Welcome to this week’s episode of Optimal Insights. In this episode, our experts discuss recent housing supply data, highlight the significant impact of inflation, and explore how election outcomes could influence interest rates and government spending with special guest, Chris Maloney, mortgage strategist at Bank of Oklahoma.

Key Takeaways:

• Current housing supply issues are a concern, with new home sales still below average.
• Chris Maloney emphasized both candidates' policies could affect mortgage rates and housing affordability in the near future.
• The Fed's recent rate cuts have not had the expected positive impact on mortgage rates.

Tune in to gain valuable insights to help you stay ahead and maximize your profitability in the ever-evolving mortgage landscape. #OptimizeYourAdvantage #MaximizeProfitability

Hosts and Guests:

Hosts:

• Jim Glennon, VP of Hedging & Trading Client Services, Optimal Blue

Guests:

• Chris Maloney, Mortgage Strategist, BOK Financial
• Jeff McCarty, Director of Hedging Product, Optimal Blue
• Alex Hebner, Hedge Account Manager

Production Team:

• Executive Producer: Sara Holtz
• Producer: Matt Gilhooly

Commentary included in the podcast shall not be construed as, nor is Optimal Blue providing, any legal, trading, hedging, or financial advice.

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Keywords: Real-time data insights, Capital markets commentary, Mortgage industry, Profitability, Lenders, Investors, Rate fluctuations, Mortgage landscape, Expert advice, Optimal Blue, Secondary marketing automation, Pricing accuracy, Margin protection, Risk management, Originators, Originations

Mentioned in this episode:

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Welcome to Optimal Insights, your weekly source for real time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize your profitability this week.

Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm your host, Jim Glennon, Vice president of hedging and Trading client services at Optimal Blue.

Our our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Hey guys. Welcome.

Today on our podcast we have Jeff McCarty, director of product management. And we have Alex Hebner, our resident econ expert on the desk. Lots going on, Jeff.

You know, we're going to try to distill it down for everybody today, but a lot of major events coming up and not just in the economy, but for the country and for the world. So if I'm an originator, if I'm an lo, if I'm a capital markets person, I'd really want to stay tuned for what you should be focused on this week.

Today's the first day of the mba, so that's a big thing for our industry. It's actually here in Denver where Alex and I live. So hope to see some of you this week.

Maybe getting a little bit of snow, a few people maybe snowed in at the end of the conference.

That's right. Getting the dusting on Halloween here so that those of us who live here can, you know, freeze ourselves while we watch our kids. Trick or treat, too.

Yeah, but always a good chance to reset, you know, kind of.

We'll probably review what the mood has been like next week across the industry, see what people are thinking about going into the end of the year for our industry specifically. But you know, of course, we've got election a week, so that's all eyes on the election.

Talking about that a lot today and over the next few weeks as the election plays out.

Yeah, we'll actually be bringing on a special guest here, Chris Maloney from Bank of Oklahoma, to talk more about the election and what the ramifications could be for rates, for the MBS market, for the economy, for housing. Just here in a few minutes. All right, just to riff on a couple data points. OBMMI, obviously, again, up a little bit.

We're about 6 and 5, 8 on the OBMMI, so that's conforming 30 year, fixed quite a bit above, you know, the 6.08 that we saw near the bottom about a month and a half ago.

Yeah. So if you have, you know, borrowers not paying attention, they're still stuck on the fact that the Fed cut rates.

We're well past that, weeks past that at this point, you know, well over half a point up from the lows, unfortunately. So, you know, borrowers may still be lagging behind in their information. Got to pay attention to where rates are past couple weeks.

Volume's still coming in though. We're seeing volume running pretty hot, especially compared to this time last year. We're about double where we were last year.

Although like rate term refis for instance are down like 65% over the last month, but still seeing, seeing decent amount of volume coming in. All right, Jeff, let's check in with Alex for a real quick econ update.

Yeah, thanks Alex, as always for joining us. So all eyes on the election, but plenty of other things going on in the economy that kind of keeps rolling even if the election's happening. Right.

So we had some fairly important housing supply numbers come out in the past week, right?

Absolutely, yeah. Thanks for having me again. Yeah, yeah. As you stated there, we had two home sales data points come out this past week.

