Logan Mohtashami on the jobs report and higher mortgage rates

Welcome everyone. My guest today is lead analyst, Logan Motoshami, to talk about the jobs numbers and how those have affected mortgage rates. Logan, welcome back to the podcast on Jobs Friday. Hoarder! Hold the line! Hold the line! And it's Friday morning. It's after the jobs report. And I think today's discussion is going to be useful for mortgage people and real estate people. Because I'm getting a sense that not a lot of people had locked rates, or there's a lot of people that were thinking rates were going to keep on going lower and lower, whether the consumer thinks of it of the Fed and everything. And I don't create these characters because I want to. It's just because I feel like if I use Gandalf the Grey, like I did last year, and when the 10-year yield was at 3.37, I said, hey, listen, we should not break underneath this level because the labor market isn't breaking. And we tested that eight times in 2023. And when I brought Hoarder, hold the door, he's holding, I said that to get below this, you need weaker economic data. We got it to break underneath. But boy, we've priced in pretty much everything for 2024. And hopefully now it gives a good sense of reality that you just have to listen to people who track this stuff so you don't get caught in a situation to where you're in contract and people say, well, rates are going to keep on lowering because the Fed cut rates. Literally, the day that the Federal Reserve did its 50 basis point cut, the 10-year yield was at, I think, at the lowest, 360, housing starts beat, retail sales beat, industrial production beat. Breaking means the economy is going into recession. Jobless claims rises. We're not there. So we have to talk about mortgage rates in relationship to the 10-year yield and where Fed policy is and inflation expectations. So that's why Hoarder was created, that if things don't get worse, it's going to be really difficult to have mortgage rates go lower now. And hopefully this was just a wake-up call in that sense that even if the jobs data was being revised lower, which I think it will be, I think the sampling size for this report is abnormally low, so it probably gets revised. In the short term, it doesn't matter. If the labor data comes in at 254,000 with 4.1% unemployment rate and the wage growth is picking up, the 10-year yield is going to rise. And of course, we're still under 4% here as of early Friday morning. It's much different than last year. And if the spreads weren't better this year, we're over 7% today. That's how crazy it is in 2024. So we try to teach this so people have a better understanding that at key technical levels back in 2023 and now here, the labor market hadn't broken yet. And if it did, we'd have a much different discussion. But if it did, the jobless claims data would be kicking up. And this is why since 2022, we said 323,000, four-week moving average, jobless claims data. Now that we're here, you could understand why I've always said you have to listen to people who have models and things because it keeps them in line. And when it keeps you in line, you're better informed for something that could surprise people like we saw today. So I think the really challenging part or ironic part for people in housing, if you're in real estate, if you're in mortgage, if you're tied to that process, when the economy is doing well, this is good news for the economy. Good news today is that the labor market is doing better than expected and was revised upward. That's great. And that wage growth went up. That's great. But if you're in housing, because that means that probably rates are going to go up, it's not good news for you necessarily. You know, one of the first articles I ever wrote for Housing Wire, I think right before COVID hit, was a better economy is not necessarily good for housing in terms of where mortgage rates can go. And back then, actually before COVID even hit us, they had kind of taken care of the trade war tap dance. And the economic data was actually starting to get better. But of course, COVID changed everything. Here, it's a much different case because affordability is very stretched. This isn't like the previous decade where affordability was good. So now more than ever, Fed policy, as I've always said, is still restrictive. We're not like near neutral yet. But for housing, it's disproportionately restrictive. Now, mortgage rates getting down towards 6% has changed the data line. This is twice now. This happened at the end of 2022, early 2023, now in the mid part of 2024. But breaking below 6%, my belief has always been the same. The Federal Reserve has a COVID-19 housing policy, and they just don't talk about it. And this is just until they actually come out and say, we want to grow existing home sales. This is what we're left with. So we have to create channels on the 10-year yield and what we expect and labor over inflation. Because now, a lot of the headline inflation reports are 2% handles, but we're above 6% mortgage rates. I think pricing was very bad today. Not only did the 10-year yield go up, but the spreads got slightly worse from yesterday. So this is the reality of the world. Whether we like it or not, this is what we have to deal with. So the reason Hordor was here was to try to get people to if something turns positive, then something like this can happen. And of course, we're in a much different spot than we were in 2023. We're talking about 7% to 8% mortgage rates with worse spreads. But hopefully, this is a wake-up call for not just people in the mortgage or real estate industry, but also consumers. Everyone's so used to monetary policy being very easy, sub 6% mortgage rates, and it's just not there. So this is why the 10-year yield forecast and mortgage rates are in channels and we work off the economic data. If jobless claims was at 323,000, if we're pulling negative jobs reports, then yeah, rates are going lower. But in this context, we're not there yet. So you keep saying yet. Do you think we're getting there? Or do you think we've hit an upturn? Every economic cycle ends. Usually, it's kind of by some type of shock that we had. The labor data right now is actually running where I had been looking for it to be for some time. I've always said, we're going to get down to about 140,000 to 165,000. And that would be normal for me considering where population growth and everything is. What are those numbers? 