Rick Ripma 0:32 Welcome, and I thank you so much for being here. This is Rick Ripma, your hard work and mortgage guy at Advisors Mortgage Group. If you have any mortgage questions, if you need to contact m, go to my website: hardworkingmortgageguy.com That's hardworkingmortgageguy.com. Or you can call me at 317215 7600. I got to tell you, when I started the mortgage business, it was over two decades ago. One area that was a mystery to me, and pretty much to everyone I worked with, was where did mortgage rates come from. Why do they change? It was a mystery. So, I talked to and I worked with a lot of very experienced loan officers. I talked to many of the loan officers that have been in the business for decades. They pass their wisdom and knowledge down to me. At least that's what I thought. One of the secrets about mortgage rates they dispense to me was, drumroll, please, if I want to know where mortgage rates are headed, I needed to watch the 10-year treasury. And you know, after watching the Treasury for six months or so, I quickly realized that many days mortgage rates did exactly the opposite of what you saw in the treasuries, and I couldn't understand that. So, then I decided I was going to go online, and I was going to investigate. I was going to find out where these rates came from. And to my surprise, I learned that mortgage rates are not rates. Mortgages were actually sold as mortgage bonds. What is referred to as a mortgage bond security, and, of course, that was a much better indicator on a day-to-day basis of where rates are moving. I was working with people who had been in the business for decades, and they did not know this. And there's still many, many loan officers who do not know this. About three years ago, I was very lucky in meeting a guru on the mortgage-backed security bond market and mortgage rates, and today, John Iacono, mortgage market guru and Advisors Mortgage market analyst joins us to help you understand the recent past. You know, what’s happened with rates in the recent past, why that's happened. And in the near to mid future, what are rates going to do? And where are they headed? John, thanks so much for joining me. I appreciate it. Jon Iacono 3:04 Thank you for having me, Rick. Pleasure to be on the show. Again, I think this is my hat trick, right? It's my third appearance. Rick Ripma 3:10 I think so. Yeah. I don't let just anybody on here, you know. Unknown Speaker 3:15 You have to be follically challenged. Rick Ripma 3:17 Yeah. Right. you can't have hair. That's a requirement. But you know, it is true. That story I just told actually is what happened. I followed people online, paid money to supposed mortgage gurus were wrong on the rate market and where rates were heading, but you understand the market as well, if not better, than anybody I've met. I really do appreciate that you do a show every week so that loan officers really know what's going on in the market and I thought it'd be really helpful if you dispense some of that wisdom on us here today in Indiana. Jon what happened in the market last year to give us those extremely low rates that we enjoyed. Jon Iacono 4:15 Alright, so let's start by talking about bonds a little bit specifically mortgage-backed securities or bonds. Let's talk about the relationship between mortgage rates and mortgage bonds. When mortgage-backed securities increase in price, interest rates go down. And when mortgage-backed securities decrease in price, mortgage rates go up. Okay? So now that you have that kind of background, so where were interest rates going back a year, or maybe even a little bit more than a year ago. So let's talk about when COVID hit. The Fed came out and they said we're gonna perform Quantitative Easing or QE. And what they did. They started buying 120 billion in mortgage securities and treasuries per month to try to help stimulate the bond market to make unhealthy interest rates dropped. That's what happened. They were also reinvesting the money from paid off mortgages back into the bond market. When a mortgage gets paid off, or it matures, the Fed gets cash. They taking that cash and reinvesting that as well. They were reinvesting around $60 billion on top of the $100 and $120 billion. So, they were buying a huge of mortgage-backed securities, they were the number one largest purchaser of mortgage backed securities, and they were causing interest rates to plummet to historical lows. Rick Ripma 5:36 Yeah, back then, when COVID first hit it, it went crazy. The market rates went way up. Everybody was scared. They brought out all these crazy new rules. And then it took like a week and everything was going the opposite direction. Jon Iacono 5:54 Correct. They went the opposite direction, because they began to implemented their QE, their quantitative easing. Yep. So now, that occurred around when COVID started, right, was it like March I believe? Yes. And then it continues, right, they continue to continue. Now fast forward to where we are currently. Right now, the Fed has been speaking. And what they're talking about is, they actually t have been lowering or quantitative, tightening their QE, their quantitative