They saw an average of about 5.3 million units moving annually.

So we are, you know, only about, you know, 75% of the average, which just continues to show the dragging effects of the affordability crisis and the high industry environment that we find ourselves in today. New home sales were equally as not, not disappointing but, but below average. 738,000 units against 720,000 expected.

A very minor 18,000 unit exceeding of the goal.

But again, you know, when we're talking about an economy that's lacking 3 to 5 million units in supply, you know, tens of thousands, a beat on new home sales is not going to plug that gap.

Really?

Really.

I think the takeaway from both these numbers is just to see that from a long term perspective where the industry remains is in a muted state and below long term averages.

Yeah. Well, our next guest, Chris Maloney from Bank of Oklahoma, as you said, we look at their commentary on this a lot.

He'll have a lot to say on this as well. I mean, we're just so far behind on housing supply. Some something to keep a close eye on for everyone, of course.

All right, so you know, we had those big numbers come out.

But then in addition again to the election over the, over the next week or two, we've got a couple of other very important economic numbers sandwiched around the election. Right.

Yeah, thanks, Jeff. Yeah. I think right now you're seeing the market being driven largely by the election.

I think with each subsequent poll coming out with Harris and Trump both being pretty neck and neck, you're seeing pretty decent market swings based on that and the market reacting to that. But before we even get the election next week, we have two pretty significant numbers, maybe, maybe the two most significant numbers out there.

We're getting GDP on this Wednesday for Q3. So just a really average gauge of how the economy is doing. Expectations there for 3%.

If we get 3%, that'd be a very strong growth rate coming out of the last few years in our high interest rate environment. And then Friday we have non farm payrolls expectations is for 125,000 jobs.

But keep in mind that the non farm payrolls is pretty prone to not being a very accurate expectation number. Last month we saw 254,000 jobs against an expectation of 140,000.

I think if we see another blowout number there, in addition to strong GDP numbers, you can rest assured that the economy is on that soft landing trajectory through the end of the year.

And I think those job numbers might be heavily influenced by the hurricanes as well. Right. Could we see some of that play out, you know, some noise just from the fallout from the hurricanes?

Yeah, definitely. Yeah. No, we're going to see some, some effects from hurricanes there.

But we're also ramping up into the holiday season and the pure labor station does wait there, wait their jobs numbers, trying to, trying to suss out any, any seasonal jobs. But there, there are always some that sneak into these numbers around the holidays when companies hire for, for the holidays.

So you could see, you could see swings both ways. Yeah. From the Southeast and the hurricane impact as well as just hiring spree for the holidays.

All right, so just to boil this down, right. For mortgage rates we're hoping for on Wednesday, we're hoping for a GDP number less than 3%.

Yeah.

Right. You know, we want to make sure inflation is under control so we can start bringing down rates.

As we've talked about, you know, kind of selfishly, we're hoping for a job number less than $125,000. Right. A potentially weakening economy. So that then next Thursday we have the Fed announcement that will be somewhat driven by those two numbers.

Certainly.

Yep. Yeah. I didn't even get around to that.

But after the election, 48 hours post election, we get an FOMC decision, rate cut decision from the Fed right there. We're expecting a 25 basis point cut right now. Both meetings for the rest of the year are still expecting 25 basis points.

So by January 1st, the expectation right now is to be additional 50 basis points lower on that fed funds rate.

So, yeah, Jeff, to your point for the mortgage industry, if you're a loan originator, you want to be keeping an eye out for misses on both those numbers, the GDP and the jobs numbers.

Wow.

So to line that up, we have GDP coming out this Wednesday, unemployment report coming out Friday, election on Tuesday, and then we have Fed announcement Thursday.

Yep, nailed it.

That's a big sandwich.

Keep your head on a swivel.

On top of that, we got the MBA here in, in Denver right now.

So, you know, if you have representatives out there, be sure to, you know, get with them when they get back into town and see what kind of notes they take away from that.

Absolutely. Thanks, guys.

Perfect.

Thank you.

Thanks, Alex.

Welcome. Chris Maloney. Chris is VP and mortgage strategist at bank of Oklahoma.

