Transcript
Dean Wehrli:
Hey everyone, this is Dean with a quick note before we start the podcast. When we recorded this with Barry about a month before here in mid-May when it’s being uploaded, mortgage rates were higher. They’ve since dipped below 3%. Just keep that in mind, as you listen to this very insightful podcast with Barry Habib. Thanks.
Dean Wehrli:
Welcome to the New Home Insights podcast, the John Burns Real Estate Consulting podcast about the US housing market. I’m your host, Dean Wehrli. Today, we have Barry Habib, from MBS Highway. Barry has been watching and acting on the housing market for decades and he looks 30, by the way, so that’s upsetting but he has been doing this for a long time. He has written a bestselling book and he’s been in all the major business media, including the Monthly Mortgage Report on The Squawk Box on CNBC for 13 years. That was on for quite a while. He’s been involved in all parts of the housing sector but today, we’re going to tap into his deep knowledge about mortgage rates and the mortgage market. Mortgage rates, as we all know, are incredibly important to the strength of the housing market right now, so getting that better understanding of mortgage rates is going to help us understand where we’re heading in the future.
Dean Wehrli:
Barry, how are you this morning?
Barry Habib:
So good to be with you here and everything that John Burns does. John’s a good friend of mine and I have just such respect and love for John. He’s an awesome guy. So excited to be here with you today.
Dean Wehrli:
Cool, appreciate it. Can you start … Just tell us a little bit about your background and about what you do at MBS Highway.
Barry Habib:
So, you were very kind. You mentioned a few things. I’ve been very blessed and fortunate that I’ve had some awards that have been related to mortgage and housing. One I’m very proud of, it just happened a few weeks ago, was I did win Zillow and Pulsenomics Crystal Ball Award for being the most accurate real estate forecaster in the US. There’s about 150 of the top economists, so I was the only one who had previously won it twice but I was actually blessed and lucky enough to win it the third time two years in a row, last two years and three out of five years. In 2019, I was Mortgage Professional of the Year out of a couple million people there. So they gave me that important honor.
Barry Habib:
I did some important things. I’ve been credited with kind of saving the mortgage industry last year when I got in front of the Fed and explained to them that the buying that they were doing was creating margin calls and they were buying too many bonds, so was lucky enough to be put in that position to do some good and Ernst & Young has an entrepreneur of the year, I came in second on that one, darn it but I think the other guy had a cure for cancer almost, so that’s okay.
Dean Wehrli:
Overrated.
Barry Habib:
I grew up really poor and this is all in my book which I was so fortunate that on Amazon it hit number one on its bestseller list for a period of time and did a lot of entrepreneurial stuff. People have called me a serial entrepreneur, so I’ve done everything from having a stereo business to a mortgage business that I’ve sold to a healthcare imaging business where we did high-end imaging, PET CTs and cardio angioscopy and things like that to businesses that have helped people in the mortgage industry understand the changes and then there’s some stuff that I’ve done. I’ve done some acting, I’ve been in a few movies, a show on Broadway, a show in Vegas, so I’ve been-
Dean Wehrli:
We’ll get to that.
Barry Habib:
… blessed to have some chances to do some good things.
Dean Wehrli:
Yeah, that’s good and by the way, go ahead and plug it, your book is called Money in the Streets, that was the-
Barry Habib:
Money in the Streets, yes.
Dean Wehrli:
… number one bestseller.
Barry Habib:
Yes and it’s a book that really … I created it to help people. It’s stories and lessons that I’ve learned but it’s through me, it’s not about me. It’s things that everybody who’s reviewed it has been unbelievably kind and said it’s truly made a difference for them and helped them to see opportunities, help you get through a tougher time and also help you deal with the times that are great that you want to maximize. So those are the opportunities that we’re given that we want to really try and maximize those times. So it’s a fun read. It’s an easy read. It’s a lot of fun.
Dean Wehrli:
I have it on my Kindle. I admit, I have not read it yet. It’s in my cue though. I have to finish Kasuo Ishiguro’s The Buried Giant before I get to your book but I will, I promise. So, let’s start with mortgage rates and how they act and mortgage rates typically act in concert, roughly, with the 10-year Treasuries and they typically are at a premium to 10-year Treasuries. Just give us a little idea of why that is and what might cause that premium to shift or to change or to increase.
Barry Habib:
Yeah, so mortgage rates in the 10-year Treasury are going to react to the same things that drives all interest rates and that’s inflation. Inflation and credit quality are the two things that drives interest rates and we’ll talk about that in a second because you first mentioned the premium of one to the other. So the 10-year Treasury, like all government instruments where the government borrows money, that’s backed by the full faith and credit of the US Government. It’s deemed to be the most safe, so therefore, the safer the instrument, the less interest that has to be paid as compensation but mortgages are very safe because they’re backed by the underlying mortgages and real estates which has been doing very well. But you get into a situation like we saw in 2007, 2008, and 2009 where you could be in a position where those mortgage-backed securities, depending on the level of quality for those, could become more compromised, hence you have to reward investors with a premium over them.