easing. So they've been lowering the amount of purchases for the 120 billion per month, they're lowering that by 30 billion every month, and it keeps on increasing. And it should be done by March of this year, next month. On top of that, anytime they mentioned this balance sheet of theirs. So, the balance sheet is $8.8 trillion. So, they have this balance sheet with the teeth. $8.9 trillion of mortgage-backed securities and Treasury notes. Alright. So, what they're saying now is they're going to start unwinding that as well. They're not going to hold it anymore; they're going to start selling. They're going to be net sellers. So now they're done with their QE. And now just today, they actually spoke right after the CPI (Consumer Price Index) report was released and said how since 1982 it was the highest CPI report the consumer. And after the CPI report came out, I think the Fed Governor Bullard spoke, and he said that they're going to stretch. The Fed is going to start shrinking that balance sheet sooner than later. So, now you have no more QE. And now you have the selling of the balance sheet and no more reinvestment. So that's why you're seeing mortgage-backed securities fall off of late and bonds are down 69 basis points today. So, for every 100 basis points, it equates to roughly a quarter percent and interest rate. But it's not an exact science, it's give or take, but about 100 basis points, about a quarter percent interest rate for the worst. So, when bonds fall, interest rates go up by about that much. So right now, they're down 69 basis points on the day. So that's kind of what's going on right now. So now there's another weapon the Fed has, if you want me to keep on going deeper into this. Rick Ripma 8:19 Yeah, I think it's interesting for people. Yeah. Okay. Jon Iacono 8:23 So yeah, the Fed are also going to raise the Fed funds rate and there's a huge misconception with this; when the Fed hikes the Fed funds rate. (The Fed funds is it the rate that member banks charge one another, for overnight borrowing). That's all it is. It's not a mortgage rate. It's the Fed funds rate. So, when that is zero, which it is right now, it's zero to .25% a very low bucket and the short end of the interest rate curve. It's money. It's like free, they stay. Actually, when they hike the Fed funds rate, it's deflationary because it actually makes it harder to lend money to one another because it's more expensive. So, what happens- it slows down, bonds down 80 basis points, now it just got worse. So anyway. So again, when the Fed hikes the Fed funds rate, it slows down the money supply, a little bit of bank back and forth between banks. So that's actually a curbs inflation, or low or lessens the bite of inflation. So that actually could help mortgage-backed securities. Mortgage-backed securities hate inflation, because it lessens the return on your investment. If the mortgage-backed security yields two and a half and inflation is seven and a half, which it was this morning. You're negative five, right? And it weathers your return on your investment if you're a bond trader. So, bond traders hate inflation. So, when there's something being implemented that curbs inflation, Bond traders like it, so if you want to look at when the Fed hikes rates, what happens? Usually, interest rates improve. Isn't that amazing? So, it's very different than most people So you're gonna see ads from some mortgage companies saying interest rates are gonna go up the Feds gonna hike great. No, they might go down when the Fed hikes rate. Right? Which is amazing. Yeah. So that's we have to keep in the back of our mind still so you hear news about the Fed hiking rates that could actually help our mortgage rates situation. Rick Ripma 10:20 Perfect. After the break, we're going to talk more with John about not only what they're doing currently but where he thinks mortgage rates are going to go in the next couple of years. Jon Iacono 10:31 You're listening to Indies Real Estate Guru is brought to you by Advisors Mortgage Group and Fix-It Mortgage. Now back to your host, the hard work and mortgage guy, Rick Ripma. Rick Ripma 10:43 Welcome back, this is Rick Ripma, your hard work and mortgage guy with Advisors Mortgage Group, if you would like to get a hold of me, if you have mortgage questions, go to hardworkingmortgageguy.com. That's hardworkingmortgageguy.com or 317-215-7600. That's 317-215-7600. And we're talking with John Iacono. John is the is a mortgage market guru. He understands the mortgage mortgage-backed securities in the mortgage market better than anybody I've ever met. John, you were talking about mortgage-backed securities and what affected them? Where we're at, recently what's going on mortgage rates have gone up. Can you elaborate maybe a little bit what you think in the near future? What's gonna happen? Jon Iacono 11:39 Sure. I mean, listen, we don't have a crystal ball, but we can kind of try to look and get a good grasp of what's going on a little bit better. You know, so we were talking about the fed their plans and how they're going to be, you know, working with their reinvestment program to QE, the Qt and their balance sheet. So, I