Why the Fed wants more rate hikes

HousingWire

On today’s episode, Editor in Chief Sarah Wheeler talks with Lead Analyst Logan Mohtashami about The Fed, mortgage rates and housing inventory.  Related to this episode:  Have mortgage rates peaked, or will we see even more chaos? https://www.housingwire.com/articles/have-mortgage-rates-peaked-or-will-we-see-even-more-chaos/  HousingWire | YouTube⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q  More info about HousingWire https://lnk.bio/housingwire  Top 5 Trending:  Bob Broeksmit says tri-merge ‘won’t be around for long’ https://www.housingwire.com/articles/mba-tri-merge-credit-report/  Why eXp Realty chose Newrez for its next mortgage joint venture https://www.housingwire.com/articles/exp-newrez-revenos-mortgage/  Have mortgage rates peaked, or will we see even more chaos? https://www.housingwire.com/articles/have-mortgage-rates-peaked-or-will-we-see-even-more-chaos/  Figure’s Michael Tannenbaum on home equity lending to the ‘sandwich generation’ https://www.housingwire.com/articles/sandwich-generation-heloc-borrowers-figure-data/  TransUnion, Equifax debut ‘score later’ tools for mortgage lenders https://www.housingwire.com/articles/mortgage-score-costs/  Want more from Sarah? Don’t forget to subscribe!  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.

Transcript

00:11Welcome, everyone. I'm joined today by lead analyst Logan Motoshami to talk about the Fed,

00:16mortgage rates, and what we're seeing on inventory. Before we dive in, here are the

00:20top five trending stories on HousingWire.com. First is some of our coverage from MBA Annual.

00:26Bob Brokesmith says TriMerge won't be around for long. Followed by why EXP Realty chose New Res for

00:33its next mortgage joint venture. Then we have Logan's latest tracker, have mortgage rates peaked

00:38or will we see even more chaos? And figures Michael Tannenbaum on home equity lending to the

00:44sandwich generation. Finally, we have TransUnion Equifax debut score later tools for mortgage

00:50lenders. Plenty to talk about going on. Logan, welcome back to the podcast. And you are in

00:56full 49ers gear for people. Let me tell you all something. I did not have this in my bingo card,

01:02and I'm a very optimistic football fan. But to have the 49ers 5-0 playing the Rams, Broncos,

01:11and the Seahawks, and to have my UCLA Bruins 5-0 beating Oregon in Oregon, ranked 12 in the nation

01:19this year with everything beforehand, was not on the bingo card this year. So I am very, very happy

01:28what happened over the weekend. So all's well enough.

01:31Also, 49ers, as usual, are plagued with injuries. I don't even understand it.

01:36I know. I know. I think seven starters are out. I mean, the whole defensive line has been, you know,

01:40we're starting to get some people back, but it's just a tough team. You know, Sarah, if we're next

01:46to each other, I'd give you a Dre Greenlaw headbutt, you know, you know, and that's a, yeah. So it's

01:55just,

01:55that's such a physical, tough fighting game. And, you know, and that's, whenever you have a good

02:01rivalry, that's how those games should be. But just to all the Brock Purdy haters out now,

02:07how do you like me now? Brock Purdy and Mike Evans.

02:12Listen, sports is a great antidote to some of the other hard things going on in the world. So

02:17happy about that. Okay. Let's talk because it's Monday morning and we're going to talk about the

02:22tracker, but first I want to check in with the Fed. And we had Beth Hammock, who you have said

02:27in the

02:27past is really leading the Fed at this point. She's the head. What did she say today? And what

02:33do you make of it? So I always had Beth Hammock really runs the Fed now. You know, it is

02:40a, it is

02:40a Kevin Walsh. She's been hawkish for a very long time. So a lot of people think, well, why are

02:46they

02:46raising rates? You know, raising rates won't help you open the straight of Hormuz or, you know, it's not

02:54going to stop the AI boom. But Beth Hammock gave her explanation and thought today's a good day.

