Full Transcript is Below:
– Welcome into NFM TV. I’m your host, Greg Sher, and we are joined by a good friend of the network, Mike Fratantoni. He’s the Chief Economist at the MBA. Mike, it’s great to see you again. You’ve got a lovely tan. I know you’re down at the chairman’s gathering with the MBA. How’s it going?
– Very well. Thanks for having me, Greg. Good to be back on your program.
– Let’s get right to the point here. You’re one for two. You’re batting 500 in our last two conversations. If you were playing baseball, you’d be the greatest hitter ever to live, so we’ll keep that in context, as well as the fact that it’s never easy to guess the market. About two years ago, you nailed it on here and said that inflation was transitory. Then we had you on back in the summer of last year where you thought that interest rates might creep down into the five and a half and below range by year’s end. Here we are in June. We’ve got a really stubborn unemployment rate that’s keeping the Fed on the edge of its seat. Tell us what went wrong on that last prediction and where you think it goes from here.
– I would say qualitatively, we’re still in the same place as we were six, nine months ago. So we see the US economy slowing. Why? Well, you have credit tightening really across the board that’s only been accentuated by the bank failures that we saw this spring. You see businesses slowing their pace of activity and also you have the cumulative impact of five percentage points of increases in the short term rate. So you’re right, the job market’s held up better than anybody would’ve guessed, but we’re even seeing some signs of cracks there. So no one wants a bad economy, but we do expect that the cumulative impact of all these forces will slow the US economy and that will bring rates down. So we’re still thinking five and a half percent end of this year.
– What went wrong in that forecast? What was one thing that really stood out that you could not have anticipated?
– Inflation has been stickier than really anyone would’ve predicted. So it peaked at about 9% middle of last year. We’re down below 5% now, but still not moving fast enough to the Fed’s 2% target.
– Existing inventory down 23%. Wanna know what is gonna be the catalyst to spurring enough activity to get the mortgage business back humming again.
– It is beneficial that builders have been active and so we’re seeing more new home inventory on the market. But because of that lock-in effect, the fact that you have so many owners that got that two and a half or 3% rate thanks to so many of the folks in our industry during the refi boom, they’re just not that interested in moving right now. I think a year, two years from now, life happens, right? You get married, you have kids, you get a new job, they’ll be more willing to look beyond that low rate and be ready to list their home again.
– What is the scenario where the market crashes? What would have to happen for prices to go down 20%?
– You would need a high level of distress in the market, and we’re just not seeing that right now. We put out our national delinquency survey on a quarterly basis. As of the first quarter, the delinquency rate is the second lowest level it’s ever been going back to 1979. So, you know, if unemployment instead of going to 5% per our forecast, if it went to 10%, we’d see distress. We’d see distress in a hurry. But that’s just not a likely outcome given the macroeconomic dynamics we’re seeing right now.
– What would it take to get originations certainly not at 2000, you know, pandemic levels, but in an area where we’re looking at a top five year again?
– To really get much higher than sort of 2.2 to 2.5, over the next couple of years it would be rates dropping back down into, you know, threes again, and it could happen. Don’t think it’s likely. But that’s really what it would take to drive rates low enough to the stat that you referenced. Get people with the 3% mortgage rate interested in refinancing again.
– So what’s that mean for IMBs? We’ve seen a lot of consolidation. We’ve seen some companies go out. Do you think that that trend is going to continue or do you feel like the market has flushed out those that aren’t gonna be around anymore?
– Our data has showed on the production side four quarters where your typical IMB is losing money on production. Those that have a servicing book have been able to offset that to some extent because delinquencies have been so low. MSR values are generally pretty strong given the slow prepayment speeds. But it’s a tough market out there, so we absolutely, to your point, are anticipating some additional consolidation.
– Fast forward crystal ball time, ’cause we talk every eight months or so. I’m actually gonna give you a range this time, so I want you to give me a range, if you will. We are in June. Let’s look at by March of next year. What is that range on the low end that you see in the market in terms of fixed interest rates?
– I think on the low end, you know, five, five and a quarter, and then sort of the high end, you know, five and three quarters. I really think with some confidence that we’re gonna be below six as we get into 2024.
– Always great to see you, Mike. Thanks so much for spending time with us on NFM TV. You’re just a great guy and appreciate you being a good sport and taking time away from your busy schedule to spend some time with us on NFM TV.
– Thanks, Greg.