think as their balance sheet rolls off, or sells off, you're going to see a falloff in mortgage-backed security pricing. And you'll see interest rates continue to increase. So, I think interest rates will continue to increase going forward over maybe the next, depends how fast is roll off occurs, but probably over the next year or so. Okay. You might have these little legs of a lower interest rate market like a little tiny refi. Like I don't want to say bubble, but like a period of time where you might be able to get some revising, I think when the Fed increases the Fed funds rate, because again, it's very deflationary. And you'll see a positive reaction in the bond market when that occurs, and when bonds increase, prices as rates go down. So, you might see a good reaction. Actually, I have proof of that. If you look back in time, and you take a look at the so the 10 year note yield. Again, what Rick was saying is rates don't come from that. But it's a good kind of forecast, it's a good thing to look at, because it kind of helps see where Bond traders will make their next move, because rates do come from mortgage-backed securities or bonds. But if you stretch a 10, year note yield chart all the way out and look at it a little bit further away. It basically kind of mirrors interest rates, right, you're gonna have some days that are going to be way off. And that's what Rick was mentioning. Some days, it'll be majorly off. And those are the days you probably need them to be on and then it'll really burn you. You're alone off. Exactly. Yeah. That's just how it happens. Right. But yeah, the 10 year note yield, you stretch it out over time. Yes, it trades kind of with interest rates. So now you look at a chart of the 10 year note yield. Right. And then you look at what happened to it over time. Well, on December 1, 2015 the Fed hiked interest rates by 25 basis points, were point two, five, and what do you know, from December 1, to all the way through September of the following year, interest rates fell. Okay, so the Fed hiked the Fed funds rate, interest rates dropped, then inflation occurred. Other things happened in the economy and interest rates started creeping back up. Well, December 15, my birthday, the Fed hiked again, so they waited a year and they hiked rates again. I think by the same amount, another .25 or 25 basis points. So, from December 15, 2016 all the way to September 5, 2017 interest rates fell again, so it's proven if you look it up. Look at the yield, it drops drastically after the Fed hikes December 15, 2016. The 10 year note yield drops drastically for the next year. So this stuff makes sense. Okay, so looking at this stuff as the Fed hikes interest rate, the Fed funds rate you may see again a little surge in refinances, cuz I think interest rates will improve for a little bit. But with all that being said, you're going to see rates increase a little bit. You might see little segments, in time, of interest rates getting better. But I think no, I know, another thing that could help interest rates in the future will actually be believing that a recession, recession or during recessionary periods, interest rates dropped as well. Okay. And so, a good forecaster of a recession is the yield curve. So, if you take the 10 year note yield, and you subtract it, by the two year note yield, when that number, that new number, goes negative below zero, then it actually forecast a recession. And if you look at it historically, every time it went negative, a recession occurred. So, if you look at the 10 year note yield, currently, it's dropping. And many expert analysts are saying that a negative yield curve will likely occur within the next year to year and a half. So, they're calling for recessionary periods. So now you have interest rates hiking up a little bit, maybe a couple little surges of refinances in between when the Fed hikes rates, but overall, I think over the next year and a half higher interest rates will increase, and then we will see if the recession occurs. If so, you'll see a refi opportunity again. Rick Ripma 16:16 Okay, so here is a question I have. They're going to start lowering their balance sheet. And they're going to raise the federal funds rate, lowering the balance sheet is bad for raise, raising the federal funds rate is good for a raise. Yeah, like a tug of war? Yeah. So, is it? Is it going to do well, be somewhat of a play? And what will increase until a certain point, then it'll just stay there? Or what do you mean; how do you think that's gonna play out? Jon Iacono 16:48 Good question. They're doing a lot faster than they ever did in the past, they're doing that roll off a lot quicker than they ever did in the past. So, it's gonna be interesting to see how it plays out for it following a pandemic, which is like a once in a lifetime thing. S it's a lot of variables are occurring right now that are very new. So we have to see how bad the roll off affects mortgage backed security pricing. Let's see how bad inflation is, right? They're gonna hike the Fed funds rate to curb inflation. Well, inflation is getting better. Is it getting worse? Again, the CPI (Consumer Price Index) was at a 40. Year higher, so Right, right, right. 