03:00You know, the bond markets close for Columbus Day. And Beth Hammock's take is this. She acknowledges

03:07that, you know, Fed rate hikes isn't going to open the straight of Hormuz. That's, that's,

03:12there's nothing the Fed can do for that. You know, she acknowledged that, you know, there's so much

03:19money in the AI boom that Fed rate hikes isn't going to stop corporate bond issuance and, you know,

03:26the, the data center build out. That's just not feasible. I mean, the, the, the Fed funds rate would

03:33have to get to such a level that it doesn't, would it make sense to where even the growth rate

03:37of

03:37inflation is that, but she did give an explanation on two things, which I just want to, I just want

03:46to

03:46kind of relay this so people could understand. She doesn't want inflation to get embedded more

03:53in expectations for business and consumers. And she believes that the, the Fed rate level was too low

04:03and too many companies might be thinking about more expansion. And she wants the Fed rate,

04:08Fed funds rate to be high enough to where other companies go, well, I don't know if I want to

04:14borrow, to help grow this economy at this stage. And this way, whatever supply is out there is not

04:22being gobbled up by more companies, which then can ease pricing pressure for a lot of companies.

04:30So she wants to slow the economy down to where growth gets much less to where companies don't

04:39want to expand. So this, this, this is her mindset in terms of why the Fed funds rate is still

04:44too low,

04:44why her neutral policy, which I believe is the highest out of all of them. She even said,

04:51if I'm wrong, I'm too low. So I think Beth Hammock is in the world where she probably wants the

04:57Fed funds

04:57rate, you know, six and a half, seven and a half, much higher than what it is right now. But

05:03realistically,

05:05she says, we'll just take these small moves and, and see what happens. Because I think

05:09the Federal Reserve would acknowledge that things would be a little bit different if the conflict

05:13wasn't here. And it's not like the labor market is like booming and wage growth is, is, is out of

05:20control. And there's a, there's a hunt for labor and labor costs are going up. That means labor costs

05:25have to be passed on for prices. So that, that isn't the case, but she just wants to make sure

05:29that

05:30the economy doesn't grow faster, that companies don't expand more. So then that could leave some

05:36of the supply shortages that some companies are facing. And that eases a margin pressure that they

05:42have to deal with. So do you think it's going to work? No, I think if, if she, what, what

05:48Beth

05:48Hammock wants is really, you got to be more aggressive with the Fed funds rate. So I just think she

05:55took

05:55charge of the, of the, of the, of the Fed funds hike. She knows she's only one vote. There's too

06:00many other people that don't want to go to that level. I think part, partly it's, she wants that

06:07role. She wants to go on LinkedIn and write about it. And you know, in Cleveland, she, when she talks

06:14to business orders, it's, it's basically, you need supply. You need more supply stuff than the cost.

06:21And I think she's just operating in that, uh, to really slow the economy down in a very fast fashion,

06:27you're going to have to do 75 basis points rate hikes in a very short amount of time. Now she

06:33says

06:33she's not in favor of that. She'd rather go incremental, but, um, unlike Lori Logan and others,

06:40uh, uh, nobody is really talking outside of taking all, uh, more, more rate hikes than getting those

06:47insurance, uh, uh, rate cuts from last year back. Um, and I think that's, that's, that's her stance

06:54that explains, I think, hopefully for people to ask, what are these rate hikes going to do? All it

06:58does is hurt the housing market. She doesn't care because Beth hammocks, uh, reasoning, uh, for the

07:05housing market is she, she went on TV and basically said, it doesn't matter what we do for housing.

07:10Cause nobody's going to give up their low mortgage rate. This is why the mortgage rate lockdown for

07:15every mortgage and real estate professional who says this is a detriment to your business

07:19because rates just getting to 6% can grow sales. Beth hammock doesn't believe in that. She just says

07:24there's, it's never going to come back because rates are just too high and nobody's going to give

07:29up her. That's not true. That's not what we've seen in the data. That's not the, the, all the new

07:34listings, all the people selling and buying homes, uh, and they're doing it with rates between six to

07:398%. Uh, you get more of that in terms of first time home buyers and more, more buying

