Welcome to this week’s episode of Optimal Insights.

Jim Glennon, Jeff McCarty, and Alex Hebner kick things off by discussing the current mortgage rates, which have hovered around the mid to high sixes, making it challenging for any significant refinancing activity to take off. Both consumer and homebuilder sentiments have taken a hit, reflecting broader economic concerns, and the impacts of tariffs on construction materials are casting a shadow over homebuilders’ confidence. As we explore these economic dynamics, we also touch on the potential implications for mortgage volume and market strategies moving forward.

The team also discusses the consumer sentiment landscape, reflecting a growing concern about inflation. Recent reports indicate that consumer expectations for long-term inflation have surged past the 3% mark, an indicator that could spell trouble for spending patterns moving forward. We discuss how these interconnected factors are likely to influence housing demand and mortgage rates in the near future, highlighting the necessity for market participants to remain vigilant and responsive to these trends.

Takeaways:

• The economic update highlights that inflation expectations are currently trending upwards, hovering above 3%, which is concerning for market stability.
• Homebuilder sentiment remains low, indicating a potential slowdown in housing market activity as builders face increasing costs and uncertainty.
• The PCE inflation metric will be crucial in determining future Federal Reserve policies, with current forecasts suggesting it remains close to 2.4%.
• Tariffs on essential materials like steel and lumber continue to pose significant risks for homebuilders, potentially impacting housing supply and pricing.
• Industry experts anticipate a flat rate environment for the next couple of years, making strategic planning essential for lenders and originators.

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:

• Jim Glennon, VP of Hedging & Trading Client Services, Optimal Blue
• Jeff McCarty, Director of Hedging Product, Optimal Blue
• Alex Hebner, Hedge Account Manager, Optimal Blue

Production Team:

• Executive Producer: Sara Holtz
• Producers: Matt Gilhooly & Hailey Boyer

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:

Optimal Blue Hedging and Trading – CompassEdge Loan and Trading Platform

INDUSTRY-LEADING, PROVEN ACCURACY Optimal Blue Hedging & Trading + Automation & Efficiency + Real-Time Risk Management + End-to-End Data Connections + Comprehensive Analytics & Modeling + Industry Expertise & Support To learn more about the benefits of hedging and trading with Optimal Blue, visit http://OptimalBlue.com/HT

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 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. Welcome everyone. Happy Monday. Getting into this final week of February, I got a really good show today.

First, as always, we will talk econ. We've got Alex here with us. We'll talk about some current events as well. And then I'm headed to Dallas for a Housing Wire economic summit this week.

So I hope to see some of you there.

And and also today we will talk through some of the topics that we're going to be riffing on in a session that I'm moderating towards the end of the day with some industry folks. So please do join us there for that.

Another big industry event going on this week is the Structured Finance Conference in Vegas. So there's thousands of people going to this one.

It's really big for, you know, back end MBS investors, a lot of folks that value servicing, look at servicing, invest in servicing. So we've got some representatives there.

So we'll definitely be interested in the mood at that conference, hear what people are saying, come out of that. Because as we've covered on this podcast, everything that kind of happens there trickles down to front end pricing into originations.

So see what takeaways they have from that.

That's right.

Yeah.

I'd be interested to hear what folks are saying about the next few years of MBS demand. Right.

Like you said, we talk about those spreads a lot on this podcast with, you know, treasury rates probably not dropping over the next couple of years.

That that spread between Treasuries and mortgage rates is really the only thing we could hope for to get smaller so that we get mortgage rates more in the low sixes rather than the high sixes where we've been. Because yeah, we've got the obmmis right around six and three quarters right now for conventional 30. It's been stubbornly stuck.

It's in that spot still generally the lowest we've seen this year, but we haven't gone much lower than 6.7, 6.69.

So yeah, still not enough for one of those. Even like many refi booms that we've kind of been hinting at, we probably need, you know, another.

Another eighth, if not more, just to even get a little bit of a refi wave. Some of the. From some of the recent originations.

Right. But seeing decent volume, you know, volume's been healthy.

Still a bit above where we were this time last year, although just demand in general is waning a little bit, it feels like, for homes. I was reading an article yesterday about that.

