximize profitability. I’ll have a lot more profit with a margin on a home that…if I’m gonna sell either one just as quick, I might as sell a $600,000 as opposed to a $200,000 because I’ll make a lot more money on the $600,000 home. There’s a lot more margin in that, so you can’t fault them.

A government program that would say, “Hey, let’s give an incentive, rather than put this thing in people’s hands,” which sounds good, you know, if you’re this or that, or in this [inaudible 00:21:26.329], first-time homebuyer, it sounds great. But, the problem is, we don’t need more first-homebuyers. We got too many of them already. And if you give them more incentive, all you’re gonna do is drive the price up parabolically. So, if I’m getting a $20,000 or $15,000 incentive, I might pay $25,000 more for the home. So, I’ve actually lost $10,000 on that transaction and then probably I’ll push it so parabolic that there will be a void when this benefit is over, just like we saw in April of 2010. We already know this, we’ve seen this move before. So, rather than do that, let’s address the actual problem. Incent builders to build homes on the lower end. That will make things easier, more affordable for everybody. And what that would is say, maybe to the builders, “Hey, look, if you can get into a ZIP code and go 80% or less than the median home price, we’ll give you this incentive to do that,” in the form of a grant, a tax break, whatever it is, maybe just maybe, that might address the problem. So, sorry about that, to jump in, Sarah, but you just brought up something so important right now.

Sarah Wheeler: No, I agree and we’ve been talking about the inventory and the fact that there are now at least three bills in Congress for first-time homebuyers to incent them. But, you know, where is the incentive to build more? I know some people thought that the foreclosure, that we were gonna have a foreclosure crisis after the forbearance ends, but we’re down to about two million, lots of people exiting. I mean, what’s your vision on the forbearance when that ends?

Barry Habib: So, people just don’t understand forbearance. So, there’s a lot of things that…so, when forbearance is over, it’s not like you say, “Okay, due in 30 days is the payments that you missed.” You don’t have to pay it. There’s no interest on it. Eventually, it gets repaid, but when? When you either sell your home or you pay off the mortgage, typically buyer refinance. So, those will be staggered, they’ll be gentle, but more importantly, the average loan-to-value on a home today is, get this. I know it’s gonna be hard to fathom, but the average LTV on a home today is 32. Means there’s a 68% equity. That 68% equity suggests that in the vast majority of cases that have forbearance, it will be relatively easy to weather the storm.

Now, what was forbearance? It was a pause button on your payments. So, now you hit play, okay, so you gotta start making your payments again. Well, there were many people that gamed the system that didn’t really need forbearance, they should be fine. The vast majority of people have come back to their jobs, so since they don’t have that bill of past amount due, they should be able to go back to maintaining the payments they had qualified previously. So, that shouldn’t be a problem.

Now, there will a segment, albeit small, because we know factually that loss of jobs from COVID affected renters as opposed to homeowners by 4 to 1, so there will be a very small percentage. Unfortunately, you know, you certainly feel for these people that will have a difficult time making the payments. But, here’s the silver lining. There’s a high probability that they will have equity in their home that they’ll be incented to protect, so should they put their home on the market, it will more than likely sell quickly. They’ll preserve their equity, and that added inventory on the marketplace, it’s not gonna distort things because it will appear as if, the analogy to me is, like, taking a water can and sprinkling it in the desert. We need this inventory. It’s not like it’s going to flood us with inventory from the small amount of transactions that unfortunately, for the wrong reasons, have come to market.

Sarah Wheeler: I also think it’s completely different from last time in many ways, but in one way, it’s not concentrated in neighborhood. I mean, it’s not like, oh, this neighborhood, all these people took forbearance, just like, you know, last time you had the subprime lending. I mean, it’s totally different, so sprinkling in the garden is a perfect analogy, because it’s all over so it’s not going to bring housing prices down. It doesn’t have that cumulative effect of even if they had to sell their house, it’s not gonna sit vacant and empty. There’s not gonna be a bunch of blighted properties.