Barry Habib:
Now, they don’t travel in lockstep, as I said, they’re both dependent on credit quality, which is number one to say what’s the chances of me getting my money back. So assuming that that’s of a very high nature, then really the driver that we see day-to-day is inflation and the reason for that is because inflation erodes the fixed payment you get. So let’s just say you gave me, Dean, a mortgage and I’m paying you every month. I’m paying you $2,000 a month. You take that $2,000, you buy a shopping list of goods and services and then what happens is that the next month, the same thing, the same thing, the same thing but over time, you notice that hey, I can’t get everything on that list because inflation caused the prices to go up a little bit.
Barry Habib:
So, what’s happening is your buying power is eroding. So if inflation starts to creep up then what you’ll do is you can’t do anything about the loans you had issued but on future loans, you’ll say, how do I offset that more rapid erosion? Well, if I charge a higher interest rate, I’ll have a higher amount that I’m receiving and that will offset the more rapid erosion and simply put, this is why we see when inflation starts to appear, interest rates rise and that’s a great segue for what’s happening right now in the market and why we think we’re going to see higher rates over the next couple of months.
Dean Wehrli:
So, inflation is kind of that preceding variable that really is impacting both treasuries and interest rates in concert?
Barry Habib:
The entire credit market, correct, and the longer the duration, the more of the impact. In other words, if there’s a loan out for a year, well, inflation’s not going to erode that much of your buying power, especially if it’s at a gentle level but you take that loan that might be out there for 30 years and then you get that compounding effect, which is why the longer the maturity, the more sensitivity to inflation. And inflation, you’re hearing more about it but we’re seeing inflation right now.
Barry Habib:
Now we take a look at things like the Consumer Price Index or maybe the personal consumption expenditure, these are two important inflation reports but if we were to look at something that is called the core rate, that is stripping out food and energy. Now, people say, well, look, I need food and energy and that’s common sense approach, yes, but remember, when we look at this from the Fed’s perspective, the Fed only wants to look at what it can influence. So energy, if a tanker like the Ever Given gets stuck in the Suez Canal and it causes oil prices to rise, the Fed can hike rates, reduce rates, it’s not going to change that. And weather patterns, the Feds, they can save a lot of power but they at least realize that they don’t have power over the weather.
Dean Wehrli:
Yet.
Barry Habib:
So, the Fed looks at the core rate, which is things that they believe they can influence with their monetary policy. So it’s very important. Now, currently, the core rate of inflation is very benign. It’s at 1.6% year over year. So that’s pretty mild but guess what, in a month from now, you’re going to see that rate go above 2%, probably to 2.2 or 2.3, that’s going to raise some eyebrows. Two months from now, that’s going to be at a level that’s more than likely going to be closer to 2.5%, maybe higher than that. So why is this important? Because if an investor is issuing a mortgage today and let’s pick a rate that’s approximate of where the market is, about 3.25%, well, with 1.6% inflation okay. I’m not going to offer 3.25% with 2.6% inflation.
Barry Habib:
So, some of the rise has already been baked into mortgage rates but over the next two months, it is my humble opinion you’re going to see a half a percent increase in rates on mortgages probably closer to three and three quarters, so get it in now, do it now. The good news is, towards the end of the year, I see them kind of tapering back down and here’s a spoiler alert, I don’t know if we’re going to talk about this, long-term, I see a recession coming and I think 2022, 2023, you’re going to see very low interest rates and a really good opportunity. So think about that today and you don’t want to invest a lot of money in points and upfront fees, try and keep your fees low, your points low so that you know you leave yourself in good position to refinance to a lower rate over the next couple of years because you will have that opportunity.
Dean Wehrli:
Let’s talk about that in a second, that’s a good segue but first I wanted to ask- So really actually one thing real quick is that really kind of the Fed uses treasury rates then in a sense to sort of stimulate the housing market because the lower they are, the lower mortgage rates should be and therefore the more demand, theoretically, in the housing market which in turn, stimulates the economy. Is that the purpose? The motivation?
Barry Habib:
So the Fed wants to … If they want to stimulate economic activity, what the stimulation of economic activity, the tool that they use predominantly is lower interest rates for the purchase of things like the 10-year Treasury or different maturities. So 10-year Treasury Notes is a very common one that they will make purchases of as well as mortgage backed securities directly because the more they buy of 10-year Treasuries and mortgage-backed securities, the lower the borrowing costs to someone in the housing market will be and if you reduce borrowing costs, then you make it more appealing or easier for somebody to enter the marketplace and purchase a home.
Barry Habib:
And that purchase of a home or the rise in home prices or the rise in stock prices creates what they call the wealth effect and that makes me feel a little better. I see my statements are coming in, where prices are doing better and my net worth is up. I’m more free to spend money and that typically generates more economic activity but the downside to that is that too many dollars chasing too few products like you see in the housing market today. There’s too many buyers, not enough inventory. So what’s happening to prices? That’s the definition of inflation, too many dollars chasing too little product.
