Barry Habib of MBS Highway discusses the future of mortgage rates in 2023 on Homeownership Insights™ podcast.
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Casey Morris: Welcome back to the Homeownership Insights podcast. I'm Casey Morris. And today I'm talking with Barry Habib, who is the founder and CEO of MBS Highway and who is a go-to voice on interest rates in the mortgage industry. Barry, thank you so much for being here. Really excited to talk to you because I know that consumers are really concerned about interest rates. They're trying to time the market, our rates going to go down. You know, there's a lot of back and for thout there. So we definitely want to get some clear information to people. Thankyou so much for being on the podcast.
Barry Habib: It's a pleasure to be with you, Casey. Thank you.
Casey Morris: I’ll just dive right in and start with the big topic, which is, do you expect mortgage rates to go down in 2023?
Barry Habib: forecasted that they would start coming down. Actually last summer we gave it a specific date of November 10th is when they start coming down and we had hit that on the head as November 10th was the date. And the reason for that is because that's when the October inflation readings were going to come out and we knew that it would take a little time for the Fed hikes to start to take an effect on slowing the economy. We felt that the timing would be right for about October. And it turns out it was. But in addition to that, the October reading replaced October from 2021, which was the first time that we thought a lower reading would replace a higher reading, meaning that the inflation rate would come down. The reason we're focused on inflation is because mortgage ratesdon't follow what the Fed does. I know a lot of people think that the Fed's buying mortgage bonds, that's one thing. But Fed hikes and Fed cuts don't haveit. Don't have a correlation to mortgage rates. You know, if you think about where we've been since November, early November, the Fed's hiked rates by1.25%, but mortgage rates have come down 1%. So, yeah, we have been forecasting them coming down. They've come down quite a bit. But where are they going? In the first half of 2023, we see about a 5% 30-year fixed rate mortgage. And that is because once again, we see inflation numbers coming down. It's going to be a rocky road. It's not going to be in a straight line. But we think inflation numbers still come down. But you can circle the date on your calendar. I'm going to give you another date. It's going to be May 10th. That's when you get to get the April inflation readings. And that's where we see a big move lower in inflation and correspondingly a big move lower in mortgage rates. We think that starts end of spring, early summer for much lower mortgage rates. We think that again, you'll be in that 5%, maybe even below 5% range on mortgages.
Casey Morris: What should homebuyers be thinking about when they're hearing this and what context should they keep in mind? I can imagine someone thinking, okay, well, if rates are going to go down, then I'm just going to wait to get into the market. Is that a smart way to be thinking about it? Or is there a more nuanced context that they can be thinking about? You know, as we are just into the start of the year.
Barry Habib: Chaos creates opportunities. In order to see opportunities, you have to think in advance. You know, great Wayne Gretzky would skate not where the puck is, but where it's going. So let's think about this. You've got a real estate market currently that still has low inventories. No doubt about it. Inventory is still low, but buyers are hibernating. And you're describing the current buyer today that's hibernating, that's going to wait for rates to come down. So what happens when you have a low inventory environment where incomes are going up so you have incomes going up, rates coming down, making homes much more affordable and pent up demand all into a low inventory environment. What's going to cause prices to rise and competition to be more fierce? So when do you want to be in that? You want to be shopping prior to rates going up or that and when there's less competition and get a discount? Or do you want to wait till rates do? I should have said prior to rates coming down, you want to wait till rates do actually come down. And then there's a horde of buyers that come out into a low inventory environment and prices are going up, but you want to do it before it happens. You want to see the future before it becomes obvious. So how do I have my cake and eat it too? And there's an easy way to do that, believe it or not. So a year ago, if you wanted to buy a home, you probably had to spend well over asking price, you know, $500,000. We probably had to spend 550 for that home because the competition was so fierce. But now it's come down to a more normal environment, a $500,000 home. I wouldn't be surprised if you can get that home for for 85 or for 90. See a little bit of a discount there. And most people who would negotiate for that will take the discount. And while that certainly seems to make sense, you can actually parlay that into a much greater savings. And the way to do it is to use that money as a seller contribution so the seller doesn't care. They'll give you that ten or $15,000. They don't care. They're giving that as a concession, whether it's in price or seller contribution makes no difference to them. But as the buyer, if I take that instead of a price reduction as a seller contribution, I now can use that to buy my rate down significantly lower so I can actually get the home of my dreams today, get it at a discount, get the rate I want today at a discount, increase my buying power today so I could actually buy a nicer home and then sit back and wait because I've already got that lower rate because I had the seller pay it for me to win. Rates actually do come down. Now you've got a horde of buyers come in and I watched my value of home that I got a discount go up significantly from there and you know it shouldn't be underestimated because look at the take a look at a scenario of someone putting 10% down on a $500,000 home. Their investment is $50,000. So if you're able to receive just a 2% discount today. And instead of a 2% discount next year, home values go up conservatively, 4%. Let's just say 3%. That's a swing of 5%, right? That's a swing of $25,000. On your on your$50,000 investment, that's a 50% rate of return differential. 50% rate of return differential. That's why so much wealth is created with real estate.