07:44activity and rates just get near 6%. Can't go under 5.75% because neutral policy doesn't take us

07:50there. But, uh, uh, this, this gives you an idea of what the most hawkish person on the federal

07:56reserve is thinking. And she really wants to attack the economy, uh, to make sure companies don't expand

08:02more. Right. She isn't talking about a labor supply attack, like the federal reserve did in 2022 and

08:082023 where the labor supply was, was, was, uh, we, there was too many people quitting their jobs

08:15and going for higher pay and, and the unemployment rate was too low job openings. She, she's not in

08:20that camp as they were, but it just gives you a framework of, you know, uh, uh, the, once the

08:27growth slows down and supply pressures ease up, that gets you back to, you know, 2% inflation and

08:33people will come back to me. Well, the core CPI is, is, is not that far from 2% inflation.

08:39What are they doing? Well, core CPI has a lot of rent disinflation in it. The PCE inflation,

08:45personal consumption expenditures is what they really focus on. And they, they, they see that

08:50as still being, uh, uh, too hot and there's too many other variables in play to, to keep it going.

08:56I mean, um, good to know what they're thinking. I appreciate you walking us through that. It's just

09:01distressing. I wish that housing featured into this. It feels like, you know, their mandate doesn't

09:07have anything to do with housing, but it has this huge impact on housing. Like I've always said,

09:12the existing home sales market is not part of their mandate, uh, uh, nor is housing construction.

09:19As long as the labor market is intact, jobless claims are low, unemployment rate is low, um,

09:25and inflation is above target. That's not part of their, uh, preview. Now in 2023,

09:31you know, some fed members said, well, 8% mortgage rates is, is, is really restrictive. And they would

09:37probably still say that today. I mean, Beth hammock even says that today, the fed policy is too

09:42restrictive for housing. Kevin Warsh said fed policy is too restrictive for housing. Uh, Neil

09:47Kashkari basically said fed policy is too restrictive for housing. Even the smirk of Austin Goolsbee,

09:53you know, said fed policy, but that's not part of their mandate right now, you know, maximum employment

10:01and, uh, uh, price stability. And then their third mandate from 1977, you know, uh, making sure the

10:08long end of the bottom market doesn't get out of hand. And I like to note that Beth hammock basically

10:13said, I don't care that the bond yields are high. Uh, uh, that doesn't replace rate hikes, uh, because,

10:20uh, borrowing costs from a lot of companies come from, from there. And, uh, he, she wants to slow

10:25the economy down so companies don't expand more, uh, in this. So again, in her eyes, uh, wage growth

10:32going lower and, uh, lower job growth would mean that less expansion. And there you go. That's how

10:38you get, uh, uh, inflation back toward 2%. Ah, well, we, what, what's your phrase? It is what

10:46it is. This is the world we live in. I think that's the thing that you say a lot. Yeah,

10:51that

10:51way, this is the world we live in. But again, I, you know, I, the, the federal reserve went into

10:562026 thinking, okay, listen, we're going to let the, the, the tariff have that one time price hit.

11:00And then that's it. We're, we're good. I mean, Jerome Powell still kept the, uh, neutral policy

11:06where it was, but the Kevin Warsh federal reserve just killed the neutral policy talk.

11:11And now Beth hammock is kind of running the show. So this is where we're at. Okay. So

11:16these are the players that you have a fed chairman who doesn't want to talk, but you have fed

11:20Hawks who would love to talk. And, uh, the bond market kind of goes, uh, uh, with their

11:26thing because if they change, then, you know, it would be different. Uh, then, you know, the

11:31fed Hawks become slightly dovish, but, uh, since she's the ringleader, I thought people

11:35should understand her position. I think that's good. Well, let's turn to the tracker and your

11:40headline, um, over the weekend was have mortgage rates peaked or will we see even more chaos,

11:46which is a great headline. And also the, the heart of what we want to get to today is what

11:50you see, because you've been looking at like, could they go up? Could they go down? What

11:53does it look like? So maybe give us an overview first of what conclusion you came to in that

11:58article. Well, so far we've protected that 10 year yield at 5.35%. And we had a

12:05lot of drama. Um, but I'm very, I'm very mindful of the bond market at key technical levels.