Barry Habib: By the way, you bring up vacancies. Vacancies are an all-time low, which was another incentive for price concessions, because I’ve just got carrying costs. So, because you have an all-time low in vacancies, sellers typically don’t have an incentive to reduce prices in a significant way. So, you’ve got everything working in favor of supporting prices, but the biggest one is supply and demand. Sarah, here’s another thing that most people don’t think about, is they say, “Well, you know, I hear this a lot. What comes up must come down.” That really isn’t true because there are several things that have gone up, and maybe they come down a little or they correct, but it doesn’t mean they come down to their original levels.

You see, if you look at California as an example, they have had persistently high home prices, yet they go up. Why? California has compensated for in a way that many places around the country might, is the national rate of homeownership in the U.S. is 66%. So, California has compensated for those persistently high prices by shaving off some of that homeownership rate. Some people won’t qualify for that. The homeownership rate in California, now it varies, of course, by different markets, but by and large around 55%. But, here’s the key. Fifty-five percent of that pot still overwhelms the availability of supply. So, if you just kinda narrow it down and make things simple, and we know the basic law of economics is price discovery is determined based upon supply and demand. So, if you have too much demand that overwhelms supply, there’s a really good chance that prices are gonna go up, and that’s what we’re seeing.

So, we know the demand will be increasing. We know that supply is challenging to bring to the market for builders right now. So, we see that, you know, unless affordability becomes and issue or a problem, that home prices will probably be in a position to have an upward bias. Now, affordability right now, I mentioned, is strong and we have to look at a couple of things there because this is the most confusing topic of all, where everybody in the media is talking, you know, Diana Olick is famous for this, and ATTOM Data is almost famous for this, and there are many others that are famous for talking about affordability.

So, here’s an example that I think really kind of crystallizes it. You see when we look at the median, first of all, they get it wrong, they look at median home price, and currently the median home price has gone up year-over-year 19%. So, they say, “Look at that and then look at hourly earnings.” Hourly earnings are only up 4%. It’s unaffordable, it’s unsustainable. Well, let’s clarify. Median home price is not appreciation. If we remember from math class, it means that half of the transactions above it, half below it. There are fewer pieces of inventory to purchase on the lower end, so that’s what’s moving that needle.

Now, actual appreciation, real appreciation is still very robust at 13%. It’s not 19, it’s 13. Now, compare that to hourly earnings and it does look a bit like it’s too far out of reach, except you shouldn’t look for hourly earnings because people work different shifts, people work different amounts of hours. A more accurate view would be to look at weekly earnings. That’s more indicative of what I might take as my real money that I’m making. But, that’s up 7.2% if you take the last few months to try and smooth things out, but 7.2% annual, let’s call it 7% weekly earnings. It’s still different than the 13%. So, somebody might say, “Okay, Barry, but those numbers, yeah, you’re right, but still unaffordable, right?” Here’s the example I like to look at, because now it requires a little bit of math, and math is hard for the media.

So, what we look at is, if you were to purchase a home last year and the principle and interest, only the principle and interest payment worth $1,000 bucks last year if you were to purchase that home, your income would have needed to be around $5,000 a month. So, $1,000 a month purchase, $5,000 a month income. Now, let’s say that that home comes back on the market this year. You didn’t buy it last year because you listened to the media, you got scared and now you have another chance to do it. Well, that home value’s gone up 13%. Since interest rates have stayed reasonably close, let’s just say they’re the same, that means the payment would go up 13%. So, last year was $1,000, you didn’t buy it. You wanna buy it this year? Now it’s up 13% or $1,130, which is an increase of $130 bucks a month. Hey, that’s less affordable, right?

It’s less affordable unless your income went up, and your income did go up. So, for your income to have gone up $130 a month, if you’re making $5,000, how much did it have to go up? Only 2.6%. So, the point here is that they don’t have to be the same. If interest rates stay the same, a 2.6% rise in your income will cover a 13% rise in purchase price. And that’s where the math comes in that the media has a tough time understanding. So, all these are points of friction. You start alleviating these and you put yourself in a position to really become of great value to your customers in your referral sessions.

Sarah Wheeler: Appreciate that. Even though we are part of the media, you know, we always try to get it right, so.