Barry Habib:
So, we see home price inflation. So when you get a lot of inflation, the Fed could be on the other end of things where if they let inflation get too far out of control, they can keep rates at zero. They can buy treasuries. They can buy mortgage backs but as we have seen in the past three or four months, rates have moved up about a half a percent and they’re probably going to move up even more because now inflation is what’s scaring the bond market and investors are going to require additional compensation to offset the erosion of their buying power from inflation.
Dean Wehrli:
I think I know the answer to this question now but I’ll ask it anyway. Beyond 10-year Treasuries, what metrics might you look at to understand where the mortgage rates are going and I think the answer is inflation?
Barry Habib:
Well, inflation. What you want to look at if you want to look at where mortgage rates are specifically, the exact instrument you look at is mortgage-backed security instruments. So you’re going to look at 30-year or 15-year mortgage bond depending on what you’re looking at. Now, the 10-year Treasury will reasonably approximate that. So look, if I wanted to see what Apple stock is doing, I’ll punch up Apple. That’s like a mortgage-backed security. But if I see the Dow and the S&P and the NASDAQ are all up significantly, there’s a really good chance that Apple’s going to be up significantly.
Barry Habib:
So, the analogy is the 10-year Treasury is like looking at the Dow, the S&P or the NASDAQ to give you a barometer for the feel of the market direction but if you really want to know specifically what the change is with regards to the individual security and mortgage rates, you’re going to look at mortgage-backed securities for that to give you the definitive and both of those, because they’re both in the bond market, will be driven by inflation and inflation is driven by economic activity. The more dollars, the more economic activity, the more inflation, the higher rates will go.
Dean Wehrli:
Okay, let’s get back to your crystal ball then. So you see near term mortgage rates, they’ve already been creeping up, we’re doing this, by the way, mid-April, mortgage rates have been creeping up to like you said, 3.3, 3.25, something like that, are we … So, you think that’s going to … That trend is going to continue here?
Barry Habib:
By mid to end of June, I anticipate us looking at more of a three and three quarter rough gauge of where they’ll be. Could they be three and five eighths? Could they be three and seven eighths? Sure. But they will be higher than where they are today, put it that way. Whether it’s a quarter or a half or five eighths higher than where they are today but they will be higher than where they are today simply because the reading we’re going to get on inflation will push those. Now, there could be some outside factors that occur that cause a change, but the overall direction should be over the next couple of months to see higher interest rates.
Dean Wehrli:
But you mentioned some of that’s baked in. So some of that, we’ve had some speculation on exactly that trend baking in this current rise in mortgage rates?
Barry Habib:
Correct, which is why when we see the … Let’s use round numbers here, when we see inflation go from 1.5% to 2.5%, that’s a 1% rise in inflation. Why am I only anticipating a half a percent rise in mortgage rates is because seeing into the future, people have already started to move mortgage rates higher because they thought inflation would start to increase. So we’ve got about a half a percent already baked in in advance, we’re going to get another half a percent over the next couple of months that will then be commensurate with a full 1% rise in inflation.
Dean Wehrli:
Okay, now you said the R word a second ago, recession.
Barry Habib:
I did.
Dean Wehrli:
Okay, so what’s the timing? What’s your sense of that and why and the timing for that?
Barry Habib:
The timing’s always hard and the further out you go, the more other or outside influences or nuances come into play. So these things are always a bit tricky but just logically speaking, the one concept that most people don’t understand is they think that when we see stimulus that that’s really good for generating economic activity. Yes, that is true in the very short run but then over the long term, that debt causes a drag. Look, so in 2020, in March and April, we had the CARES Act one and two, totaling $2.8 trillion. So by October, we already saw that wear off. GDP for the entire year of 2020 was 4.3% but in the fourth quarter, after the effects of the stimulus had worn off, it was a meager 0.4% for those three months.
Barry Habib:
So, it was all front loaded. Now, not coincidentally, between December 2020 and March 2021, we saw also $2.8 trillion in stimulus. So here we’re seeing inflation pressure, we’re seeing economic activity. We’re seeing all this stuff but it is my opinion that by the fourth quarter, we will be seeing the effects of this wear off and that’s a very simple concept if we look at an analogy. So let’s just say a family wants to go out and buy a car. Now, when we were kids, we used to save up money, put it in the piggy bank, break the piggy bank, right? But we don’t do that anymore. What do we want now is to tell us [inaudible 00:15:35]. The older we get, the more instant gratification we need, right?
Barry Habib:
So, I don’t want to wait for that car and save up for it, I want it and I want it now, so I’m going to use debt to take a future purchase and move it to today so I can have that purchase today, which is great. I have to borrow and use debt for it. So, what happens is now that I’ve created this economic activity, the manufacturer, the dealer, the salesperson, they all make money. They spend it, it creates a little flurry for a short period of time. It’s very ephemeral, so as it wears off, what is left? What is left is that same family now has a thousand dollars a month less every single month for the next five years, so it drags on economic activity. And it’s the same with governments.