12:12And then if it breaks above 5.35% and, you know, yields, uh, you get more aggressive selling

12:19after that. We have the potential to easily go up towards six to 6.41%, which, you know,

12:24the last time the 10 year yield was at, uh, 6%, I'm going to say it was probably early part

12:30of the century. And I think mortgage rates were like eight and a quarter to eight and a half,

12:34uh, uh, back then. And I think, uh, we don't want that. We don't, but, but, but, but that is

12:42the

12:42reality of the world we live in, right? People, you have consequences, right? People have to realize

12:48this. You can't play bully ball all the time. And I'm going to fire all the fed governors. I don't

12:53like, I'm going to put all my fed people in there. We're going to cut rates to 1%.

12:57So you have to have consequences for actions, right? If you want to do a trade war and a war

13:03in the middle East and conflicts and oil prices and everything, this is going to be part of the

13:07outcome. Now, um, it is, it is interesting that we had so much bad news, uh, the previous week

13:15and the 10 year yield didn't break. It tested it a few times, like three or four or five times

13:19it tested it. But, uh, I, I, I'm just trying to frame this out for the month of October.

13:25You know, if we get past that, then you have the midterm elections. And then if the Democrats

13:31have enough seats, they might be able to end this conflict or Trump might just go, Hey,

13:36listen, I have, I have so much time left before that happens. I'm going to go, I'm going to

13:41escalate this one last time. So we have a lot of variables that can make this worse. Uh, um,

13:47but, uh, this is the key month you get, you get a better idea of what can happen going out.

13:52I think somebody told president Trump, Hey, listen, the 10 year yield is getting really

13:56close. You don't want, you don't want this to break at this point. And then, you know,

14:00it's basically easy, uh, uh, marketing for, uh, uh, the Democrats going into the midterm.

14:06So, uh, president Trump made that statement about, Hey, listen, I'm not going to attack Iran

14:10before the midterm. So, but I'm not 100% convinced that he just doesn't let it go after either.

14:16So for the month of October is key. Of course we have a fed meeting. Uh, uh, we have two

14:20inflation

14:20reports this week. Um, but that was the idea of the tracker about here it is. This is a good

14:25fight.

14:26So it's gear up for the second week and everything that's going to happen in the month of October.

14:30But also I think some people were surprised that inventory fell, uh, a new listings data fell. And,

14:37you know, my explanation for that is the last podcast, you know, went into how to look at housing

14:41inventory going into 2027, but, uh, we're also at the seasonal peak, you know, last year, the, the,

14:49the seasonal peak was in August, but rates were going lower. So demand picked up. So it's harder

14:54to have inventory growth when demand is, is, is rising, especially mortgage demand here. You have

14:59the ability to go a few more weeks, uh, definitely before you get a peak, but it's also, we're usually

15:05starting that seasonal decline. So, uh, weekly pending home sales were down. Listen, there's,

15:10there's, if my threshold is 6.64 on, uh, for mortgage rates, and we're basically almost

15:161% higher, that housing demand is going lower. It's to, it's where we find a bottom. And,

15:21you know, the weekly pending home sales data is a little bit higher than what we were in

15:242023 at the last time rates got toward 8%. Uh, but we're going to see when that floor hits

15:30and then you start to get ready for spring, but there is no data with rates here that shows

15:35growth. And the last, you know, last year we were heading toward a nine month high in

15:40sales. So the year over year comps are going to be very, very hard. Uh, uh, uh, you're

15:45going to have bigger year over year declines in that context. And we see that in the purchase

15:50application data. We see that in the weekly pending sales, but there's nothing that I've

15:53seen in the last four years, 2023, four, five, and six to show that when rates are here,

16:00you have growth in any of the demand curves. Now we're also talking about the marginal home

16:04buyer, right? Existing home sales have been stuck around here, this 4 million level for

16:08years now. Uh, but that marginal home buyer tends to do better when rates get below 6.64