Probably heard Chris speak at our Capital Markets Forum in San Diego earlier this year. He's been on our monthly webinars. He was actually on one last week. And you may also read his market commentary, which is a really nice read.

If you haven't subscribed to that, he's out there quite a bit offering some great and unique insights into what's happening in the macro economy and does a really great job of relating that back to mortgages.

So as we mentioned earlier, we're going to talk to Chris a little bit about what's going on right now, especially, you know, mainly the election that's coming up. And you know, quick disclaimer. Anything that Chris says is not our fault or the fault of optimal blue.

Hey, thank you, gentlemen. But it's also not the fault of bank of Oklahoma as well. So put that out there too.

That's fair. We've now indemnified ourselves. So let's get into some, into some election conversations.

So obviously next week we're gonna, we're gonna see a lot, you know, in addition to all the economic releases that are coming out around the election, we have the election on Tuesday.

And let's just talk first, Chris, a little bit about generally what should we be watching out for as the election approaches and as the results start to become evident.

Well, it's, you know, you keep an eye on rates, of course, you know, You've seen quite the sell off over the last month, ironically, since the Fed cut rates by 50 basis points. And part of that is the people ratcheting down their Fed rate cut path expectations.

But part of it is, it seems in the past couple of weeks the general consensus, or maybe it's even a concern, is that you're going to see a Republican sweep, that Trump will take the White House, the Republicans will take both the Senate and the House.

Now, it's considered across the board that the best outcome of this election would be a split government, which one party taking the executive branch and the other party taking the legislative branch, or at least a legislative branch being split, so that neither party can really ram through the most extreme of any of the promises they've had. Now, one of the reasons for the sell off again is that Trump is considered to be relatively worse than Harris in terms of there's a Republican sweep.

You would see a larger deficit under Trump than you would under Harris.

And that's, I think if you do see a sweep, you're going to see a little bit more of a long term sell off in long term treasury rates than you under a Trump sweep than you would see under a Harris sweep. And if you look at the history of what Trump has done, we've seen Trump already in his first term.

He was, he was a spendthrift is the best way you could put it. I believe the addition to the deficits, it's around 7 trillion.

It's expected that if taking all the promises he made about tax cuts, spending, they estimate that the next four years, if it's a Trump presidency, would add about seven and a half trillion, whereas with a Harris sweep would add approximately three and a half to four trillion. But it's ironic that if you look at what the Harris camp is arguing, nobody really cares about the deficits.

Neither party is talking about balancing the budget. The argument to the Harris administration comes down to I'm not going to be as bad as this guy.

It really comes down to do you want, fiscally speaking, do you want to be punched in the face four times by a Trump administration versus being punched in the face twice by a Harris administration.

So that's a great macro overview of what's going on in the economy in relation to the candidates, Chris, but you know, getting kind of specifically into our industry, we've talked about this in the past couple episodes, but maybe you can comment on what you see as the important aspects of either candidate's housing policies.

Well, it's, if you look at the policy proposals put forth on both by both the Harris administration on her website, her Harris president website versus the Trump for President website. And it's amusing because you look on the Democratic side and you could tell she has a lot of eager beaver college interns working for her.

It's 82 pages long, lots of visual graphics, very pretty to look at. And it mentions the word housing 66 times.

Whereas you look at the Trump proposal, it looks like something written by a frat boy who woke up that morning and said, oh, I gotta, I gotta bang out the paper quickly. It's only 16 pages, purely text, there's no visual graphics whatsoever. And it only mentions housing five times.

Now that's not necessarily a bad thing, but if you look at the Harris administration, what they're proposing, she promised to build 3 million homes using her proposals. Now the run rate of single family home building right now is about 4 million over four years. So they weren't clear about it.

I imagine she means that would be 3 million additional homes on top of what we've been building lately. And she proposes tax incentives aimed to work with builders who focus on first time home buyers.

And also a $25,000 down payment assistance also for first time home buyers. In addition, she proposes capping any tax benefits for any invest investors who own 50 or more single family rental houses.

Obviously she's going after the, what we call the institutional investors, like American Homes for Rent. They're blamed, unrighteous in my view, for the shortage of single family houses. Now, on the Trump side, his proposals are much more vague.

He blames the housing crisis in part on illegal immigration. And he also proposes tax incentives for first time homebuyers and to open up federal land for building.