Casey Morris: That's a really great point. And, you know, I think all of that, hopefully that will be helpful to people who are listening to this and, you know, to try to get them out of that mindset of trying to time the market based on what they're seeing because there is so much opportunity in acting. Now, if you think through the strategy or you work with a loan officer to figure out a strategy. And you know, it's interesting that you mentioned buying down the interest rate because we actually just had a podcast episode come out about seller paid to on buy downs and, you know, just trying to educate people on there are options out there. You don't have to wait. And it's probably not a good idea to wait because you may end up paying more in the long run. Whereas if you kind of just dive in now and really look at the numbers, there's a huge opportunity here.
Barry Habib: Incase you need a two one buy down. It's really nice because the same example of500,000 our home, if you did a two on buy down, let's just say the rate were six and a quarter today probably between six and eight, six or something like that. So you actually start off with four and a quarter for the first year. Then we go to five and a quarter than six and a quarter. However, if you agree that rates are heading down, you get that four and a quarter rate today, you save$500 a month. When rates come down, you take the unused portion of the buy down because you going to refinance sooner, that gets refunded to you. You can actually use that to fund the refinance so you can essentially refinance for free. So get the lower rate today, refinance it for free to keep a low rate and again, take advantage of the seller having paid this for you all while you are able to get a discount on that home and watch that home's value go up because you got in on the ground floor, you were smart enough to get in before it became obvious. So you saw the future before it became obvious.
Casey Morris: Right. Absolutely. And we recently had Dave Stevens, who for listeners who may not know who he is, he is the former federal housing commissioner and former president and CEO of the Mortgage Bankers Association on the podcast. And he suggested that this winter and spring will actually be the best opportunity for homebuyers for the next three years, even if rates drop later this year. This is really the best time. So what is your take on that? And do you see this as you know, this winter and spring is like the most favorable, you know, looking ahead even into further into 2023 and maybe into 2024 and 2025?
Barry Habib: Yeah,I agree with David. David's a dear friend and I agree with him. We are we seecompletely eye to eye on that. I think this is an excellent opportunity rightnow. There is historically during the winter months anyway, a slower time, alittle less competition. You see activity picks up every year between April andJuly due to the fact that. Families want their children to start at thebeginning of the school year. So you see this pick up in activity every yearbecause people realize that, you know, as far as my child goes, if my child isgoing to be relocated into a different school system and they come in themiddle of the year, it's already toughened up because kids could be kids can bemean and kids could also have formed friendships. So that can be difficult onyour child, but grades can suffer. So if I have my child thriving and doingwell, but now in the midst the school year, they go to a different school.Let's remember that no two schools teach the same way, the same curriculum. Notwo teachers teach the same way so they can be thriving in one classroom. Butthen when they're moved and relocated, they can have difficulties and theirgrades can suffer. And that can be stressful for the kid, for the family. So Iwant my kid to start at the beginning of the school year, which means that Ihave to be moved in by. June, July or August. So I'm out there shopping, buyingfor a home. April, May, June, July. And that's where you're going to get a lotmore competition for the homes that are available. So I feel that you'relooking at this as this winter, early spring as an optimum time to buy. Yes.And of course, we know that that is probably before mortgage rates would startcoming down, which would add additional competition and additional activity.But there's ways to get around that, as I said, by having the seller payclosing costs by doing 2 to 1, by down, by doing a refinance later on, you willactually save a lot more money doing so. Look, think about it this way. So sortof have to do a refinance and it cost me $2,000 to do it. Right. But if I saved$15,000 or $10,000 in the price of the home and I made because I got in earlyan extra ten or $15,000 from the home price going up, who cares about to spend2000 bucks for a refinance?
