Bruce Norris is joined again this week by Barry Habib. Barry is an American entrepreneur and frequent media resource for his mortgage and housing insight. He has had a long tenure with monthly appearances for CNBC and Fox. Barry is the CEO of MBS Highway, a company and platform created to help interpret and forecast activity in the mortgage rate and bond markets. Barry has had many successful businesses that he has founded, grown, and sold. This includes Mortgage Market Guide, Health Care Imaging Solutions, and Certified Mortgage Associates. Barry’s mortgage sales career includes being recognized for having the highest annual origination production in the United States on two occasions. He personally originated over $2 billion in mortgage loan production over his career. This week we talk about lending trends during recessions, generational differences in demographics and lending, and the current interest rates.
In the last segment, they covered the industry as far as some of the policies involved dictated lending and homeownership. It is interesting how we have the lowest rate of homeownership going back for a little spot in the 90s then back to the 60s. It coincides with us having this phenomenal interest rate to where you can sign up and have a fixed payment that would be very attractive for a very long time. Bruce believes we have an odd combination. If we look at an unemployment chart, it says it is about 5%. If you look at a ten-year T-Bill, it is about 1.75%. Those two charts do not usually go together. If you have a 5% unemployment chart, your ten year T-Bill will not say 1.
Bruce asked how unusual it is to have anything under a 2% ten-year T-Bill, especially when paired with 5% unemployment. Barry said it is extremely low just to have a 2% handle on a ten-year T-Bill. The all-time low is 1.39%, and if we go back to February of this year we saw how we got down to 1.45%. There are different circumstances that exist, not just things like the rate of unemployment. We can argue with the rate of unemployment that while there are less unemployed, the workforce has a very low labor participation rate. You have a lot of people who are not in the labor force right now; and if you take a look at the hourly earnings you see we have not really grown that much either.
If you went measure inflation-adjusted hourly earnings today, it was the same as it was in 1997. We have not really seen before this growth in the amount of income. There may be more jobs, but they are lower-paying jobs. Because of the increases in minimum wage by 15 states, some of this is a little fictitious on the account. Some of the increase we have seen in hourly earnings is almost punitive in how it has been forced upon individuals. It is not because of the situation where the economy is so strong or powerful since there are certainly cracks within the economy.
There are a lot of reasons for the ten year treasury being where it is. One of them is foreign forces. The globe is much interconnected. If you were in Europe and wanted to put your money away for ten years, you can be offered ten basis points. A year after you have invested that money, the German government will send you a check for 1 euro. This is your interest for 1,000 euros. If you were in Japan, you give however much money you want, put it away, then pay them money for holding onto your money. This makes the U.S., even with the ten-year Treasury yield, so attractive compared to what else is on the market. This is one of the reasons we will continue to see downward pressure on rates.
Bruce asked if this happens because somebody finds the high yield and buys it. Barry said this is one of the reasons. However, the other reason is the currency trade. If you are European and can get 1/10th of one percent interest by investing in the German market, this is not very appealing. You could look across to the U.S. and get 1.75% and see the difference 17 times higher than the yield. However, this is not the only factor. The U.S. dollar versus the euro today has a relationship of 1.14 to 1. Many think this means the dollar will eventually be closer to the euro. However, in Europe they are continuing with the process of making the euro weaker, while in the U.S. the Fed may come under pressure to hike rates at least once more this year. This could happen in June depending on employment and inflation rates.
Inflation could drive the Fed to make a move, but that would strengthen the dollar. If down the road the dollar and euro were the same, you not only made 1.75% more but you made 14% on the currency. Instead of getting roughly 1/10th of 1% for investing a euro, you made about 16% between currency and yield if you did it in the U.S. Treasury. A lot of Europeans and Asians are smart and buying treasury hand-over-fist. Foreign purchases would help keep down interest rates in the U.S. Our inflation levels have been tame, and this is what keeps rates low.
One of the reasons inflation rates are tame is because oil prices have been very low. Oil today is about $38-$39 a barrel. When you look at oil as an inflation component, it is very important. Right now you are comparing it to oil prices last year, which were at $60. The difference between $60 and $38 is a huge drop and a real big weight on keeping inflation low. If we go into June and July, we will be comparing it to the prior year when it was at about 50. If we move to the end of 2016, we will be comparing oil to roughly $40 per barrel. You will be in a position where oil will no longer be an anchor on inflation and the Fed may have to act based upon the fact that inflation levels will rise.