Problem is, a lot of federal land is in very remote areas. There's not going to be any building there anyway. Now, one of the most interesting things is Marco Labrier.

He was the head of the FHFA under the Trump administration. He was actively working to end conservatorship of the GSEs. Fannie Mae and Freddie Mac.

Yeah, they've been in conservatorship now for almost 18 years since they collapsed into bankruptcy during the great financial crisis. But interestingly, the Harris administration and their policy proposal actively argues against freeing the GSEs.

So I believe this is the first time which either party has openly expressed an unwillingness to put Fannie and Freddie back into even the quasi private type of situation they used to be in.

And I think whether or not Trump gets in, whether or not Harris gets in, whether or not either of them of them sweep across the board in terms of being taken a legislative and executive branch under their control, the under conservatorship is something I do not worry about. I don't think anybody should worry about. The reason being is politics doesn't work like that.

If you had control over essentially the entire housing market and you could use that to reward your supporters and punish your enemies, would you give that up? Neither would I. It's never going to happen.

That makes a lot of sense the way you put it.

Getting back to the housing proposals, you know what, what really the feasibility of any of these housing proposals, whether it's the red or the blue side actually passing and achieving their intended goals, you.

Know, it's really, it's in a way the problem is, and it's really not a problem. The last thing you want is concentrated power. But all real estate is local and that, and that really counts also for building homes.

It's not, there's not too much the federal government can do to get home building going. That's all decided that your state level, your county seats, even your local townships, that's where the problem comes from.

All the regulations and the land use restrictions and the taxes and the building codes, that has nothing to do with the federal government. And that's really what's been smothering the single family home market. That's why we've really.

This was during zero interest rate policies. We had seven years of zero interest rates during that decade. So I don't think the Fed can do anything about it either.

The national association of Home Builders, they put together an estimate of just how much the cost of your average single family home that's newly built. How much of the cost is increased merely from all these regulations?

Comes from about 25 to 30% of the price of the house is merely due to regulations. There's not too much the federal government can do about that. And a larger problem is what we call nimby, not in my backyard.

And California is a poster child for this. They just don't let you build anything at all whatsoever.

Even if you look in the city of San Francisco, for example, this is a highly populated, densely populated urban area and half the city is zoned only for single family housing.

So again, as much as they want to, and the shortage of housing and how that's affecting affordability for homes has gotten so bad that finally the politicians have noticed, but there's really nothing they can do, unfortunately from the federal level. Yeah.

When you shared those, those numbers earlier in the week about the cost of regulation, it's just mind boggling how big those numbers are staggering, you know, relative to the things sometimes we think about on a day to day basis. Right. When we're talking about, you know, a couple hundred dollars here or there, you know, the cost of a mortgage and things like that.

But I mean the regulation on that side is just, and that's just the explicit cost of regulation as you said that, you know, the NIMBY problem, the implicit costs surrounding that cause it to add up even further. Right.

I talk to a lot of home builders around the country and I've always asked them, there's a desperate shortage of homes, especially on the lower end, your starter homes, why aren't you building them? And the answer is the same across the board. It's your local governments that's the problem is at the local level they would like to build it.

But once you factor in the cost of the plot of land, the cost of all the regulations, your margins only make sense. When you build these McMansions, your $750 million homes, everything else just doesn't make sense, unfortunately.

So just to tie that back to some things we've been talking about on our podcast the past couple weeks, you know, we've been talking a lot about new programs from Deaf HFA and Fannie and Freddie. Right. Encouraging first time home buyers. Some of these mission score payups, you know, those can only do so much. Right.

You know, it's very little they can do relative to some of these other things you mentioned to encourage some of the lower income borrowers to, to become homeowners.

Yeah. And that's all well and good and but that again, that's only affects the financing side of the problem.

You can't buy what isn't built in the first place. That's the issue with the American housing market.

Well Chris, as you mentioned before, you know, the market has been selling off for about the past month leading up to the election. And you know, some of that might be related to things like inflation expectations that are going to come out of certain policies.

But what are like short term as we get into the election week and the aftermath, you know, what should we be watching out for and can we expect in terms of interest rates, especially mortgage interest rates in the short term?