Casey Morris: It'sinteresting because it just it all seems to come back to like looking at it andlooking at the full picture and not just sort of getting hung up on race andsaying, well, I don't want to pay more and I don't want to buy a house now andthen what if rates drop? It's like there's so many other things to consider andso many savings that you could have if you just sort of like broaden the scopethere and really looked at the opportunity.
Barry Habib: Ifrates drop, you refinance. Now, see, there's another thing that could happen,though, is that if you've been looking for a home and let's just say youstarted looking for it, it's not uncommon for somebody to be looking for a homefor several months and let's say start looking for a home. And I mean, let'ssay it was six months ago and rates were lower. And at the time you werequalified because of the lower rate for a more expensive home then youpotentially would be now. Now your eyes have been spoiled because you've seenthese nicer homes and now you're feeling, oh, man, I have to settle. This iswhere that negotiation for having the seller pay your points. Because if youtake a permanent buy down and get that rate down to about 5%, well then you'reright back where you were, where you can qualify for more home and get the sametype of home and all by having the seller pay for it. So there are moreadvantages than that and more ways to overcome some of the hurdles that mightthat people might perceive.
Casey Morris: That'ssuch an important point that, you know, right now there's more opportunity fornegotiation and sellers to do that. But once it's like the peak buying seasonand more people are coming back into the market because rates go down, sellersare not going to have as much incentive to do that because they have plenty ofpeople who want to buy their houses with no conditions at all.
Barry Habib: Bingo,they have it. And there's another aspect to. Is that? As these rates come down,as competition gets more fierce and as sellers see that they're going to beprobably looking to actually raise prices and that competition. Great inventoryenvironment already.
Casey Morris: It'sinteresting because it's like, you know, for the last couple of years from thebuyer perspective, it's been really tough to compete because there has beeninvestors and a lot of people who are coming in with cash and things like that.And so to have a window where there is less competition and it's not all, youknow, in the seller's court, this is a great time to to take advantage of it,even if it doesn't seem that way on the surface when you consider all thethings that you're talking about and the fact that it might be less stressfuljust because you don't have that extreme competition.
Barry Habib: Yeah,it's a rare opportunity. The media is so negative on housing. They've beennegative on housing for the past ten years. They've been wrong for ten years.We've seen home values do nothing but go straight up. The media hasconsistently been negative on housing, claiming that renting is better,claiming that there's a bubble after bubble after bubble. Now we're not inanywhere near bubble like conditions there. First of all, one of the things tothink about is affordability. Now, it is true that with higher rates it hasbecome less affordable. But that is not a forever situation for two reasons.One, and we talked about it, rates are headed lower. They already come down.They're headed lower. So that's one thing. But the other is that incomes arerising. Now, ADP measures 25 million payroll records and they say if you stayedat your job, your income went up 7.3%. So that means you virtually negate allof the increase from the change in rate. But you've still seen services andfood and gasoline prices go up because of inflation. And that's the marketwe're in right now where it has become less affordable because of that. But asmortgage rates come down and as incomes during 2023 go up and let's say theyonly got 5%, you can make the point and argue that it is literally moreaffordable to buy a home in 2023, even with home values having gone up 20 10%in the last 12 months, even with mortgage rates being higher than they were in2021 when they were like three and a half to a 5% mortgage rate instead ofthree and a half with a. With a purchase price that's 10% higher. You can seeclearly that because incomes go up over the past couple of years, that it isliterally more affordable to buy a home in 2023 than it would have been in2021. And you know what happened to home values in 2021? Now, I'm not trying tosay we're going to see 18% or 10% in a year. I'm not saying that. I am saying isthat 4% or so is very realistic in appreciation and that 4% can create anenormous amount of wealth for you. And not only will you see 4% on top of that,you can get a discount of 2 to 3% today. So this is a very good opportunity.
Casey Morris: Doyou have any thoughts on what rates might do, not just in 2023, but lookingahead into 2024, Just sort of give people a long view, if that's possible.