Barry Habib: I’m not saying it’s hard for you guys. You guys are great. You guys are what’s good about the media. I’m taking about, you know, the Diana Olick’s of the world and the media who’s biased is a negative one because they understand the affect of the amygdala, and the amygdala is within your brain, and it’s the reaction to fear, which kind of slows time down because as human beings, we want pattern recognition. Because if we see something bad happened as a result of doing this, we then say, “Oh, let’s really remember and embed this in our memory so we don’t have this bad thing happen to us.” Trust me, as someone who has their own show on CNBC for many years and has been on for 30 years on TV, I understand what they’re thinking. So, that’s why when you watch your 11:00 news, it’s not like, “Oh, man, things are really great out there.” It’s always with a negative bias because they know if they scare you, they’ll catch your attention for a longer of period of time, and they can charge more for advertising. You guys do a great job. You guys are presenting the facts, you’re presenting the story, but the major networks, what they typically do with any news item is have a negative bias.

Sarah Wheeler: Oh, absolutely. And we see it too, especially with housing, where maybe that’s not their specialty. And so, they get in a little bit over their heads. Well, let’s talk about, you know, we were talking about information and where people get it, I feel like originators have a ton of information at their fingertips now. You know, they can look at different data sets, but sometimes I think that might be overwhelming. From your perspective, what are some of the most important things that people should be paying attention to? What are the data sets that matter? What are the points of information that really should be guiding people in their business and as they’re talking to consumers?

Barry Habib: Okay. So, we created Certified Mortgage Advisor course so people would really have a good understanding of this to really be an advisor, not just say you’re an advisor, be an advisor, to really understand the economic trends, understand technical analysis, the Fed, how lenders are manipulating APR, understand all the economic reports, how the bond market works, where mortgage money comes from. You would think you would learn this in the beginning but people don’t and that gives you an advantage.

So, what should you watch, especially when you know this? Well, interest rates are based upon or driven by inflation, because the reason why inflation drives interest rates is because if you were to give me a mortgage, Sarah, and I’m paying you $2,000 a month every single month, you could take that $2,000 a month for the next 30 years, and buy a shopping list of goods and services. But, over time, Sarah, you notice that after a few months or a few years, the money that I’m giving you, the $2,000 a month will not buy everything on that shopping list because inflation drives prices a little bit higher. You can live with that if the rate of inflation is 1% or 2% and you’re getting 3.5%, you know you’re making a spread there. But, if inflation starts to rise, you can’t do anything about the loan that you’ve given me, because I’m a fixed rate, I’m done. But, you’re gonna begin to say, “Hey, if this inflation is here to stay, then on the future loans that I issue, I have to make sure that I’m starting at a higher perch to offset that more rapid rate of erosion. Therefore, I have to charge a higher interest rate.”

Most people don’t understand the simple concept of what drives interest rate. They just think, “Oh, one day it’s this, one…” No. And that’s why when you said, “Okay, what should you be looking at?” You look at the economic reports with an eye towards what is going to cause inflationary pressure, because that is what the interest rate environment is gonna look for. Now, today the game is a little bit rigged because the Fed is buying so much, it’s not a true market that is based upon natural reaction to those news items. So, it’s a bit muted. We’ve got training wheels on. But, under normal circumstances, inflation would be your driver. Now, what drives inflation? Economic activity. The definition of inflation is community dollars chasing too few products. And the hotter the economy and economic activity, the more persistent inflation will be, and as the economy softens, less pricing pressure. Now, one important thing that people don’t understand is the impact and the effect of debt on interest rates. And you see, if we know that interest rates are governed by inflation, inflation is governed by economic activity, debt will be a drag on economic activity.

The reason for that, Sarah, is because I’ll give you an analogy. If a family wanted to make a purchase of a vehicle, a nice car. Now, remember when we were kids, we would save up, put money in a piggybank and then we’d buy it. But, as adults, heck, who wants to wait? We wanna feel good now. We want that instant gratification. I want it. I want it now. So, we take a purchase that would have occurred in the future and bring it forward by using debit. We buy it on credit. We buy it with a loan. So, when we do that, we instantly create economic activity. The manufacturer, the dealer, the salesperson, they all make money. Everybody’s making money based on that transaction. We created a lot of economic activity. But, after that wears off, what’s left behind? The debt. Because now that family who purchased the car has $1,000 a month less for the next 5 years to generate economic activity.