16:13and tends to do worse when rates get above 7%. Uh, but again, it's late in the year. This

16:18doesn't mean sales can't grow. We've had a nine month high in sales last year in December,

16:22but with this rate environment, there's nothing positive in that forward demand curve. So

16:27kind of don't read too much into that inventory decline. Just know that the seasonal nowadays

16:32come in and, uh, uh, that's how we start to prep for 2027. I think the inventory thing

16:39though, um, is confusing to some people because it's like, well, when mortgage rates go up,

16:43you expect inventory to go up just because like, Oh, okay. People are putting this on hold,

16:48but then you also have to think about new listings, right? How many people are listing their homes

16:52in this environment? You do. It's just, you know, uh, inventory is very seasonal. So you always get

16:58the spring increase. Uh, one of the things that were different about COVID is that the spring increase

17:03came a little bit later than normal and the seasonal decline also came a little bit, uh, later than

17:09normal. Uh, but we always have that seasonal increase. The only time I've never seen a seasonal

17:13increase in inventory is 2020 and we were in the middle of a pandemic. So that makes sense.

17:18People didn't want to, uh, uh, list their homes during COVID. Um, but, uh, uh, the seasonal decline

17:25should be happening and, uh, that has nothing to do. Now we're going to get the existing home sales

17:30report today. Uh, it's not going to be pretty, uh, but also the existing home sales report is going

17:35to soon have its natural inventory decline as well, but we are kind of getting back to, um,

17:42we're not quite back to normal, but we're, we're working our way back up to 2019. So I had to

17:46make a

17:46video and talk about how people, a lot of people don't know this, but inventory, our data and the

17:52NAR inventory inventory was heading toward all time lows before COVID hit us. Right. And I show it in

17:59the charts. Yeah. And it's still today. Not a lot of people do this. When people talk about 2019,

18:032019 active inventory was the lowest levels ever, ever recorded in the history of America.

18:08So we don't have any data. And then COVID happened and the rates got lower and people were worried

18:13about prices crashing. I'm like, Oh Lord, have mercy. We need higher rates. We're prices are

18:18about to escalate out of control. That was very hard to try to convince people. People did not like

18:23that stance. Yeah. Team higher rates is what you said. Yeah. Team higher rates. But the problem was

18:29we, again, as always, we had a bunch of jackasses who talked about forbearance and then, you know,

18:352021 was supposed to be the biggest crash at home prices ever because inventory and nobody was in all

18:40that. I remember that whole part of my documentary is actually the 2021 crowd with all these people

18:45who had all these things out. Everyone's going to rush to sell their house and take their equity.

18:48I was like, men and women do not act like middle-aged men podcast stock traders. They don't care about

18:54cap rates. They don't say, Oh, I could, I don't want to buy a house. I'm going to save money

18:57and put

18:58it in the S and P index. No, you buy a house, you have sex, you have kids, you raise

19:02your family,

19:02you go to work. This is what a house is. It's not a financial asset to revolve around what

19:08investment periods are. So people don't get it. They thought, Oh, here it comes. It never happened

19:132020 to 2026. There was never anything in the new listings data to actually talk about a surge.

19:20And you have a bunch of fake housing experts who have no data lines to work off, who regurgitate

19:25and copy other people's data and try to make a story for themselves. You, you call them what the

19:30foreclosure crash bros, right? Forbearance crash bros. We had fun with that crow. Oh my God. I remember

19:37the online battles with that crew. Holy Toledo. They didn't, they didn't even have their numbers

19:42right. I was like, they were like, Oh, forbearance is going to go to 10 to 15 million. I was

19:46like,

19:46homie, it's already over. Almost everyone got their jobs back by October of 2020 that were homeowners

19:54because people who had 60,000 and more income already were back to pre COVID employment levels.

19:59Who are you talking about? And it never happened. But again, the negative side is prices escalated

20:05out of control. But in this case, inventory actually broke to all time lows before COVID. So

20:13we're just trying to get back to those levels. So when people say 2019 inventory, I don't see anyone

20:20else in America, Russia, China, or Iran who says 2019 active inventory was the lowest levels ever

20:28recorded history. You can see the seasonal curve in the second half of 2019. And then the first few

20:32months of 2020 and we're just working. And that, that to me is the most healthiest aspect of housing.