The Fed looks at two inflation levels. One of these is the CPI (Consumer Price Index), which is above the Fed threshold of 2%. They actually prefer the PCE (personal consumption expenditure), which does not work since it ignores two things. This includes the cost of putting a roof over your head and out-of-pocket medical expenses. None of us pay any co-pays or medical expenses, so why should we take that into consideration. The PCE foolishly omits those two, and the Fed looks to it because it is only slightly lower than the CPI at 1.7%, and the Fed prefers it. Janet Yellen does not want to hike rates because she is afraid it will cause the dollar to spike, slow down the economy, and hurt the stock market, thus diminishing wealth. This is what they are all afraid will happen.
On December 16, the Fed hiked rates. This was something people knew was going to happen and the stock market would hate it. We had a stock market decline that was rather precipitous of 13% between then and February 10. The big thing with the Fed forecast was that they wanted to hike four more times. This will give people options other than the stock market for where to put their money. They may say they do not need any riskier assets, but they may be able to save and get at least some rate of return. However, the Fed has really hammered savers.
There is a big disparity in people and in the classes, and the Fed is the only one to blame for that. When you see stocks and real estate going up, you have to consider who has the money to buy these and who does not. The poor people cannot save any money, so this is a problem you have that is very difficult to unwind. Bruce wondered who controls the long-term since the Fed controls the short-term. Barry said no one controls it since it is a free market. It is purchased by individuals, institutions, retirement plans, and foreign governments. It is truly a free market since no one controls it. The Fed are the ones who control the overnight lending rates. Sometimes the two move in very opposite directions, as we saw in December when the Fed hiked rates and the ten-year treasury dropped rather precipitously. This was because when Fed hiked rates, stocks sold off and the money that came out of the stock market was parked in the treasury and stock security market. You have to understand what the cause and effect would be.
One of the things that has happened over the last 8 years is there has been very little volatility. If you look at the Fed fund rate changes around 1980-1981, there was something like 20 Fed fund rate changes in that calendar year. It has been amazing to Bruce the attention that one rate change has garnered in the news media from quarter to quarter. Bruce asked Barry if he sees volatility returning at all to interest rates. Barry said although we have seen volatility with interest rates, we have not seen it as much in the Fed interest rate changes.
The last Fed rate hike cycle prior to December 16, 2015 was 2004-2006. The rate was hiked from 1% to 5.25%. This was such big hike, and a lot of rate hikes occurred during this time. After this the Fed went on a cutting spree until we got to 0. Since then we have really only had one move, but this does not mean mortgage rates have not changed. In 2013, mortgage rates spiked about 1 ½ percent in a relatively short period of time. There is still volatility in the interest rate environment, just not as much with the Fed.
Bruce asked Barry about expectations for a recession and when it might occur. Barry said one of the things you want to look at is the two-year Treasury note yield and compare it to the ten-year Treasury note yield. A good marker is when a ten-year Treasury note yield gets beneath where the two-year Treasury note yield is, a recession is in the relatively short-term future from that point on a consistent basis. Right now the ten-year treasury sits about 80 basis points above the two-year Treasury note yield. It still has some cushion there, but when you compare it to where it was a couple years ago you see the gap has narrowed and rather significantly.
With it moving in that direction, Barry is considered of there being a good possibility that within the next two years we will see a recession. What triggers this is hard to say, although a big part is global concern and the terrorist threats. It could also be related to what is occurring in the Stock Market since earnings are vulnerable and weak. Prices and PE ratios are high, and the Fed is terrified of hiking rates. There are a lot of elements and factors out there that could trigger it, and we are on a relatively close relationship between the ten-year and two-year to bring us to a point where there is a marker saying if we get close to a recession then it’s a self-fulfilling prophecy. In this over-regulated government that is not very friendly toward businesses and earnings are vulnerable, we are in a tough situation.