140,000 to 165,000 per month. Of what? Of jobs created. That would be normal. I haven't been able to hit that number for a while while we're getting closer to 159 million. So I would have been wrong about the labor data. Now, post the revisions, we're here. So the labor market is getting softer. It's not tight anymore in that sense, but it's not breaking. And this is why I've always tried to emphasize softening is one thing, breaking is something else. Breaking is what we've seen in every single economic cycle post-World War II. Jobless claims break. And what's happened is there's so many people out there that are just, I'm going to say it, are just lying to you all. They're just lying. You have to question yourself. Are you going to listen to people who just want to tell you what you want to hear? Or are you going to listen to people who are going to tell you the truth? And softening gets you lower yields. Softening gets you better spreads that we've seen. But if you're looking for a sub-6% mortgage market, this is why I can't go below 5.75% in my forecast until I see the labor market breaking, the spreads getting noticeably better, they've gotten better, not back to normal, or the Federal Reserve changes its policy. And we're not there. We got to the lower end of the forecast, and that's why a hoarder was created. And we have to just take it one week at a time. I do expect these numbers to get revised down. But for right now, the whole, well, the Fed cuts 50 basis points, mortgage rates got to keep on going lower. There was a reason why I had to make that stand here, because you could see what happens just like that. Since on the day the Fed cut rates, bond yields have gone up over 35 basis points. Mortgage rates have got up, in some cases, half a percent. This is the world we live in. This is the rules that we have to follow. And we just take it one day at a time with economic data. Okay, so let's talk about the Fed, right? Because we were very excited that they're now in a rate-cutting stance. What does this do to the next rate cut? And will it matter, or has that already been priced in? So now people are talking about a 25 basis cut versus 50. It doesn't really matter in this sense. The market has already discounted so much of the rate-easing policy that it doesn't matter how we get to neutral or how long it is. What matters more is the labor data. So labor data, the internals of the labor market are getting softer based on what the Fed kind of tracks. So they kind of want to get ahead of curve. In this context, they still have restrictive policy. This is why I always try to say it this way. If you listen to the Fed, they keep on telling you they're restrictive because they are. They could have cut three times already and still be in restrictive policy. So we get to a point to where, unfortunately, you're going to need more labor and economic weakness to get mortgage rates, or the Fed just goes, okay, our policy has changed. We believe the Fed funds rate would be better at 3% or 2.75%. And we would like to see the housing market grow sales. I think that was some of the knock in the last few months that even lower mortgage rates hasn't boosted. And I just keep on saying, they don't care. The only thing they really cared about was that the new home sales market, because that is construction workers. And what had happened was when rates started to go lower, builder's confidence data picked up, single family permits are going, construction jobs have been created in the last two reports. So it's frustrating, I get it, but I wouldn't be doing my job if I didn't bring corridor out. And we set labor triggers tied to economic cycles. And this is how it's worked since the Peloponnesian War. It's progression models. They're not the most exciting thing, but they tend to be right because they keep away from the noise and they focus on the data only. So let's talk about purchase apps, because as we said in the last podcast, we had what, six, no, 12 weeks of positive purchase apps. What does this do to that momentum? 12 of the last 17 weeks have been positive. We've had six straight weeks of positive gains, back-to-back year-over-year positive growth. If we follow every single time rates have gone up in the last three years, mortgage rates rising up like this should create a negative purchase application data. That's how it's worked for a lot of times. What happened earlier in this year is that rates never got down towards 6%. So we stayed at a very negative level. So we've now have two years that show us getting towards 6% is actually things that can work. Staying in the high sixes, low sevens, not working in this marketplace. So now we have enough data to look at it in that light. But again, paper, rock, scissors, the inflation story is over, but the labor market has to get much weaker for rates to go lower and stay lower. The spreads have to get better. Spreads weren't good today, or the Fed stays up. It should get below that 5.75. If you're looking for that, you need that to occur. And I think that's the frustrating part because people saw the data getting better. And I just don't think the Federal Reserve is going to come out and say, okay, we know this is the third calendar year of the lowest home sales ever. And we would like to have policy to have that grow. And if you don't get the growth, we're just stuck at these levels. But it has, and it was very encouraging to see for the second time that getting towards 6% changed the data line, even in a non-seasonal timeframe. Let's talk about construction workers because you watched those closely because they are recession indicators, especially for housing, but the construction workers' jobs increased. Residential construction workers have always fallen before every recession recently. There's a lot of things that are different about this cycle than in previous decades. From March to July, this data line was going nowhere. In fact, we had actually a negative print after the revisions, one of the months. So what occurred is that policy was too restrictive. The builder's confidence was falling. Housing starts were at recessionary levels. Permits were at recessionary levels, but that all changed starting in June. Again, if the Fed wanted an easy layup, easy layup, you just get the 10-year yield between 3.21 and 3.80 with normal spreads, and you alleviate a lot of the other concerns if you're just tied to housing. That doesn't mean it's super easy policy like we saw in the previous