You know, supply is starting to pick up a little bit at the same time, so might actually see some interesting moves in housing prices this year. All right, let's go check in with Alex, see what's going on in the world.

All right, Jeff and Alex, let's talk a little bit about what is going on in the world. What, what did. If I was hibernating last week, what did I. What did I miss?

Not a crazy amount last week. I think last week would have been a decent week to take a nap during.

But looking at some of the housing specific metrics, we did get, housing starts and building permits third week of the month is always focused on housing specific metrics. All of them fell kind of right around expectations.

There really wasn't anything too market critical in regards to those housing specific releases, as you kind of alluded to. And what I think we're going to talk about later, what the rest of the year looks like for the housing market.

But as things stand right now in a pretty decent position. Homebuilder confidence, which is interview and take a temperature test for homebuilders throughout the country.

So so far this year it was 47 in January. So it's averaging so far this year.

I think we were joking about this on the podcast.

Maybe two weeks ago at the San Diego forum, someone had a graphic about how inflation expectations based on political party completely reversed in January. I can't imagine what might have triggered that. But, but this consumer sentiment reading reflected that as well. Republicans saw inflation dropping.

Independents and Democrats generally saw it rising, which is the polar opposite of what we saw in December.

That being said, what we are seeing in the economy right now from these consumer sentiment reports is the expectations for long run inflation are landing north of 3%.

That's kind of been what I've been harping on during these econ updates is we've just seen that we saw that inflation metric stall out around two and a half percent at the best last year when they started cutting rates. And then we've just kind of seen it 10 at a time tick back up towards 3% and even north of 3% for some metrics.

That's definitely got me concerned a little bit about where the inflation picture is on the economy as a whole right now. And that release on Friday saw a pretty big sell off in equity markets because of that. Just seeing stalling in consumer expectations.

Yeah. So consumer sentiment down, home builder sentiment down.

Some of that could be policy related too, especially with the home builders with steel tariffs and lumber tariffs.

There's a little bit of posturing there even potentially where builders are saying we're going to have problems going into this year if, if any of these tariffs take hold and then yeah, the consumer piece, hard to say whether that's heavily reliant upon what, you know, policy changes or if we really are just seeing things slow down and jobs are harder to get and meanwhile things are just continuing to get expensive at a, at a relatively high pace.

Yeah, definitely.

I think tariffs in regards to the home builder sentiment are absolutely of the main concerns for these, these home builders going into this year with just those broad based tariffs slapped on all, all imports. Yeah, steel and lumber prices, most of that lumber comes from Canada and they got tariffs slapped on them.

So that's definitely a big concern for, for the finance departments that all these national home builders.

All right, so what, what's going on this week?

This week I would say number one release is going to be that PCE metric as we like to say, is that the, the Federal Reserve's preferred inflation metric, CPI and PPI are nice to look at, but pce, which is inclusive of, you know, insurance rates and vouchers paid by the government is what the Federal Reserve is going to be looking at at their meetings. Of those three major inflation metrics, PCE has remained the lowest thus far. It's still got a two handle on it.

It's about two point right around two and a half percent last I checked.

If we see this tick up towards 3%, I would say that that gives us kind of a trifecta on, on all three inflation metrics pointing towards higher inflation. That's coming out on Friday. It's expected at 2.4% this time around. But definitely keep an eye on that on Friday.

Aside from that, I would just keep an eye on Federal Reserve speaking engagements. It's quite heavy this week. There's nine of them in total and four of them are from voting members.

If you were going to, you know, tune into any of them, I definitely recommend tuning into the, the four that are, that are the voting members as they are the ones making policy decisions.

Yeah, I saw Austan Goolsbee spoke over the weekend, Chicago Fed President. He was saying, you know, don't pay too much attention to one bad inflation number. We still haven't yet seen a trend that inflation is fully up.

I think that's probably a more optimistic way of looking at it. But you know, we'll see what type of language there is like that from the others in terms of how they're looking at inflation here.

Is it really just one bad number? I mean the, you know, we've, we've started to trend higher. It feels like we've never really hit the right low number.