Barry Habib:
We now have $30 trillion in debt and it’s an amazing amount. We use trillion a lot but a trillion means that if you went out and you spent a million dollars a day every day seven days a week, you know how long it would take you to get to a trillion? It might be surprising but it’s 2700 years. If you started in 700 BC spending a million dollars a day, you would not hit a trillion dollars yet, okay? So it is a huge amount of money. We owe $30 trillion and what is going to happen and what we see happening and this is true every time in history, everywhere in the world, as debt rises, less money for economic activity, slower economic activity, pressures inflation lower, lower inflation, lower rates. So higher debt, lower rates. Lower debt, like we saw in the 50s, 60s, and 70s caused higher rates because there was more economic activity.
Barry Habib:
As we started in the 80s to see rates decline, it was directly coincident with debt increasing, which slowed economic activity and it’s not just the US. It’s China, Japan. It’s the UK. It’s Italy. It’s France. It’s Germany. Everywhere in the world, every period in time, same thing. And this level of debt is going to come home to roost and slow economic activity.
Dean Wehrli:
And the lower rates would not have the stimulative impact they might otherwise have because consumers are in a great deal of debt?
Barry Habib:
Continues to be diminishing returns. You need more, just like a drug, you need more of the drug at higher levels to create a similar response but in every instance, that response is ephemeral. So you get the burst and then it withers away and when you think about all we’re doing is we’re taking these future purchases and moving them forward. There’s going to be a pretty big void that’s left there, so I think that we’re going to be in slower economic times and interest rates will be reflective of that as we get to the end of this year and into 2022. Whether we get the textbook definition of recession or not, that really depends.
Barry Habib:
Now, I did correctly forecast in 2019, I said … Actually, at the end of 2018, I said early 2020 looks to us like a recession and we nailed it. January 31, that was a recession. That was two months before the lock downs but still, we were able to take a look at the economic factors that typically precede a recessionary period and we said the interest rates are going to drop and we called it correctly on interest rates and we said that that means real estate values will go up and here we are. That was pretty much spot on. Now, past performance does not guarantee future results as you know but to us, it seems like, as Mark Twain said, history does not necessarily repeat itself but it does tend to rhyme. We see a lot of rhyming going on there and I think that we’ll be in a position where we’ll see much slower economic activity and an opportunity with lower rates and maybe recession 2022, 2023, I think we will get there.
Dean Wehrli:
Okay. Well, now I know why that Richard Pryor movie, Brewster’s Millions, was not called Brewster’s Trillions because that would’ve been a very long movie.
Barry Habib:
Yes, I remember that one.
Dean Wehrli:
We have rates creeping up. Typically, I mean that’s led at least in the near term here recently a decrease in refi’s, in refinancing mortgages. Do you think … Are lenders going to sort of let their market kind of shrink? Like do you think they’ll start doing some more … Maybe some less credit worthy folks and give mortgages to those guys?
Barry Habib:
Well, if they read the playbook, that was certainly a mistake in 2007 and 2008, right? There was just a lot of money looking to find a home, so they opened the spigot maybe too wide, definitely too wide. I don’t know if-
Dean Wehrli:
Do they read the playbook? Have they read the playbook? I don’t know, it’s questionable.
Barry Habib:
But I don’t think that that’s where we will head but what smart lenders will do is they will, kind of like a great football coach or quarterback, take what the defense gives you and right now, what people have to understand is that there is a tremendous amount of equity in homes and there’s also, coincident with that, a huge amount of debt amongst the highest amount of personal debt that people have ever had. So, the smart players out there are showing their clients that you can pull some money out of your home, pay off all your debts and then if we want to really change your life for the better, let’s take that savings and instead of pocketing it and blowing it, let’s put it back and plow it back towards your mortgage and accelerate that so that you reduce the terms.
Barry Habib:
So, if somebody has 28 years left on their 30-year mortgage, they can reduce it to 10 or 11 or 12 years, keep their payment exactly the same that they’re making now but now help their retirement because they’ll have 20 years less of making that $4,000 or $5,000 a month payment, so now they got their retirement set and also the equity it built could be used for their kids’ college and it’s just a feeling of wellbeing that they will have. So, this is what smart people should be looking at today and it’s much less sensitive to the interest rates out there. Plus, anybody who purchased their home with less than 20% down, they’re paying something called mortgage insurance.
Barry Habib:
Given the fact that over the last 12 months, we have seen increase in appreciation around 10% plus a decrease in the amount you owe due to normal amortization of 2 to 3%, maybe 4% depending on where you are in the schedule, you now might have 12, 15% more equity in that home, eliminate that mortgage debt of … I mean eliminate that mortgage insurance so that could save you hundreds and hundreds of dollars every month just in that alone.