Barry Habib: Thefurther out you go, the more difficult it gets to forecast because therebecomes these black swan events that are unforeseen and not at all in the realmof forecasting. For example, no one saw COVID coming right and right, but wecame very fast. Let's face it, three months before COVID, no one knew that thatwas a possibility that would change the world. Right. Just think about that.How it changed everything so fast and something like the Ukraine and Russiawar, that certainly changed things. Think about the effects that we're feelingon inflation from the stimulus bills that were that were passed, you know, thatthink about the Fed's bungling of interest rate policy. So there are thingsthat are very hard to predict or that are irrational. Who would think thatpeople that are supposed to be smart at the Fed would act so foolishly? Whowould think that members of Congress would make the mistakes that they made?Who would have saw that these these other events that we talked about? Theseare things that make forecasting into the future more difficult. So without ablack swan event. I think that interest rates towards the end of this year aregoing to probably have a little bit of a headwind from inflation becausethere's a lot of inflationary factors that aren't going to help us as inflationcomes down. But we should also think about China and China opening up justtheir air travel and just the usage from this enormous economy. The world'ssecond largest economy will put pressure on energy prices and energy prices.Will the rise of energy prices from their current very low levels will likelyadd some inflationary pressure. Now, we can't tap the Strategic PetroleumReserve. We already did that, unfortunately, to dangerously low levels, so thatlifeline can't be thrown out anymore. So what will happen is you'll probablysee energy prices rise, which will likely put some inflationary pressures inplace towards the end of this year. And that could mean that interest rates dostart to move a little bit higher. So all the factors are in place right nowfor like a golden opportunity to get a discount on the home right now,refinance to a low rate and then sit back and watch prices go up and sit therewith a low interest rate. So I think that things right now, I don't see ratesare going to go skyrocketing, but they they'll probably come off their lows nowover time, the further out you go. You know, the amount of debt that's outthere has proven itself over time everywhere in the world. Every period of timein history that as debt levels rise, it's a drag on economic activity, whichthen is a deflationary effect. So I do think that there is pressure to thedownside for rates over a longer period of time. I don't think rates get out ofhand. I think we've seen the high. Whether we get below 5%, I think there's apossibility that we get a little blow, but it's not going to be in a straightline. And there's other factors that in the interim will cause a little bit ofa rocky road.
Casey Morris: Gotcha.Yeah, that'll make sense. And it sounds like, you know, just like you said,there's an opportunity right now, and if people are ready to buy a home,otherwise, then it doesn't make sense to try and wait and see what rates do. Itmakes sense to move forward with, you know, with all of the differentstrategies that you mentioned and, you know, get a good deal and get into ahome now.
Barry Habib: Yes.
Casey Morris: Great.Well, thank you so much. I really appreciate this. This is really interestingand informative and hopefully it gives people, you know, just more context thanwhat they're seeing in the headlines and things like that to really understandwhat's going on and what their opportunities are. So I really appreciate yourtime.
Barry Habib: Casey,It's such a pleasure to be with you. Thank you so much.
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The information in this podcast is distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway Independent Mortgage Corporation.
Copyright©2022Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. Fairway is not affiliated with any government agencies. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.
Fairway is required to disclose the following license information. AZ License#BK-0904162; Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act, License No 41DBO-78367.Licensed by the Department of Financial Protection and Innovation under the California Financing Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License; Georgia Residential Mortgage Licensee #21158; For licensing information, go to www.nmlsconsumeraccess.org; MA Mortgage Broker and Lender License #MC2289; Licensed Nevada Mortgage Lender; Licensed by the NJ Department of Banking and Insurance; Licensed Mortgage Banker-NYS Department of Financial Services; Rhode Island Licensed Broker & Lender; Fairway Independent Mortgage Corporation NMLS ID #2289 (www.nmlsconsumeraccess.org).
The information in this podcast is distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway Independent Mortgage Corporation.
Copyright©2022 Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. Fairway is not affiliated with any government agencies. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.
Fairway is required to disclose the following license information. AZ License #BK-0904162; Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act, License No 41DBO-78367. Licensed by the Department of Financial Protection and Innovation under the California Financing Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License; Georgia Residential Mortgage Licensee #21158; For licensing information, go to www.nmlsconsumeraccess.org; MA Mortgage Broker and Lender License #MC2289; Licensed Nevada Mortgage Lender; Licensed by the NJ Department of Banking and Insurance; Licensed Mortgage Banker-NYS Department of Financial Services; Rhode Island Licensed Broker & Lender; Fairway Independent Mortgage Corporation NMLS ID #2289 (www.nmlsconsumeraccess.org).