We've been above two and a half percent for three years. Right. And then that's, you can see it in the CME Fed Watch Tool, you know, expectations for where rates are going to be over the next 12 months.

We're starting to get to the point now where one cut is almost in question for the rest of this year. Right.

It's going to take some kind of, I don't know, softening of the labor market I suppose to see rates go lower to give the Fed any kind of reason to cut. But for now it just feels like inflation is heating up again or is at least it never got to an acceptable level.

Yeah, I, I concur, Jim.

I think you saw it kind of trough out maybe Q3 early Q4 of last year when we're getting rate cuts and since then it's been continuous number of releases that have shown an uptick in inflation. Definitely nothing, nothing in rear view quite yet.

Right.

Let's see what else is going on. We had had some somewhat troubling news about the FHA last week.

So that's something that obviously is very close to our industry is in our industry where the, we might lose half of the employees of the Federal Housing Administration.

Yeah. Yeah. I don't want to jump to too many conclusions quite yet.

Yeah, we definitely saw last week, on Wednesday, we started seeing reports hitting the ticker of the FHA's kind of next on the chopping block in regards to these federal job cuts. The number kind of hitting the ticker was somewhere between like 40 and 50% of the FHA could be laid off.

That initial number has been kind of tempered back since that initial release that we saw on Wednesday. You know, anonymous sources at the fha. All these sources are anonymous right now.

They don't want to be singled out as someone, you know, as a whistleblower of any sort. But what was told to CNN was that they're not expecting half the workforce to be cut.

And with all of these, I think we've kind of seen a, a trend here, whether it be the cfpb, usaid, the headline shows, oh, they're all losing their jobs. And then it gets tempered back to maybe 10% and then it, it kind of falls somewhere in the middle.

So far, that seems to have been the, the experience thus far for, for the past month or so. So I would say just keep a pen in this one. Don't, don't jump to any conclusions quite yet that the FHA is disappearing tomorrow.

My one concern would be, and this was highlighted in a, in a Housing Wire article, and I would tend to agree with this, that the existing cuts that have already been made, there's about 200 people who have left the FHA so far. Those are people cut due to the voluntary resignation program or they were during their early probationary period.

They weren't yet subject to civil servant protections. Those 200 people could create a workload imbalance that could result in a downward spiral and further voluntary resignations.

So that I would say is until we get a definitive number on some sort of workforce cut, that would be the main concern. That just, just workload concerns could lead to more voluntary resignations.

Yeah.

You have to wonder what a lot of this, even just the news out there about cuts across the government and some of the, I don't know, abrupt moves that have been made, what the effect is on morale. Right. For, for federal employees right now.

Yeah, I definitely can't say I, I envy their position. Yeah. Not knowing if you're going to have a job in a week, a month or a year, that's definitely scary situation to be in.

Yeah, that's a rough situation to be in. Yeah. You lose more people and then you get into A spiral. Right. Where then the workload increases for everyone who's left, and then people start.

Start walking out the door at a much higher clip than we. Maybe you normally see whatever turnover looks like, you know, for federal employees.

Yeah, absolutely. Yep. Like I said, that. That seems to be my main concern for the. For the time being would just be voluntary resignations.

Yeah. So practically, if that happened, you know, some significant amount of layoffs happened for the fhfa.

I think we saw some quotes, you know, just what you would expect. Right. Slower processing times, you know, slower service response times, things like that. So certainly could have an effect.

Direct effect on our industry and loan production.

Yep.

That or you could just see entire loan program types done away with as well.

Yikes. Yeah. All right, good stuff, Alex. I think that was it for the week. Yeah.

Yeah, I think that covers us for this week.

All right. Thanks a lot for the insight and for the wisdom.

Absolutely. Anytime.

Okay. So something we thought would be kind of cool to do every couple of months is to just kind of check in on what's going on in the world. What.

What are expectations for the remaining part of the year, and what are some things we want to make sure we don't lose sight of. Right.

As originators, as lenders, as capital markets folks, just what are some things that we want to keep at the front of our brains and watch out for as we continue through this year? Maybe just the three of us, too, just giving our opinions on where we see rates, where we see spreads and volume and.