Dean Wehrli:
So, kind of using this equity that has been rising tremendously as kind of a piggy bank, a very lucky, a fortunate piggy bank but use it smartly to drive that debt?
Barry Habib:
Use it smart. Don’t just tap into it and blow it. Use it to structure your debts in a way that by making the same payment, you’re shaving many, many, many, many years off the life of your loan and now you’ve put yourself in position. Well, look, if I’ve got no mortgage in 10 years, that gives me an extra 18 years of not making that $5,000 a month payment, that’s probably the best retirement plan in the world and then what I would also have in 12 years from now is maybe an extra 2, 3, 4, 5, $600,000 equity in my home depending on the amount of mortgage that you would’ve had, the larger, the bigger the savings and now you can utilize that for your kids’ college, for other things. Maybe it’s a vacation home, something like that. So, you can certainly use the leverage there.
Barry Habib:
It’s a wonderful way to … Without increasing payment in a guaranteed fashion, doesn’t matter what bitcoin does, the stock market does, doesn’t matter, you guaranteed will have amassed this if you do one thing and that is make your mortgage payments.
Dean Wehrli:
At the risk of being cynical, I predict more trips to Disney World and fewer people paying down their debt.
Barry Habib:
It is human nature to want to do that, so look, you cannot force people to do things but in either case, you can argue that those more trips to Disney do add personal enjoyment and pleasure. So, if you’re keeping your payment the same but you’re enjoying things more, why not, right?
Dean Wehrli:
Let’s talk about mortgage availability. Do you consider this right now kind of a tight lending environment, a loose lending environment or porridge too hot, too cold or just about right?
Barry Habib:
Well, I think it’s kind of appropriate. So, I don’t know if I want to use the goldilocks but it is certainly appropriate. We had seen some interesting things happened after the crash in the late 80s and early 90s where the lending standards got so crazy tight and they eliminated things that were programs that probably did have a place but they went overboard. After the housing bubble, same thing of 2007, 2008, 2009, we saw the same thing happen where it kind of went overboard. Now, it hasn’t gotten too relaxed but it is appropriate. I think that lending has got some stiff requirements but they’re appropriate requirements to make sure that you can make the payments and that sometimes is a dose of medicine that is good for you too. It’s good for the borrower too to make sure that they can meet these standards.
Barry Habib:
It’s certainly not a perfect system but I think right now, the underwriting guidelines are appropriate. They’re not too lax, which can be dangerous and they’re not too stiff, which can be restrictive. So I think we’re right in a good spot here. Look, if you qualify, there’s a really high probability you’ll be able to get the home and if you don’t, maybe there’s a reason why you shouldn’t.
Dean Wehrli:
Yeah, okay, since you are the best forecaster out there, what’s your crystal ball for mortgage availability. Will that trend to be a little looser?
Barry Habib:
I think that you might see, around the fringes, around the margin, a little bit more relaxation but I don’t believe that they’re going to be going overboard but I do think that home prices are going to continue to go up. By the way, I know we haven’t gotten there but you’re going to see inventory levels remain low, the amount of people coming into the market is going to increase but you’re going to see a continued level of significant appreciation in home values.
Dean Wehrli:
How about are you seeing any kind of those more exotic loans creep into the market like we had in 2004 and 2005?
Barry Habib:
Well, those fog up a mirror type of loans, they certainly … I mean look, a 580 FICO score, which is not good, right? You could get a 580 FICO without verifying income, without verifying assets and zero down, hey what could go wrong with that loan, right? That was kind of crazy. It didn’t make sense but I believe that we may see maybe some relaxation in the credit score required but they’ll probably need some compensating factors. So, the spigot will open a little bit but it will not be without some good contemplation as to why we should be doing that.
Dean Wehrli:
So, we’re not going to make the same mistakes-
Barry Habib:
I don’t believe we will because it was really devastating and there was so much pushback, so I don’t think we’re going there.
Dean Wehrli:
That’s good. The Fed continues to buy mortgage-backed securities. Gives us a little primer on why they do that and will they ever stop or maybe more likely, will they ever be able to stop?
Barry Habib:
We had the temper tantrum when the Fed tried to stop this a few years ago and the Fed said, okay, well, we’re at 4.5 trillion on our balance sheet, they took it down to about 3.8 trillion. The market threw a fit. They said sorry. So they continued to at least keep their balance sheet neutral and of course, now it’s loaded up dramatically higher, more than double that amount right now. I don’t know if the Fed can exit this gracefully. I think the fat balance sheet is here to stay and the Fed lies too. The Fed lies. They say, oh … Yeah, and they change. We’ve been calling the Fed out on this because they said they’re buying $80 billion in treasuries and $40 billion in mortgage-backed securities. We said, what? So, go to newyorkfed.org, they’re buying 100 billion in mortgage-backed securities, not 40 billion and then they changed their language to at least 40 billion. So they did that when we called them out but now they’ve made it much more clandestine.