You know, a lot of people, they tend to look at the treasury market to gauge where mortgage rates are going and where there's a strong correlation between you say your 10 year treasury yield and your 30 year lending rate. Mortgage rates are really set in the mortgage TBA market.

And if you look since the Fed cut rates by 50 basis points back in mid September, looking at the optimal blue 30 year for example, is up, the conventional is up about 60 basis points. The VA is up 70 basis points. The FHA is up 30 basis points.

So I think the problem what the Fed did the Fed cut into a market which is still awash in liquidity. You look at the Chicago Fed National Financial Conditions Index, it is deeply in easy territory.

You look at the Bloomberg liquidity Index, we are awash with liquidity. And when they cut 50 basis points, the market didn't really cheer. A 50 basis point cut is almost an emergency type cut.

And people started asking what are they worried about? And you had Powell out there saying everything's going great but we're cutting 50 basis points. And the question is, well, why are you doing that?

So I think the 50 basis point cut more than anything it might have made markets nervous about, as you said, a reemergence of inflation. And that's really a problem. And you also look at the Fed rate cut path was very, very aggressive.

Markets were really pushing for another, I believe it was about two months ago, they were looking at 100 basis points by the end of the year from now, not from September and about 150 basis points next year.

Now the markets have since ratcheted down their expectations of Fed rate cuts to another 50 basis points by the end of this year, 100 basis points total next year. And that finally comes into agreement with the Fed's latest scp.

So I think that's part of the reason also that you saw that sell off in rates and rates going up. But at this point I think it's as good as it gets.

If you look at the Fed fund futures markets, we priced in 150 basis points worth the cuts through the end of next year. So I unless the Fed gets more aggressive, I don't think you're going to see rates rally and fall from here.

But at the same time the problem is people are worried about inflation still. And I didn't think they were going to cut this year.

I was surprised when they finally were not really surprised because starting back in July, Powell started referring to inflation using the past tense as if the problem was put to bed already. Now, if you look at pce headline, it's 2.2, but the Fed already said no. We look at PCE core, that's almost 3%.

You look at CPI core is at 3%, I believe so. While they say that inflation's been put to bed, I don't think the market agrees with them.

And as we get into the election, Right, that's the unknown at this point. Both candidates and both sides have expressed just a ton of spending programs. Right.

Which would lead to more Treasuries on the market, which could potentially drive yields on Treasuries up, which is obviously going to affect mortgages.

Well, yeah, that's. And we spoke to that at the beginning where you know, either candidate's going to be terrible on the deficit.

Trump would be worse with the expectations of him possibly winning even with the sweep. Yes. That's why you see worries about the deficits are going to be massive. And we know that government deficits are highly, highly inflationary.

And now I've been asked by clients, did the Fed cut because the election is coming up? There is nothing in the historical data which says that the Fed is. Their decision making process is affected by presidential elections at all.

All right, great stuff. I feel like we could talk about this all week.

But to wrap things up, thank you so much, Chris, for the wisdom, for the conversation, for the just the information that we should all be thinking about and paying attention to as the election comes up.

All right, thank you very much for having me, gentlemen. It was a lot of fun.

Yeah, thanks, Chris.

All right, let's wrap this thing up. Please tune in next week where we're going to talk a little about lock desk policies and philosophies.

Whether you're an originator or a capital markets expert or really anybody who's curious about that topic, we're going to have some really good info and really tie some things together for you. We'll also have, as always, our econ discussion with Alex.

Great episode today. Chris Maloney always brings the energy. Great point of view. He's so knowledgeable about the entire housing market.

Obviously, you know, helping us think about a few different things besides just, you know, where mortgage rates are, but kind of the overall outlook of housing. I just love his energy every time we get to talk to him and always learn something from him.

Absolutely. Another great episode. Had a great time talking to you guys. And I gotta ask Chris about some of those books on his bookshelf.

Yeah, absolutely.

That's actually one person I think, actually read all those books on the bookshelf. Probably.

I believe it.

It's not just a fake backdrop. All right, Alex, Jeff, thank you so much.

Thank you. Thanks.

That's it for today.

Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Don't forget to follow us on LinkedIn for more updates and to access our latest video episodes.

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