And kind of, you know, have our own ideas of what we should be focused on this year. So starting out with.

And then what I plan to start off the panel with at the Housing Wire conference this week is where are rates going to be this year, next year, year after that? If you ask almost anybody right now, we think rates are going to be flat. Right.

Relatively flat over the next couple years, within a range between like 6 and 7%. You two have any. Any opinions that fall outside of those bounds or maybe a caveat?

No. Right.

That is pretty bold if you look at the CME Fed Rate Watch. So I think it's about less than 10%. I think we will not have any rate cuts over 2/3.

I think we'll have two rate cuts this year, which I'm probably closer to your side, Alex. I really don't see that many rate cuts on the horizon as we've kind of alluded to in different parts of this podcast already.

There's just so many we think about rates in the middle. We're just being pulled in five or six different directions, depending on what you think about, particularly for mortgage rates.

Jim, you were touching on. If the labor market continues to soften or maybe starts to soften, then that can certainly be a cause to decrease rates.

If, you know, obviously inflation's, I mean, the two big things being the labor market and inflation, but we're still at such a kind of if part of the conversation which way we're going to move.

Yeah, that's the big if. Right.

The big caveat this, this narrative that I guess I've been peddling for the past year or so, which is the American consumer has borrowed too much money on credit cards, has, we've kind of ran out of Runway for white collar jobs, you know, somehow that's going to feed into lower retail sales, worse employment situation and so on, but just has not, has not materialized yet. And if it doesn't, there's really no reason for rates to get cut deep this year.

And that's again, nothing has quite materialized. Right. We're on like the precipice in terms of inflation. Inflation's running high, but not like that high. Right.

We, you know, keep reading into every, you know, every number we see, try to read into it in one direction or another and it's just kind of sitting there, you know, just on the, you know, a little bit on the high side. Right.

And it's all, it's all backwards looking as well. I mean none of this is forward looking or this is all observed in the past.

But to, to my argument of no rate cuts this year, I think, I mean the Fed as proven last year, they need to see sustained decrease or halt in inflation before they make cuts.

Considering recent releases have been trending upwards, they're going to need to see significant pullback in inflation and for that to be sustained, which I don't think they'd be comfortable. Even if the next report looks great, they're not going to be comfortable until at least September.

And I'm not confident the next report will look great. So that's my argument. In addition to that, I mean just the headwinds of tariffs on the economy.

And I guess the good news is there still seems to be some sort of natural cap on rates.

Like even when these supposedly bad inflation numbers come out like we saw, you know we sold off a little bit right after the number but then we rallied right back. We're back to 6.7 after several, you know, bad unemployment numbers or inflation numbers.

So let me, Let me ask one to you Jim. Looking at again CME Fed watch just solid indicator what people are thinking.

25% of people think there's going to be a rate cut by may tell the story of how we have a rate cut in six weeks or in eight weeks from now.

Yeah. To me the only way would be next week's non farm number is really terrible. We get close to the zero number. Right.

I keep guessing that we're going to hit zero at some point. Right. You can see the trend lower. We're down into the hundreds now, the low hundreds. That to me that's the only way it happens.

There won't be enough inflation data that comes out by then. That's going to contradict everything we've seen for the past seven months. I don't know what do you all think?

You think that, that that's just dead money. The folks that are that have put futures on that they're being a cut in the spring.

Yeah. I mean six to eight weeks from now. I, I agree it have to be a. Out of the park in a bad way. Unemployment report or some sort of external catalyst.

A Covid like event, a bank failure type event. Something like, like the economy needs juicing.

Yeah, yeah, yeah. That's always a possibility. Right. And it feels like we're all least expecting it is when something like that happens.

And who knows where it comes from. Some people think there's another credit crisis coming. Debt bubble, equity bubble.

Equity bubble.

Yep, yep. Yeah, something like that. Could tamp down inflation too.

If wealth suddenly evaporates, whether it's through, you know, home values are more likely through investments. There could be an event that puts us in a situation where the economy needs stimulation.