Barry Habib:
So, here, you’ve got this supposedly transparent Fed except when it comes to telling you honestly how much they’re buying in mortgage bonds and treasuries because it would make you choke to see how much they’re buying but they’re buying much more than they’re admitting to publicly and now they’ve changed their verbiage to, oh, at least that amount. Now, your question was why are they doing this? Well, they want to try and keep rates at lower levels because they know that the recovery is fragile and if we do see a significant rise in rates and borrowing costs, it would really put a screeching halt to economic activity.
Barry Habib:
So, they’re trying to do their best here by continuing to get economic activity without pushing inflation button too much and without tapering back too much so that we see a deep reduction in the economy and a relapse to quickly go into recession. Now, there is something that they’re doing, YCC, it’s called yield curve control, and that’s buying an amount of treasuries to keep yields within a certain range. So, if they go up, they’ll just buy more. If they go down, they’ll buy less. So they’re trying to, without admitting to doing so, use something called yield curve control and to some extent, they’re doing this and they’re keeping rates at a pretty low level.
Barry Habib:
The 10-year Treasury has moved up. Back in November, it was 0.84 and now it’s pretty much double that right now, so it has moved up a lot, predominantly when Janet Yellen was the one that was named to be. She wasn’t appointed yet but just on naming her because she strikes fear in the hearts of those who care about longer term and inflation and being responsible. She was a horrible Fed chair and as treasury secretary, she’s shown a lot of that irresponsibility publicly. Oh, let’s not worry about the future. Let’s not worry about … Let’s just go big. I mean if I had a teenager that spoke like that, I’d sit them down and say, look, you have to worry about the future. You have to be responsible but here’s our treasury secretary who’s just off willy nilly. She’s a scary person to me.
Dean Wehrli:
But isn’t it fair to say that a lot of the people who are calling for the Fed to kind of extricate themselves from this don’t want the economic consequences if they did that act?
Barry Habib:
Of course, yeah, it’s a very … The Fed has painted themself in a really tough corner and it’s a really tough position to be in here. I think it’s very uncomfortable and who wants to … Now, you know J. Powell, it’s going to be his last year, probably Lael Brainard will be the Fed chair next year and he’s going to hand over some tough reins. And you know he’s not going to start pulling back the reins because does he want to go down in the history books as oh, yeah, we had an economic recovery until J. Powell, as Fed chair, caused the Fed to tighten too quickly, they tapered too quickly and then we immediately went into another recession. He’s not going to want that on his resume and in the history books.
Barry Habib:
So, he is going to keep status quo for the rest of this year, hand it over to Brainard, and say, “Good luck,” and she’s not going to have good luck because there are no good answers here.
Dean Wehrli:
But wasn’t Paul Volker reputation eventually kind of resurrected 20 years later?
Barry Habib:
After he died, sure, people realized that what he did was in 1982, when he took interest rates up dramatically and caused a lot of pain, he was like the parent saying hey, guess what? No more candy. Now, we’re going to be on a diet of vegetables and it sucked, everybody hated it but it was exactly what we needed and it was the right medicine. We haven’t had anybody like that since then. [crosstalk 00:29:37]
Dean Wehrli:
I forgot he died first before his reputation was kind of …
Barry Habib:
Yeah, yeah, I mean a terrific Fed chair actually.
Dean Wehrli:
Yeah, more generally, do you see any mortgage policies from the new administration that you like, hate or anticipate and what kind of reaction they’ll have?
Barry Habib:
Well, let’s all pray that this bonehead move to give first time home buyers a $15,000 tax credit doesn’t come to be because this is just … It’s just insane, idiotic. It’s horrifying. We saw this exact same movie in 2009 and 2010 when it was an $8,000 tax credit and all it did was take future purchases, accelerate them. In April 2010, when it expired, what you had was an enormous void and so it created a big calamity, people paying over asking price, appraisal problems. Prices got jacked up and then the day afterwards, the $8,000 that you thought you were getting in a tax credit as a benefit, you wound up losing more than that in the value of the home as homes plummeted and all the problems that you had getting in there and then the housing market really suffered.
Barry Habib:
Now, it would be so much worse because with $15,000, yes, the number’s pretty much double but back then, we were trying to generate buyers. We have an overabundance of buyers. This is not where this should be applied. My idea was if you want to do something, Ronald Reagan said some of the scariest words is I’m from the government, I’m here to help you, so if you do want to do some help, don’t get more buyers because there’s too many of them already and there’s going to be more each year for the next five years because birth rates from 33 years ago, when you look at the demographics, something nobody does, shows that births increase in a huge spike. So, in the next three or four years, you’re going to get a real rush of 33-year-olds, that’s the median age of your first time home buyer, so you’re going to have more than enough people wanting to buy.
