This is a YouTube video titled "Rates, Real Estate, and Recession" created in July 2022, featuring Derek from the McGowan Mortgage team providing a detailed monologue on the 2022 housing market. The content covers inflation, Federal Reserve rate hikes, mortgage rates, economic indicators like the 10-year vs 2-year Treasury yields, unemployment rates, and their relationships to recessions and housing market trends. Derek explains historical patterns and current market dynamics, emphasizing the likely continuation of rising home prices despite potential recession risks. The video is an informative presentation rather than a multi-speaker conversation.
Hey guys, it's Derek with the McGowan Mortgage team. Today I'm diving into rates, real estate and recession, three big topics in the 2022 housing market. So inflation. I think we all can agree that inflation's very hot these days. I'm sure we've all seen the headlines or we've seen at the gas pumps or the grocery store. But ultimately, to break that down, super simple. Inflation is supposed to average about 2% year over year. So if something cost $100 this time last year, today it should cost $102. That's just the natural increase of inflation over time. That's healthy. Well, inflation's over 8% right now. So that means in the last 12 months things have went up on average 8% in cost. So that $100 item last year now cost $108. But the big thing is buyers are still willing to pay it. And that's the problem where if a seller is offering that thing for 108, nobody's there to buy it. Well, they have to lower their price until they catch buyers that are willing to pay the price. So that leads to point number two, the Federal Reserve. The Fed's been hiking their rates. I'm sure if anybody's been paying attention to the economy at all, they probably heard the Fed's hiking rates every time they get together. A big part of that is that the Fed hikes their interest rates. They're making everything a little bit more expensive. So what they're trying to do is now, so let's say somebody needs a loan on that $108 item. Well, they're willing to do that if the rates are good. But now the Fed's bumping rate for everything for credit cards and auto loans. And their Fed rate hikes are more the short term items. But that trickles down. It hits a lot of different financing. And even it kind of loosely can touch mortgage rates, not directly, but it kind of does trickle down even and impact mortgage rates as well. So if somebody needs a loan of that $108 item, but now the loan's a higher interest rate that could. And the idea, the goal is to price people out from the Fed so they can't obtain that item is pushing it to an unreachable hey, I'm going to tap out, okay? I could do the 108 DOL dollars when the rate was, was 3% but I can't do that $108 now that the rate's 6%, for example, that's what the Fed's going for, they're trying to push people towards an unattainable level. So that way the prices start kind of resetting and fall back down to earth. They're trying just to, you know, stomp out some of the sellers of goods and services that are able to charge higher and higher and higher because buyers are paying it. So that's the whole idea of the federal rate hikes. And eventually they won't have to do that because it'll kind of snuff out a lot of the excess buying. However, when they hike the rates pretty much every single time, it leads to a recession. And that's where everything kind of seems like we're headed next. So let's look at history. Inflation back, you know, back in the 80s was, you know, 7% up to 14. Mortgage rates also went up right along with it. Because inflation is right in line with what happens to mortgage rates. The Fed almost doubled their rate and that stomped out inflation. Got it back down. Mortgage rates dropped right back down. However, the S and p went down 30% and there was a recession. Then Alan Greenspan, the next Fed chair, we had inflation just about doubled. Mortgage rates also went up about 1 1/2 percent. Fed increased their rate about 2%, eventually curbed inflation. People, that was enough to tap some buyers out. Inflation came back down to earth. Mortgage rates followed suit. But the S and P, the stock market lost half of its value. Recession hit again. Then Jerome Powell, the current Fed chair, this is going on right now. Today, inflation was one and a half percent. Now it's eight and a half percent. Mortgage rates have more than doubled. Federal funds rate is 3% and climbing now. Inflation should drop. This eventually will cut down inflation and again do the same thing that's happened over time and that should help mortgage rates drop as well. But there probably will be a recession. Now look at what's happened every single time the Fed hikes their rates and you know, mortgage rates drop. Fed hikes their rates. Mortgage rates drop. Soon after that, Fed hikes rates. Mortgage interest rates drop. Fed hikes their rates. Mortgage rates drop. You know, Fed's really hiking the heck out of the rates here. Mortgage rates