Suddenly there could also be a lot of talk about Socialism. Ask anyone who has lived in a Socialist country if it is a good thing, and they will tell you they are all running away from them. Why it is being promoted as a good thing is something Barry does not understand at all. Someone needs to open a history book and see what Socialism has done in the past rather than just seeing it as getting a lot of free things. If you look at Greece and Spain, or any country for that matter, Socialism has never worked. It is designed for people to gain and hold power by promising free things to individuals. The problem is that the “free stuff” has to be paid for somehow. There is no such thing as a free lunch, and when the weight of it is too great it topples the system.
This is why you have problems and issues around the globe. The thought of it coming here to the United States is something scary. There is a saying that “capitalism is the worst system except for the others.” It certainly has its flaws, but it has proven to work. Our country was founded this way. If you go back to the pilgrims, they initially had a form of Socialism, and it was about to be a failed experiment. We would not have had the United States until they decided to give it a last ditch effort and issue each person their own parcel of land. They would then each be responsible for their own, and this was the start of capitalism in the United States. Out of that was born the country that we now have.
The problem is we have become a country of headline readers, and people who follow the media will see that they don’t really care about the truth. All they care about is striking fear in your heart so that you will tune in and they get better ratings. The message everybody needs to be taught is that they just need to look deeper and not just believe what they tell you.
Bruce asked if we have a recession what the ten-year T-Bill interest rate might be 1%. Barry said this would challenge the all-time low of 1.39%. It’s not like it is impossible if you look at other examples like Germany. Nobody thought they would be at 0.1%. It is just like somebody thinking they will wait if their mortgage rate is 3 ¾. A ten-year T-Bill that was under 2% was unthinkable for most of Bruce’s life, and now it does not even raise an eyebrow. If you have a 1% ten-year T-Bill, the mortgage rate is approximately ¾% lower than where it is now, so around the 2 7/8th range for a 0.30 fixed-rate mortgage.
Bruce asked what all of this would do for real estate. Barry thinks it will really help support real estate prices. Inventory levels are so tight and demographics are so favorable. If you look at the births in the United States, baby boomers between 1946 and 1964 made up 76 million births. This was the largest birth generation. Then you have those from Generation X where there was an enormous dip in the birth rate. Now with millennials coming in, you saw them pass the baby boomers a few months ago as the most populous generation in the United States. They have now become the largest population segment in the United States generationally. Because of this, they are driving the economic bus.
If you want to be really good in anything that you do business-wise, just think about that philosophy. How do baby boomers differentiate from millennials? The millennials grew up with Google, so what they do not need is information. What they do need is insight and wisdom, and that is what they will pay for. Whatever you do, whatever business you have, you cannot offer information because they will get the answer in three seconds on their phone. You have to give them the insights that they cannot Google. If you are able to do this and convey it, then you will gain their trust and their business.
If you look at Zillow and the median age of a first-time home buyer, it is 33 years old. If you take a look at the birth rate, you see an enormous dip in 2004-2007. Inventory levels were high, representing 4% of all the homes on the market that were for sale. This came at a time when individuals could not stop it because the birth rate that matched first-time homebuyers were low. We are right at the beginning of this huge wave of births that will continue for the next 8 years where first-time homebuyers become greater and greater. This could go on to become an enormously successful time for real estate with high demand. Right now there is only 1.88 million homes available for sale. This is a reduction of 46% in the last five years. Today, 1.7% of the homes that are out there are on the market for sale. It is only a tiny bit of inventory. Ask any realtor what their biggest problem is, and it is no inventory. When supply is tight and demand is strong, both which you have now, then prices can only go up. Forget what the media says, every single measurement you would look at from a logical standpoint points to real estate values moving higher for the next several years.
Bruce asked Barry when we will return to a more normal interest rate environment when the saver gets rewarded and interest rates are low. Bruce wondered if we are going the route of Japan, which Barry said will depend on the elected officials in place driving these decisions. If you ask someone in Japan who thinks they will be stuck like this for 20-25 years, they would have definitely said no. Back in the 80s Japan was so powerful they were buying up everything and were the envy of the world. They got into a situation where their stock market became overvalued and overhyped, then they went the other way. They went through that boom cycle, then moved away from it governmentally. This is where people like Bernie Sanders came out of this. They tried to step back, and their economies stagnated.
They have other issues too, such as they are tough on immigration and a much older population. Their economy is something from we which we have to take a look and learn. If you just take a look at what has happened through history, it is not hard to see how economies have been affected.
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