Barry Habib:
The problem is you don’t have enough inventory. Where is inventory created from? Builders. And builders don’t want to build on the low end because lumber costs are making it $25,000 more, margin is less and restrictions on regulation and land make it very difficult. So if you said to a builder, hey, builder, if you produce a home that’s less than 80% or 75% of the median home price in this zip code, we will give you a subsidy to help give you an incentive to generate the inventory that we need but nobody things of that. But that would be a good idea.
Dean Wehrli:
Yeah, yeah. Now, I know, I have to plug John because John Burns and Chris Porter, our demographer, did write Big Shifts Ahead, which is a book about demographics and how they impact the housing market. So there is one book like that.
Barry Habib:
And John is brilliant.
Dean Wehrli:
[crosstalk 00:32:05]
Barry Habib:
And John is brilliant.
Dean Wehrli:
More generally, any other concerns you see ahead? Policy wise, anything that makes you worried besides the $15,000 credit?
Barry Habib:
There’s a lot of talk about tax increases and I just think you need to tread lightly there. It’s a slippery slope. One thing that I believe every politician should be receiving before they do policy is something called a Rubik’s cube because they do not have an understanding that when you turn one lever, they think they turn this lever and they just interpolate and extrapolate out the figures that everything else stays the same but as individuals in states now that are high tax states found out is that people decide to move. So you can’t get the same revenue just by cranking up tax rates. So, I think every person who is involved in economics or in politics, if they saw a Rubik’s cube makes it more complicated than you think and when you turn something one way, there are consequences and that’s why it is so common to hear unintended consequences when it comes to monetary policy or fiscal policy more importantly and more accurately.
Barry Habib:
They need to understand that there are consequences for the actions that they take. Same thing that we’re talking about with this housing tax credit. They didn’t realize those consequences and they also need to understand that they should learn from past … They don’t look at history books and they need a history book and a Rubik’s cube and I think we’d be much better off.
Dean Wehrli:
So, mortgage, just like mortgage underwriters need to look back at 2003, 2004, 2005, policy makers need to look back at the earlier tax credit and learn from that.
Barry Habib:
Yeah.
Dean Wehrli:
Now, you talked about the R word a second ago, recession. Let’s talk about the B word, bubble, now. I mean market prices are pretty nuts right now in just about every market in the country, which usually presages a correction. The arguments against that are this incredibly tight supply, this … Well, right now, anyway, a growing economy although that’s questionable and the lack of exotic mortgages, which you mentioned here. That’s good. That’s the bulwark of these prices but there’s … I mean do you see prices becoming increasingly affordable? Do you think that’s going to lead to some kind of basic correction?
Barry Habib:
So, I think prices are going to continue to rise. I believe that the housing market is super strong. You can’t compare it to 2007 or 2008 or 2009 because first of all, people have equity in their homes, so they’re not … They’re going to want to protect that equity. There is a much deeper shortage and as I mentioned earlier, you have an influx. So people said California was unaffordable for many, many years. So here’s the deal. In the United States, the home ownership rate is about 67%. In California, it’s a little bit above 50%, right above that. So why do home prices keep going up? Because the sheer number of people overwhelm the affordability issue, so okay maybe 67% of people can’t afford a home but there’s so many people that 50% of a huge number of people is more than there are houses available, hence, home prices go up and that is the same situation in the United States. You’re going to see them go up.
Barry Habib:
Now, let’s talk about those two, the affordability and then let’s even take it one argument further about forbearance. So affordability, here’s what people do not understand is that they say, okay, well home prices have gone up. First they’ll look at the wrong metric. They’ll look at median home price, which is up 16%. That’s not appreciation. That’s just half the homes above, half the homes below and because not a lot of inventory on the low end, it’s moved up. The real number is appreciation. So it’s about 10%. So let’s call it 10% appreciation. Then they look at hourly earnings, which is up 4% and say, ah, unsustainable.
Barry Habib:
Let’s face it, math is hard. So when you look at 10% appreciation and 4% hourly earnings, they say unsustainable. So the first thing is hourly earnings is not what you look at because I can work more hours or less hours. When you look at weekly earnings, which shocks me that nobody looks at, that’s up 7%. So now, okay, Barry, so it’s not 16% of prices going up or 4%, it’s closer to 10 and 7 but still 10% appreciation, 7% wages, unsustainable, less affordable. Wrong, because the math has to come into play and if you’re listening to this and you really want to get this, write this down.
Barry Habib:
So, if a year ago, your monthly payment for principal and interest only was $1,000 a month, your corresponding income to that would’ve been somewhere in the neighborhood of $5,000 a month. That’s just the way the ratios tend to work out for just principal and interest, not taxes and insurance. So, $1,000 a month was the payment and a year ago, your income was $5,000 a month. Now, interest rates have stayed about the same. They’re about an eighth cheaper this year than they were at this time last year but let’s just say about the same. So now your payment, because the property value went up 10% would go up 10%. That means your payment goes up from $1,000 a month to $1,100 a month. It goes up $100 a month. So you can say, hey, less affordable. It’s $100 more expensive. It’s less affordable.