drop. You can see over and over and over and over. Every single time the Fed hikes their rates. It's a, you know, instant. Maybe not instant, but it's a no doubt reaction at some point. Mortgage rates will drop shortly after that. Now the 10 year versus 2 year. So this can get really confusing. But to simplify this for every all of us to Understand? So if you're going to take out a loan, this is the, the cost that the US government borrows money at. So if the US government's going to borrow money for two years versus 10 years, normally the two year rate would be lower because they're only borrowing it for two years. Hey I'm going to pay back in 24 months, not 120 months. But that's not always the case. Traditional thinking would mean that oh, the 10 year must be a lot higher because they're borrowing for a lot longer. And normally this is the gap at 11 1/2% roughly between the 2 and the 10 year Treasury. However, you can see in recent times that's whittle down, whittle down, whittle down. What that's saying is, you know, traders in the bond market, which is what this is, Treasuries bond market are saying hey, there's probably going to be a bad economic thing happening soon and the interest rates of the near term are actually needing to be higher for somebody to just want to take the money back in two years. They think money's not going to do, you know, the cost of the value of money is not going to be that great in the next two years. So they're actually saying hey, we'd almost rather when this inverted at this moment, this said traders were actually giving a 10 year loan to the US government better than a two year loan at a better interest rate. So they're literally saying hey, we'd rather get your money back in 10 years instead of two because we think major things are going to happen in the next two years. Now every time there's an inversion in the two in the 10 year, just like we talked about there, a recession happens. These gray areas are recession so you see inversion, these red areas, bam, recession. Every single time that's happened throughout history we just dipped down again and very good chance recession happens. Now some of these, there's a little bit of a lag. You can see it happens a little bit afterwards. So maybe not tomorrow, but maybe the next six months, year, year and a half, very good chance of a recession. Now another indicator, unemployment rates and recession. So unemployment, you know, we have a recession and then unemployment rates go up. So you can kind of see here, every time the unemployment rates start to hike up, a recession happens. So we have had, you know, unemployment rates going up, very good chance of recession happening. That very well could be on the way. Now mortgage rates and recession this show, this kind of ties that correlation together here. Every single Time there's a recession, look what happens to mortgage rates. They were up to 7, almost 17%, and they dropped back down to 12. They're up to 18, 19% and then they drop back down to 12. And you can see every single time, recession, rates drop, Recession rates drop. Recession rates drop. Recession rates drop. And rates have been climbing. And they're probably going to drop when there's a recession. So you can see every single time, bam, bam, bam, rates drop during recession. It's more. So a guessing game on if there's going to be a recession, not so much a guessing game on when there is a recession, mortgage rates always drop. And the other reassuring thing is house values stay strong. So don't worry about that. There's been nine recessions since the 60s. Eight out of the last nine recessions, house values continue to just plug away and continue to increase. The only different time is 2008. Totally different dynamic. We do not have a dynamic today. So there's a 90 plus chance here that the next recession and house prices are going to continue to increase. That'll be nine out of the last 10, once that's said and done. And this is the other piece to the puzzle that makes a lot of sense here. So back in 2008, or leading up to 2008, we had almost 4 million homes available. Right now we have 800,000. And that's the huge, huge difference here. Where back then homes were plentiful, you can walk down the street and find them. They weren't worth that much because there was too many of them. People didn't want them. There wasn't the demand. Now today people want them, they just can't find them. The demand is very high, which means the value is very high of homes. And so that was the supply side. This is the demand side. Back in 2007, we only had 116 million households. Now today, with just population growth, we have 129 million households. 14 million more households that need homes, 3 million fewer homes. That's the issue that we have. And that's why home prices are so set to continue, you know, to increase at a good pace until we get enough houses to market, then it'll calm down. But houses are very, very safe. Mortgage rates will probably drop the next year or two. That's your mortgage update.