You know you see a, even an emergency cut could happen in that kind of, in that kind of scenario. So what does the, what does all this do for volume? I think that's really what people worry about in our industry. Right.

Is what's the volume going to look like this year.

So any kind of incremental increase in volume, if you don't have to hire significantly to manage that, that means a good year for the mortgage industry. It's not the binge that we saw during the pandemic, which I think we all know probably is never going to happen again, but it is healthy.

Yeah, good. Might be a little bit aggressive of a term. It would be an okay year. How about.

Okay, yeah, decent. Survivable. Yeah, survivable year.

Yeah, absolutely. Which is. Which is much better for where we're in 23. So, you know, nice little growth over the past 12 months or so.

But again, whereas volume, there's just so many moving parts. You talked about, you know, homebuilder sentiment. We've been talking a lot about other things at play, such as insurance costs rising.

We've talked about rates enough, but. But all those other things outside of just rates, in terms of how it affects the borrower, between taxes, insurance, just affordability.

Yeah, Affordability is just brutal still.

Yeah. So you can. I mean, all these things are being kind of pulled again in all these various directions.

Which one has the biggest effect versus just kind of general borrower sentiment. We've talked a lot about.

Borrowers are finally, you know, realizing rates are going to be where they are, so they're finally being forced to move or, you know, just feeling like it is finally time for me to move. Go. Go buy a home.

Yeah, yeah.

I think borrowers are comfortable with the rates, but throw another stick in the spokes and see what happens. When it comes to, like, everything you just mentioned, Jeff. Yeah.

Whether it be insurance or homebuilder costs, whatever it may be, see how borrowers might react to that.

So that brings us back to policy. Right. That's the other.

There's GSE reform, which we've talked about a few times on this podcast and on our webinars. Doesn't feel like anything is imminent. There but certainly would have an impact on spreads and impact on the market. Tariffs.

We mention that on every single podcast. Right. It's, I think it's at the forefront of everyone's mind.

Will tariffs continue to be used as a bargaining tool to bring, bring other nations to the table to talk about other issues such as immigration or fentanyl or whatever it may be, or are we really going to tax our biggest trade partners 25% of every good that comes into the country? That's a pretty big open question that's still out there where the, the lean tends to change, you know, week to week.

Yeah.

You know, in terms of policy specific to our industry, obviously we talk about conservatorship a lot and I, I just can't see any short term, short to medium term path out of conservatorship. Jim, you had shared an article from KJ at Wells Fargo.

One of the, you know, key takeaways I had from that was just don't underestimate the amount of infrastructure that Fanny of Freddie have put into place and are responsible for in the housing industry.

And to think about starting to peel any of that back is just a huge mountain to climb or making other people responsible for that type of infrastructure in any meaningful way. I just, I don't see any path towards that certainly this year.

And what do we get out of it?

That's the other thing is it feels like, you know, the administration is, is looking to, to make progress in a lot of different areas, whether it be cost of the government in general or, you know, agencies that have a direct effect on the consumer. But the GSEs, a lot of folks don't even know what the GSEs do if they're not in our industry and what we're taking them out of conservatorship do.

It's likely not to lower rates, it's likely not going to create new loan programs. It's, you know, potentially causes more competition over the long haul.

But that would be the kind of far reaching impact of taking them out of conservatorship. So yeah, it does seem like a lot of work for, for what over the next few years in terms of the new administration.

Because I mean, no one thought we'd be here, no one thought we'd be 15 years out of the more than 15 years out of the great financial crisis and still have the GSEs in conservatorship. It's, maybe it's just been too long. I mean, there's a million things to think about, but I think those are the big ones.

A lot of it has to do with the administration. There's obviously the unemployment situation, which we've touched on here as well, and inflation.

Those are really the things that we need to keep at the front of our brains as we go through this year. And we wonder where rates will be and how that will affect volume. All right, thank you, Alex. Thank you, Jeff.

Thank you.

All right, let's wrap this thing up. Thank you so much, Alex. Thank you, Jeff.

Anyone who's out there who's going to be headed to the Housing Wire Econ Summit, we'll see you in Dallas this week. And 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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