Barry Habib:
So, what would occur is that you’re going to be in a position where while on the surface you think it’s less affordable, what happened to your income? If your income goes up by that $100 a month from $5000 to $5100, well then it’s the same affordability but that’s not a 10% rise, that’s a 2% rise and with incomes going up now at 7%, you’re actually more affordable today than you were a year ago. That’s why it’s important to do the math on this. Most people don’t and this is why this is the seventh most affordable market on record, even if prices go up, it will still remain affordable.
Barry Habib:
Last point is on forbearance. When forbearance ends, all you did was pause your payments. The payments that were paused do not have to be paid in a lump sum. That will ride along like a second mortgage on your home with no payments and no interest. You satisfy it when you sell the home. You have a ton of equity. When the loan matures, ton of equity, so that will also be staggered, so it’s not going to cause any kind of turbulence. Now, you do have to resume making payments, which means you hopefully have a stream of income. Now, you were qualified before. You should be qualified today.
Barry Habib:
A lot of people did forbearance that didn’t need it. They didn’t lose their job or anything, they just gamed the system. They’ll be fine. Most people got their jobs back, they’ll be fine. For those few individuals that have forbearance and now are not working and are still in this troubled position, obviously we feel for them but the good news, the silver lining is they’re going to want to protect the equity that they have in the home, so they might use some other resources to pay it or if they have no other resources, if they sell their home, they’ll probably make a handsome profit. They’ll probably sell it very, very quickly and then that added inventory will be like a few drops of rain in the desert. It’ll be absorbed quickly into this housing market that desperately needs that inventory. So, forbearance won’t be an issue.
Dean Wehrli:
I’m impressed you answered that, first of all, brilliantly but second of all, you didn’t use the word soft or landing in any kind of adjacency whatsoever. That was … I was praying that you wouldn’t and you didn’t. That’s great. Thank you. Okay, that’s the serious stuff, Barry. Let’s end it with some fun stuff. So you’re not just a real estate guru and a mortgage rate expert, you’re something of a Broadway impresario as well as an actor, by the way. So, maybe most notably or people might have the most understanding of or awareness of is Rock of Ages, the stage play and then later the movie in 2012. Five Tony nominations including best musical and it ran for six years. Just what brought that on? What got you into [crosstalk 00:39:17]
Barry Habib:
Yeah, I was really blessed, the 27th longest running show in the history of Broadway. We’re closed right now because of COVID. Let’s hope that we reopen. So here’s the thing is I had my own show on CNBC for many years, for 13 years as you mentioned and somebody really liked my voice and they kind of liked the way I looked on TV. Years ago, I guess, I was reasonably decent looking. So, they said, “Hey, we want to cast you for a movie.” I was like, “Yeah, sure. Heck yeah.”
Barry Habib:
Well, that movie was this Nic & Tristan Go Mega Dega. They dressed me up in this pastel uniform with big hat, [inaudible 00:39:46], I was like a cartoon character but it was fun and it also allowed me to have opportunities to do a few other movies and then eventually, I got this other role, you mentioned the movie you saw in Barry Munday, where I played Dr. Habib actually and in the trailer, as I mentioned to you earlier and the guy who wrote and directed it was Chris D’Arienzo and he just did such a great job and as we were talking one day, he showed me the script right in his trailer of Rock of Ages. I loved it. Myself and four other guys, we put up all the money. We took it off Broadway. Good thing I was dumb and didn’t know how tough it is because if I was smarter, I would’ve probably known not to do that but we got fortunate.
Barry Habib:
It was a brilliant play or musical I should say and then we really got dumb and put it on Broadway and ponied up a lot of money but it became a huge worldwide success and I had shows all over the world with it and I actually sing in a band called the Rock of Ages Band, so it’s-
Dean Wehrli:
Do you really?
Barry Habib:
Yeah, I do. I sing in a band and in spite of me, the band’s really, really good because we’ve got great musicians but yeah, we have a lot of fun with that and I also produced Chris Angel’s Mindfreak in Vegas, so it’s a lot of fun to see people happy and enjoying that. It’s a great outlet for me.
Dean Wehrli:
Well, Def Leopard, Journey, Scorpions, I’m with you, a little disappointed no Rush but White Snake, Barry, you have to answer to America for White Snake.
Barry Habib:
Well, you know we had David Coverdale do the intro to the show. So, when you come into the theater, he would be the voiceover. I don’t want to ruin it because when it comes on, you’ve got to listen to his voiceover. It is hysterical.
Dean Wehrli:
Okay, okay. Then you’re excused for White Snake now. Thank you. Barry, this has been fantastic. I really appreciate you coming on and joining us.
Barry Habib:
Oh what a pleasure. You’re terrific. I’m big fans of the things that you guys do and I’m honored to have been on your show and allowing me to participate. Thank you.
Dean Wehrli:
Awesome. Thank you. This has been a New Home Insights podcast with Dean Wehrli. My guest has been Barry Habib. Thanks for listening.