1982, there was the highest numbers of 7.5%. So, if inflation continues to increase, they're going to do bigger hikes. As they start to level out, they'll do smaller hikes. Well, the CPI number is a rolling 12 month. So, it basically they take the monthly, month over month number, and that's your data point, right. So, the oldest ones fall off. And then it shifts and the newest number goes in. Well, this month, and next month are numbers that with a high number replaces it. It's like replacing like zero or something, right? So, it's replacing zero inflation, monthly inflation, right. So even a point one, you know, it would make the annual number higher, but the next few months after, it starts to replace similar numbers. So, I think you're gonna see a natural level off of inflation just due to the data points. So once inflation levels off, the Fed might mitigate their hikes. So, they might not even be hiking by that much, so we got to see how it plays out with that if inflation take gets tamer. And the Fed doesn't hike as much this role is going to really affect mortgage-backed security prices. So, I think it's better to get into the market sooner than later. And then take it from there, and go forward. If there's a recession, then it might be a very good refinance opportunity. But I think it's better to get into the market, you know, sooner than later, the housing market. Rick Ripma 18:54 Right. And when you look at history, you look back in the in the late 70s, early 80s. And the late 90s, early 2000s. When the feds came in, and they raised the federal fund rate. Inflation was kept in check; it came down and mortgage rates came down. Yeah. But at that point, did they have a balance sheet issue then too, or did they not? Do you know? Jon Iacono 19:20 So, I'm looking at a chart for 2015. Going back then they didn't have a balance sheet, but I don't know what how they fared with it. Like I know, in the past, they rolled off the runoff on October 2017. Well, they did it slowly over two years. They're talking about doing it a lot quicker now, which is scary and a lot. And during like these fed hikes, where in the past, they did the Fed hikes first and then they rolled off the balance sheet. So, they're doing a little different and seemed like doing it more aggressively this time. So, it's a good question, but I think this time is a little bit different than any time in the past. Okay, follow the pandemic. Rick Ripma 19:56 Yeah. And you know, the thing that's so disappointing in this as that it seemed like everybody except for the Feds knew that we were creating an inflationary period, and the Feds acted like it was not going to continue. Yeah, transitory course. Yeah, exactly. And now it's like they're going over. But I probably shouldn't say it, but it just seems like the government recently, just no matter what they do, it misses. It's just not, it's the opposite of what we should be doing. Jon Iacono 20:31 Yes, they were transitory. That was the favorite word of the day, every day. And it all sort of just went away. All right, but I suppose it just all went away. And, yeah, now it's that inflation problem. And they thought it was still transitory. They mean, it's not going to the consumer, and it's going to be temporary. So, I think everybody listening, everyone in that room. Everybody in my room over here. We feel inflation every day, and food and meat pricing, and gasoline pricing. You know, we feel it, we see it, it's definitely around. So, it's a real thing. And inflation again erodes the return on investment for bond traders, it hurts rates ever. It's no good for interest rates. Rick Ripma 21:13 Yeah, it's just a hidden tax, really, inflation just takes away your money. I mean, anybody who's working, they just have less. They have to spend more for whatever they're buying now. You know, we talked some about this. But I would like to talk about, you know, how does comparative with the way this market is, the way the market mortgage market is right now? How does this compare with you know, or do we have a housing bubble issue? Are we looking at a possibility of a housing bubble issue? Kind of comparing this to 2007/2008? Jon Iacono 21:48 Yeah, definitely not. A completely different setup. So, 2007/ 2008, you had an influx of inventory, and very little demand to meet. That was purchasing, that was a seesaw, like, say, once in your head in one direction. Fast forward to current times, we have quadruple the amount of demand and no inventory, right. Like I don't say none, but very low levels of inventory. The existing home sales was recently released. The existing home sales is a report that measures homes that are pre existing on the market. It's about 90% of the homes on the market. So now, I think the December one I pulled up, yeah, the December existing home sales, there was 910 homes for sale. Okay. And that was down significantly from the prior report on 1.1 million. Now, you want to see where it was in 2007. There was 3.7 million homes for sale. So, currently 900 attainment and 110,000 homes for sale. You have 70 to 370 million loans