20:37We're just getting back to that part. And then the supply and demand equilibrium works in a more

20:42favorable fashion for buyers in this sense. And that's what everybody always wanted. Everybody

20:46wanted more inventory, but people thought the builders were going to solve that. I go, homie,

20:50that's not how it works. Majority of all inventory comes from the existing home sales market because

20:55the stock is so much higher. The builders never build more than 200,000 homes completed units for

21:00sales. So you're never going to get it from that, but this group can. So just getting ourselves back

21:05there. So if you see the seasonal decline, it's perfectly normal. It's not because demand is

21:11picking up or anything. And then you start to prep yourself. So new listings data, week to week decline,

21:18slight down year over year, nothing yet on the negative side on both sides. Like you don't want to

21:22see new listings data start to go down year over year noticeably. And you never want to see a surge

21:28of

21:28new listings because of distressed sellers. Neither of those things are here. It's going to be the

21:32second week of October. So we're starting to get to that final curve where we're not even going to

21:36write the tracker the last two weeks of the year because it's Christmas and New Year's and nothing

21:41happens during that time. People overread it and we'll start to prep for 2027. As long as rates are

21:47here, then we know how this housing market works. We track it every single week and we take it. If

21:52rates go lower, we'll see when does that turn the market or if rates go higher, how bad does it

21:57get?

21:58Here, weekly tracker is designed for this. So you look out months ahead for the sales report,

22:04not this report that you're going to see today. And then we push it out.

22:08Okay. Before we go, one of the things that I noticed, it's why the charts on the tracker are so

22:15important because you can see exactly mortgage spreads. You can see how they've gone up and that

22:21has implications for the mortgage rates. At the same time, they're the only things holding us back

22:27from over 8%. So maybe talk about what happened with mortgage spreads.

22:33So how we track the spreads is we've got the weekly Freddie mortgage rate and sometimes on a day where

22:41spreads actually got better on a Friday, it doesn't really account for that. So the spreads are more

22:46elevated than the lows of this year, but they're still below 2025 levels. So they're still behaving very

22:53well. If the spreads got worse, you're already above 8%. You're talking well above 850 if you get back to

23:04the spreads. But the history of mortgage spreads is at this point, there's nothing to push it

23:09aggressively higher. But if the Federal Reserve got in a major rate hike cycle, I don't think the bond

23:15market is really priced for that yet. The bond market has priced in a lot already in terms of

23:22future Fed rate hikes. So the onus is the Fed has to either do it or talk it back. That's

23:28why people

23:29are trying to talk back the October rate hike. They want to wait one more month to get that second

23:33rate

23:33hike in. But again, it buys you a little bit times for the conflict. So I think if the Fed

23:40is trying to

23:40make it October past, it's just that they're hoping that this conflict ends by midterms, and then we can

23:47reassess everything at that point. But for now, not the case. The spreads are behaving good enough to

23:56keep things at bay. And again, if the spreads get worse, it's not just current mortgage rates, it's

24:02harder to get mortgage rates even to the low sevens again, because the spreads would need to improve for

24:08that. I did not plan for 2026 to talk about the back end of spreads being so important to a

24:16certain

24:16future rate level. But clearly, hopefully now everyone gets to see why they're so important in

24:21the mortgage story. Go look at the chart too. It's really instructive. As you said, it's up from the

24:26lows, but it's below last year. Logan, as always, thank you so much for guiding us through. Thanks for

24:33writing the tracker. We will talk again soon. Pleasure and good luck, everyone. May good fortune,

24:38be with you in this week of battle. Is that on the football side or is that on the mortgage

24:45rate

24:45side? No, that's on the 10-year yield side. Right now, I love my Niners and Bruins, but man,

24:50that 10-year yield at 535, man, just hold the line, right? Stay with me, you know? Gladiator,

24:57going down with the horses, you know? Here we go. All right, Logan, thanks.

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