And it’s not different for government. You just think about what happened in 2020. You had CARES Act 1 and 2 in March and April. It was $2.3, then $500 billion. We talk about $2.8 trillion, combine $2.3 trillion and $500 billion. These are very big numbers. And we have a lot of economic activity. But, by the fourth quarter, it already wore off. Then, we had $900 billion in December of 2020, followed by $1.9 trillion, another $2.8 trillion in March of 2021. It’s my feeling that all this economic push you’re seeing now will subside towards the fourth quarter, which is why the administration is already thinking, as you get into a congressional election year, we gotta do this program, we gotta do that program, the child program. They’re trying to do the infrastructure program because you’ve gotta keep the steroids flowing, you gotta keep it going, and we don’t know how that’s going to impact us. But, the debt from it, we have proof of this, you can see it in every country in the world, every period of time in the world, as debt rises, rates go down. Because after the initial flurry, once it wears off, you see slower economic activity because of the debt, which crushes inflation lower and then you have lower rates.

Plus, don’t forget about all the technological deflationary pressures they’ve had. Look, innovation solves problems. You think Amazon is not gonna do more robotics and they’re not gonna do more AI, as will everybody. Innovation solves problems. Technology is an enormous pressure on deflation. Remember, Moore’s law that, you know, this technology will double every two years. So, it is my feeling that we will be in a low interest rate environment for a long time, and I do think that there’s a chance to see low rates, perhaps as low as we were, I don’t know if they’d be lower. We got it right when we said the low on the 10-year Treasury would be a half, it was exactly right. I mean, I remember saying it on Fox, and people sent me mail saying, “What, are you freaking nuts? Half a percent. How is that ever gonna happen?” And we got to exactly, was the closing low on the 10-year Treasury. I think that there is a chance to certainly challenge 1%, maybe get below 1% again in 2022-23.

Sarah Wheeler: Wow. Super interesting and thanks for saying it on here. We’re interested to hear that, for sure. We’re coming to the end of our time, so I wanted to ask you one more thing. You know, last year, so many lenders ramped up staff, but with margins falling and being compressed with different things happening, are we seeing the first signs of cutting that we know has to be coming?

Barry Habib: You know, it’s really unfortunate because these are good people and these are their, you know, their livelihood. But, it becomes an exacerbated problem because as you know, what has transpired during that crush, people were paying a lot of money, because you can’t just make an underwriter in a day. Okay. Let me give you a week’s worth of training so, you know, you can be an underwriter or a processor. Certainly, these are skilled positions. So, oftentimes, the only way that you can add to your staff to accommodate volume, and it seemed like it was well worth it, is to overpay to steal somebody from one place to another. So, as the bidding process got higher and higher, these positions are very costly.

So, looking at it now if we get a persistent level of contraction and margin compression, there certainly is going to be very unfortunate to see some of these positions be let go. And that’s gonna be hard. It’s gonna be a difficult task, difficult things for people to consider. So, you know, and especially given the sensitive nature to interest rates that we will see should we start to see it taper, should we start to see interest rates rise, I’m not sure that’s gonna happen because I think what could happen is as we get to Jackson Hole, the Fed may be really prepared to want to start to taper. But, if we see the effects of the stimulus start to wane and we start to see economic activity, the Fed will be very, very, very fearful of wanting to pull the trigger on this too early, so they may kick the can down the road and that could keep the refi machine going.

By the way, the best thing you could be doing is looking at debt consolidation, because that makes you far less sensitive to rate increases, and far more valuable to your customers so you can positively change their lives by doing so. And here’s the thing about debt consolidation, is that you’re really taking what the defense is giving you. So, what has the market given you here? The point of friction that’s been alleviated is people have equity in their homes. So, you can use that equity. Look, let’s remember this in the past year or so. We’ve experienced exponential growth because of exactly what we said, a point of friction being alleviated. What was it? The barrier that the rate’s too high. So, the problem with that, Sarah, is that the market did that. We didn’t do that. And if you wanna be really successful into the future, you have to alleviate points of friction and you’ll constantly see exponential growth.

Sarah Wheeler: Well, Barry, thank you so much. There’s so much there, I’m gonna relisten to it myself and really interesting to hear what you’re looking for going forward. And we will definitely check back with you after that Jackson Hole meeting and kinda see, you know, where are we going from there. It’ll be really interesting for the rest of the year. But, thank you so much for coming on and sharing your insights.

Barry Habib: You’re awesome. Thank you.