with no demand. That's why there was a bubble homes are incorrectly priced mortgage lending was extremely easy to get. And there was very little red tape regulation and a total amount of totally too many homes on the market versus the demand. And that's why it burst because the home pricing wasn't justified. Fast forward. Now. You know, it's following a pandemic. Urban sprawl people leaving city areas and rural areas. The demographics, there's more so we look at demographic charts, we look at the average age of a first-time homebuyer-it is about 33 years old. And they make up about a third of the purchasing of new homes of homes. And that batch of people are buying their homes for the first time for some homebuyers. It grows every year. If you look at birth rate charts, we look at birth rates 33 year ago. Well, there was more births in 1988 and 1989. So, 33 years later there's first time home buyers coming to market every single year than the prior year. That causes a ton more demand on the housing market. So that is very supportive of housing pricing. So that's why home pricing is legitimate. You know, that is a lot of demand with little inventory. Rick Ripma 24:25 You're right. It's a supply and demand issue. Really. We have a tremendous amount of demand. And for the reasons you're talking about. A lot of it is these first-time homebuyers. So, there's this huge demand. And it's not that there aren't. I know in Indianapolis, we had record year last year in real estate sales. You probably did in New Jersey, too. So, it's not that they're selling a lot of houses. It's just that the demand is so high that it's very hard on the buyer and sellers. It's a great market. So, do you see that changing? How long until that birth rates started to come down? Jon Iacono 25:08 So, it's gonna start to level off after 1991, I think, but then it actually still at the height of the chart. And then again, it goes up again. Okay, it kind of peaks and levels off a little bit and then a piece again. That birth rate chart is really showing very prudent and very, very true to mimicking where demands coming from, it really helps. Then also there's new construction to come. Household completion is when a home is…… so there's permits, you permit for the home to start, which is the breaking of ground, and then there's completion right, when the home is slated to be sold. Well, that fell almost 9%. And they're down 6% year over year from December to December. Builders have major challenges with materials and labor. Backlogs of homes continue to grow. Homes authorized, but not started yet increased by 1.1% and are now at 44% year over year. So, there's a huge backlog of these new homes, trying to help inventory levels but it's just not getting there. Because, again, labor and materials, pricing and shortages. So, when that starts to get better, when labor comes back a little bit, when maybe material costs drop a little bit, and it's easier to get certain appliances. I know there's a huge appliance backlog, especially for those like microchips, right? Computer chips, right. So, when that stuff starts to get better, you'll see a better new construction report. And then also, I thought about it, you know, think about existing homes, you might see people be more apt to listing the home. Now, as COVID starts to waver or slowly go away prospective home sellers might be more accepting of people coming into their home, that might help as interest rates start to creep up. That actually might help inventory too, because the sellers might say, Hey, here's my affordability batch. So, let's not wait till interest rates get even higher, because I want people to be able to afford this home and get it at this price. You know, so they might list their home and say this is a time to sell. They just made 18.8%, the national average via the Case Shiller, of homes appreciation over the last 12 months. I mean, there's super levels of appreciation taking place. And I'm sure homeowners are going to take advantage of that. So, I think there might be a little bit more inventory coming into play. But it’s still very tight demand, its still very strong. The average time a home is listed right now is 19 days on the market, the national number. We just need more homes on the market. Rick Ripma 27:43 We only have like 30 seconds for the answer to this question. But weren't we, for the last 10 years, short on new home construction, which has also helped create this lack of inventory? Jon Iacono 27:55 Correct. Yes, new home construction has been lagging over the last 10 years. And it's just spiraled into a huge deficit of new home construction. Correct. Rick Ripma 28:06 All right. That's what I thought. Well, hey, John, I appreciate it very much. Thank you so much for joining me. I truly appreciate it. Your knowledge is unbelievable, and we appreciate you sharing. Jon Iacono 28:18 Anytime. Thank you very much. I love being on your show. Rick Ripma 28:22 If anybody needs to get a hold of me you can go to Hard Working Mortgage Guy.com That's Hard Working Mortgage Guy.com Or you can call me at 317-215-7600. That's 317-215-7600. Thanks again and have a great weekend.