The Pomp Podcast - #930 Mortgage Rates Are Highest In 12 Years, But Home Purchasers Aren’t Slowing Down

Starting point is 00:00:00 What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now, let's kick this thing off. Today's episode takes a look at mortgage rates, how they're the highest in 12 years, and why home purchasers aren't necessarily slowing down. I really enjoy recording these solo podcast episodes, and I hope you enjoy them as well. Before we get into this episode, though, I first want to talk about our sponsors. Today's episode is brought to you by Coinbase wallet, your key to the world of crypto. Crypto isn't made to just buy, sell, and hold. With Coinbase Wallet, you can do so much more. Collect more NFTs, earn more with DeFi, and trade more

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Starting point is 00:03:27 Good morning, everyone. Bang, bang. Economic incentives drive the world. There is no better example than the mortgage market within the United States right now. In response to the pandemic, the Federal Reserve conducted multiple emergency interest rate cuts in 2020, which brought us into a 0% rate environment. These actions were intended to incentivize market participants to borrow significant amounts of capital, and that is exactly what happened. Investors ran to banks, borrowed as much money as they could, and the economy was flooded with cheap capital. You can see this reflected in the explosion of mortgage applications, both new purchase and refinances, starting in early 2020. If we break out the

Starting point is 00:04:05 refinancing borrowing and compared to the 30-year fixed mortgage rate, the inverse relationship is very obvious. As rates have cratered, refinancing applications exploded. The economic incentives were playing out perfectly. It doesn't take a genius to identify that refinancing applications are now falling quickly, especially as the 30-year fixed mortgage rate is going parabolic. This shows that the increasing cost of capital, particularly due to the Federal Reserve's need to increased interest rates to address inflation is having a material impact on borrowing demand. To put some numbers behind this trend,

Starting point is 00:04:40 refinancing demand is down nearly 15% over the last week and down almost 60% in the last 12 months. But here's a really interesting data point. Refinancing and new purchase mortgage demand are actually decoupling in an unexpected way. We saw this happen back in 2011 to 2014, but it wasn't nearly as severe as a decoupling as we are seeing now.

Starting point is 00:05:04 The demand for new purchase mortgages has continued to stay fairly stable while refinancing demand has fallen off a cliff. The simplistic analysis would arrive at the conclusion that this is entirely the result of monetary policy decisions by the central bank. That is unlikely to be the complete story though. Refinancing demand is almost exclusively

Starting point is 00:05:24 the product of monetary policy. Homeowners ask themselves, is the current cost of capital cheaper than the cost of capital I currently have? If the answer is yes, they refinance. If the answer is no, they don't refinance. Given that current mortgage rates are at the highest level since 2010,

Starting point is 00:05:41 homeowners are choosing not to refinance. But new home purchases aren't exclusively driven by the cost of capital. There is the imbalance of supply and demand in the United States, which keeps home prices propped up since we can't build new housing fast enough. There are evolutions in work trends related to remote work, a pursuit of better work-life balance, etc. Millennials are also starting to have children,

Starting point is 00:06:02 which leads to the classic pursuit of a new home to fulfill the suburban lifestyle. Many market participants will focus on the drop in refinancing demand due to the increase in interest rates. But the more interesting story, in my opinion, is the persistent demand for new home purchase financing demand in light of the increased interest rates. Even the highest mortgage rates in more than a decade can't slow down the demand for housing. This leads to a much longer conversation about how important it will be in the coming five to 10 years for the United States to become more efficient at building housing across the country. Demand is not going to slow down, and we aren't producing enough product. The average cost of a new home in the

Starting point is 00:06:39 U.S. has now crossed over $500,000, which is absurd. Sure, undisciplined monetary and fiscal policy has some impact on that number, but the imbalance in supply and demand is likely just as important. Hope each of you has a great start to your day, and I'll talk to everyone tomorrow. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition

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Starting point is 00:07:23 and I'll meet you guys for the next episode.

The Pomp Podcast - #930 Mortgage Rates Are Highest In 12 Years, But Home Purchasers Aren’t Slowing Down

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