decade, but that does give you the ability to grow sales. This is why I always say you need sub-6%. And the reason I say sub-6% is because the builders have shown you since the lows of 2022, you can grow sales, even in a more expensive market that's tied to more mortgage buyers. It works. We've just never been able to do that. And here we are again, we were so close toward breaking under 6%, but it's just, we're not. We don't have that kind of policy yet, or the labor market isn't deteriorating yet to get to that next stage. So for a couple of weeks, you've been outlining those three things that could drive mortgage rates lower, right? So it was, if we see the labor, if we see jobs numbers come in bad, if we see, oh gosh, there was a three thing. The spread's getting better, right? The spread's getting better or the Fed becoming more dovish. Yes. So you've said that, we don't see those three things happening. Now let's talk about what could make rates go up significantly. Do you see things that could do that? Now, significantly means the labor market and the economy starts to re-accelerate. Wage growth, which picked up in this report, starts to re-accelerate and the Fed just stays and say, we believe in restrictive policy. Now, what this does is the spreads are down. So we don't have to worry about like 8% of mortgage rates. Fed policy is getting toward neutral. But if for some reason the Fed says, we are abandoning neutral policy. We want to get to tight. That's a whole different conversation. That's not happening today. But right now, considering where everything is, mortgage rates look about right to where the Fed wants. If the Fed had come out and say, we want accommodative policy, that's a whole different conversation. It's just not there yet. So you're probably going to get, right now we have a lot of data between now and the next Fed meeting, but a quarter rate cut and it doesn't matter. As we can see here, since the 50 basis point rate cuts, mortgage rates have gone up. When mortgage rates were heading down 2% from the peak, no rate cuts. So I'm trying to get people to follow the economic data and not the inflation data anymore because the growth rate of inflation is falling, but the labor data is really key. And here we are again, labor over inflation on the opposite side. And three of the four reports beat expectations. I would argue that the job openings internally was weak, even though the headline print came up, but jobless claims are still low, ADP beat and jobs beat. So unlike last month, last month, three of the four were negative. This month, three of the four were positive. So we see yields go up. And it's much different when you're working below 380 than you were at 470, right? And that's why we try to create those channels for people to work off of the data. And that's why Horta was created, just he's holding everything back. So that's what policy is. Given where we are right now, your best guess is like for the next little bit stuck, we've been stuck for a while. In reality terms, we've been stuck between 5.75 and seven and a quarter. Of course, in 2023, when the Fed went hawkish, it sent mortgage rates to 8%. You could see them kind of panicking back then, but this is kind of where we're at. That was the whole range of 2024 was seven and a quarter to 5.75%, keeping in line with where Fed policy is and where the labor market is. You only break these things under or higher if things are better. Now, early in the year, the 10-year yield was rising. The Fed was like, we need confidence, we need confidence, we need confidence. 10-year yield is going up. And all of a sudden, the labor data started to get softer on them. So we're on the lower end of the range on the 10-year yield, but still, you guys could kind of see this. It's the reality of the world we live in. And I get it. Trust me, I hear it all the time. Existing home sales are so low, why is the Fed doing this? Doesn't care about the existing home sales market. The new home sales market, yes, but the existing home sales market is not. And this is why you don't hear anything. You do not hear anything except, well, the best thing for housing is that we beat inflation or stuff like that. But it could be a lot worse today, Sarah. One of the things I'm highlighting today on Twitter is that imagine if the spreads didn't improve this year. We're over 7% mortgage rates and the market doesn't respond well to that, either the builders or the existing home sales market. So much different landscape, but hopefully now everyone can see how powerful the labor market is to where the 10-year yield and mortgage rates can go. It is. It's just disappointing because we all were thinking we were going to get a pretty good fall. And we all, were we all? Were we all thinking it could go lower? No, no, no. But just like even just, it was headed in a good direction, I think is what I would say. And it overdid it. That's the thing, right? And that's, and again, I wouldn't have created Gandalf last year if I didn't think that level could hold. I wouldn't have brought Hordor in now at 380, but to get lower than this, the 10-year yield to take mortgage rates, they're going to need weaker economic data because the Fed will tell you, like Janet Yellen said, we are still in restrictive policy. So the Fed rate cuts are not, they can help the spreads get better in that regard. And it has this year, but we're in this position and we've been rightfully so based on where the policy and expectations are. The labor market was breaking and jobless claims are rising, whole different story. Nothing has happened, but for right now, we got to a key level and it's for now, it's held itself and bounced up higher. Well, Logan, I wish it was better news for those in housing, but you have to call it what you see. So I appreciate you giving us a play by play. This is how it's supposed to be done, right? You don't let your ideological, what you want to happen, change what your models. And this is why I say people have to follow people that have models and forecasting because it keeps them in line. It takes the human element of emotion or anything out of the equation. And you follow that and track that. Thank you so much for being on. We will talk to you again soon. Yes. And good luck with fantasy football this week. You know, because it looks like I'm going to be five and oh, maybe you won't be one and four. Maybe you'll be two and three. We can hope. All right. Thank you, Logan. Bye.