As a 20+ year veteran in the Mortgage Industry, I have had to learn (quickly) to embrace the things that I cannot control...even if those things directly impact my business (and the way others perceive how well I am doing in my business). Amongst those "external variables" (outside changes) that I have no control of, are:
- Mortgage Rates
- Housing Values
- Government Regulations
- Bank Approval Guidelines
- Topics/Opinions Published (or not Published) by the Media
- Competitor Advertising Gimmicks
- Technological Advancements
- Consumer's Willingness to Embrace Technological Advancements
Suffice to say, there is a lot of "noise" online typically due to one/more of the above variables. In order to approach these topics at the highest level, I am not too proud to seek expert advice when available. The following information contains comments (direct and/or paraphrased) and graphs from a man who is highly respected in the Residential Mortgage Industry (and beyond). His name is Barry Habib, the CEO of MBS Highway, and in my opinion, the most influential human in the Residential Mortgage Industry.
The comments below were taken amidst his interview today with Ryan Hills, the Host of "the REsource.tv" (both Ryan and his publication are also highly respected in "the industry").
How is "Yield Inversion" (i.e. an "Inverted Yield Curve") a reliable indicator of an upcoming Recession?
In the chart below, you see historical recessions marked by vertical shaded lines. The yield inversion is caused when the green lines reach (or go below) the horizontal pink line (these moments in time are marked by red font). Notice the red font is the precursor before each recession (vertical shades areas).
Then, notice the direction we are currently approaching!
- When the 10 year yield is below the 2 year yield (inversion), we have an imminent recession.
- Longer term maturity yielding lower than a shorter term maturity.
- Shorter term maturity is going to ride at/above the Federal Funds Rate (and the Fed has had several rate hikes over the past couple years, although they have calmed down as of late).
- The 10 Year Treasury cares about inflation...as inflation is what will erode the return you get.
- If you were the recipient of the payment of a bond. Let's say you gave money out, and you were going to receive interest over the next 10 years, you could take that interest and buy stuff with it.
- But...if stuff starts to get more expensive because of inflation, your buying power erodes.
- The only way you can protect yourself is by starting out at a higher perch.
- More inflation causes interest rates to increase
- Less inflation causes interest rates to decrease
- Why would inflation go up? Too many people trying to buy stuff, and that makes the prices go up (indicating a "strong economy").
- If inflation goes down, people aren't buying as much stuff, and things go on sale at reduced prices.
- Lower inflation causes lower interest rates (it is also a sign that the economy is getting weaker)
- When you see an inversion to the yield curve, this is NOT what causes a recession.
- Example: That's like someone who walks into work with the sniffles and a runny nose...that's not the problem. The underlying problem is that he/she has a cold and is sick.
- Yield inversion tells you that the economy is sick.
- When you see something like this, you know a recession is coming.
Interest Rates DROP during a Recession!
The chart below covers 50 years of Recessions
(which are once again referenced in the vertical shades areas of the chart)
- Unemployment is currently at 3.80% (the lowest we've ever had while NOT being at war)
- Recessions will occur shortly after a turn up in the unemployment rate.
- Why? Think about it.
- When you own a business, things are going great, you're hiring new people, BUT now things slow down. The economy starts getting a bit weaker and what do you do now? Well, your biggest expense is typically payroll, so you lighten that load and unfortunately have the unpleasant task of letting people go.
- Those people head to the unemployment line, which ticks the unemployment rate higher.
- But what happens to the mentalities of the unemployed people?
- Suddenly, they are not going out to dinner as often, nor are they buying new clothes, and/or going on vacation.
- The businesses that were previously supported by that spending begin to slow down. What's their option? They too have to start laying people off.
- And that cycle perpetuates...
- A recession is forecasted for 2020/2021...when that occurs, interest rates will drop!
Housing is NOT going to crash during the Recession!
In the chart below, we once again indicate the times of Recession with vertical shaded lines. Look at the direction of the chart inside of those shaded areas. Oftentimes, housing goes up!
- Has The Fed used up all their bullets to control interest rates? No, they can still drop the Federal Funds Rate further and/or pursue quantitative easing. Each would cause interest rates to drop.
- Borrowers now should be focusing more on keeping closing costs low, rather than pursuing the lowest mortgage rates (and should not be paying points to buy rates down).
- Why? We are likely going to have an opportunity to refinance current loans down again soon!
- It wasn't the recession that led to the housing bubble...it was the housing bubble that led to the recession.
- During the Recession, we entered and exited with a flat housing market.
- There was a period of time when home prices actually went UP during the previous Recessions (look at the rises inside the grey areas of the above chart).
- Why do prices go up? Because interest rates go down dramatically! This makes housing more affordable. During a Recession, it gives the Buyer an opportunity to purchase with a lower interest rate, with Sellers much more amenable to terms.
- This is not a bad thing...it's a great opportunity!
In closing, the above notes are taken from a Residential Mortgage Industry "guru" and should weigh louder in your minds than quick "soundbites" rattled off on local news channels and publications. The above information is based on neutral analysis of economic variables, trends, and patterns. Think about it.
As always, I am happy to speak to you (and/or your Clients) to discuss methodologies to pursue logical economic solutions whenever desired. Last but not least, remember the image below, and be careful who handles your largest financial indebtedness!