Mortgage Dynamics And Demography (w/ Logan Mohtashami)

TL;DR

The mortgage rate transmission mechanism is discussed, highlighting the historical relationship between the 10-year yield and mortgage rates. The current stress in the mortgage market is explained, with a focus on the differences between the current crisis and the 2008 financial crisis.

Transcript

ASH BENNINGTON: Let's talk about something you touched about a little bit earlier, which was the transmission mechanism between the 10-year rate and mortgage rates. What is the function of that transmission mechanism? How does it actually work, and what's happened here that's been different from in past cycles? LOGAN MOHTASHAMI: What I tell people ... Read More

Key Insights

• ☠️ Mortgage rates should be under 3% when the 10-year yield is below 1%.
• ☠️ Actions taken during the current crisis have caused higher mortgage rates despite the expected relationship with the 10-year yield.
• 😘 The current housing market has a strong loan profile, but stress may arise in certain segments with low FICO scores and no selling equity.
• ❓ The housing market in 2020 was expected to improve before the virus outbreak.
• ☠️ Coastal areas with higher median sales prices are more sensitive to mortgage rate changes.
• ❤️‍🩹 International cash buyers, particularly from China, have had an impact on the high-end housing market, but their presence has declined.
• 🥺 Rental markets suffer from a lack of affordable rental construction, leading to inflationary rental prices.
• 👔 Increasing wages alone may not solve the rental inflation problem, as it is closely tied to supply and demand issues.

Questions & Answers

Q: How does the transmission mechanism between the 10-year yield and mortgage rates work?

When the 10-year yield is below 1%, mortgage-backed securities are purchased and mortgage rates should be below 3%.

Q: Why were mortgage rates higher than expected during the current crisis?

The stress in the mortgage market, similar to 2008 but with different circumstances, led to actions that raised mortgage rates despite the expected relationship with the 10-year yield.

Q: What is the key difference between the current housing market and the 2008 crisis?

The current housing market has a strong loan profile with high FICO scores and no exotic debt structures, unlike the previous cycle.

Q: Which segment of the housing market is most at risk during the current crisis?

The stress is seen in FHA homebuyers in 2018 to 2019 with low FICO scores and no selling equity, leading to potential foreclosures.

Summary & Key Takeaways

• Mortgage rates should be below 3% if the 10-year yield is below 1% due to the relationship between the two factors.

• The stress in the mortgage market, similar to the 2008 crisis but with different circumstances, led to higher mortgage rates than expected.

• The housing market has a strong loan profile with high FICO scores and no exotic debt structures, but stress may be seen in certain segments such as FHA homebuyers with low FICO scores and no selling equity.