Brian Manning’s 2022 Interest Rate & Market Predictions: LIVE RECAP

I’m going to go ahead and get started – You probably got notified when you came into this, that this is going to be recorded. So if you want a copy of this, let me know, we’re more than happy to send it over to you. I do want to say thank you very much for everyone that’s attending here today. Like I said a minute ago, I know this was earmarked for an hour, but can be very unlikely that this will take an hour of our time. Certainly, you know, considering the recent events and interest rates, and what’s happened in the stock markets over the last day, week, several weeks, this probably is more pertinent right now than ever before. So I’m super excited to be looking at this, and talking about what’s going on in the markets as far as interest rates, and housing are concerned. So first thing I want to look at is just a quick recap of last year, and what our predictions were last year, and how they panned out. So last year, we predicted that we would see rates rise in the beginning of the year, and then we’d see rates recover in the fall, we didn’t see rates rise in the beginning of year, they rose sharply through March of last year. But they’ve actually recovered a little quicker than we thought they would. And rates recovered really more by summer versus fall. So we’re a little off there. But not by very much. 

As far as housing was concerned, we really forecasted the housing in 2021 would be extremely strong, we thought that we would see high single digit appreciation, definitely, we’re off a little bit there, because many places got, you know, medium to high double digit appreciation. Certainly there was extremely strong demand in housing last year COVID supply chains or impacts from supply chains and COVID had an impact on it. Lack of inventories were continuously right now had an impact on it. So you know, even if we got it right, with a single high digit appreciation, certainly seeing double digit appreciation is pretty phenomenal. Looking at this year, though, there’s gonna be some, you know, incredible dynamics in this year that are very impactful. As far as interest rates are concerned, that’s going to impact all of us in the room. So the biggest game changer is absolutely going to be the Federal Reserve, they’re gonna play a major role in 2022, they’ve always played a major role in interest rates, and mortgage rates. Right now we’re in the process of experiencing a taper. So they’re tapering out of a bond buying program, we have rate hikes, we’re gonna talk about a balance sheet run off, we’re gonna look more at these details as we get farther into the content today. But it’s all going to have an impact on housing markets, interest rates, stock markets, etc. 

Also, another big change this year, as it happens every year is going to be in the makeup of the Federal Reserve, and they’re voting. So there’s 19 Federal Reserve members and 12 of the 19 members are voting members. And every year you rotate through for people of the 12. So it changes up so. So the Fed panel this year, this voting Fed panel is definitely going to be more restrictive on their monetary policy, certainly more in favor of rate hikes. So they’re going to be more in favor of fighting and fighting inflation. It’s definitely gonna have an impact on stock markets. And certainly the question here is going to be, you know, could the Federal Reserve lose resolve in their process of combat inflation because of they start to hike rates and they start to combat inflation and the stock markets have a hissy fit, you know, the Federal Reserve holds strong and continue to fight inflation or they lose resolve to, to the stock markets. Certainly the Federal Reserve should have hiked rates sooner than we’re at right now. Because we haven’t seen a rate hike yet, although we will this year, and we’ll start talking about that in a minute. Because, you know, we’ve heard the word transitory through all of last year as far as inflation was concerned. But without a doubt, I would say it hasn’t been very transitory. 

So first thing I like to do is kind of look at a history of the Federal Reserve, what they’ve done over the last several years and give you some feedback on how they fund inflation and the impact that has had on markets and interest rates. So if we go back, this was Fed chair at the time, his name was Arthur Burns. So Arthur Burns was in a position where inflation was just rising rapidly. And he was very steadfast and he just said through the whole life, he said, inflation is transitory. And he just stood by that really through his entire time of being Fed chair. So when Arthur Burns was fetched, from 1978 to 1980, he saw inflation rise from 7% to 14%. You left in 1980, which is incredible to see a rise in inflation that high and he really through the whole thing was steadfast, like I said, and he just said inflation was transient and that probably sounds familiar because, you know, all through our current Federal Reserve right now. And then last year, all we’ve heard about was inflation being transient, well, inflation is the arch enemy of interest rates. And when you have inflation rise, you also have mortgage rates rise. So inflation rose from 7% 14%, while mortgage rates rose from 12% to 18%. I mean, first if you could even imagine getting a 12% interest rate right now. Absolutely not. But certainly to see rates rise from 12 to 18%. is detrimental in a marketplace.

So after burns, you had Paul Volcker come in and Paul Volcker, new Fed Chair did not think that inflation was transient. And in the first two years of him being fed chair Paul Volcker height, the Fed funds rate from 11% to 20%. First of all, it’s really hard to wrap your mind around because our Fed funds rate right now is pretty much at zero, right? He was already starting at 11%. And he almost doubled the Fed funds rate over two years and went from 11 to 20. Well, as he combated inflation by hiking the Fed funds rate. He also saw inflation drops. So it was very effective and what he was doing to fight inflation. So inflation under Paul Volcker dropped from 14% to 5%. And that was probably very welcoming. So when you saw inflation drop, you also saw mortgage rates drop. So as he fought inflation, and as he hiked, the Fed funds rate, you saw mortgage rates declined from 18%, back down to 12%. So he was very effective in what he was doing to fight inflation, but there’s consequences so anytime you have a tightening of monetary policy, stock markets and equity markets don’t like it. So as Paul Volcker went through and hydrates and he combat inflation, stock markets and the s&p declined by 30%. And eventually, the tighter monetary policies pushed the US into a recession, into around 1982. So effective, but definitely came with consequences. 

Then we had Alan Greenspan, Alan Greenspan came into Fed chair in the late 90s. When Alan Greenspan was Fed chair, he saw inflation double from 1.75 to three and a half percent. So Alan Greenspan looked back at what Burns did, he looked at what Volcker did, he did not feel that inflation was transient. He watched what Volcker did in combat inflation, and thought it was appropriate. So as inflation rose from 1.75%, to three and a half percent, mortgage rates rose some 7%, eight and a half percent. So I’ll show my agent this but this was, as I was coming into mortgage lending, I was locking rates for people anywhere from 7.75 to eight and a quarter percent. So I kind of caught the tail end of what Greenspan was doing here. So ready. So unlike burns, we had Greenspan hike rates. So Greenspan basically hiked rates to match when inflation was doing so he raised the Fed funds rate from 4.75 to 6.5%, over a one year period of time. So when Greenspan did that, of course, the markets responded, inflation responded, and inflation dropped from three and a half percent down to 1%. In addition, because, again, inflation is the arch enemy of interest rates and mortgage interest rates as well. When Greenspan was able to combat inflation, and he got inflation to come down, mortgage rates also dropped. So mortgage rates dropped from eight and a half percent to 5%, which caused a huge refi boom, because a 3% drop in interest rates is absolutely drastic. But once again, Volcker, when you tighten up monetary policies, there’s going to be consequences. And when Greenspan went through and fought inflation, the s&p 500 fell by 50%. From the spring to fall in 2000. So their marriage, Rob, [whoever’s talking, I think, if you could just mute yourself, that would be great. Just so we don’t get the feedback in there. Thank you.]

So there’s consequences. And the consequences were that we saw the s&p 500 fall, and we also entered into recession into 2001. So looking at Greenspan, and what he did was extremely impactful, but again, comes with consequences.  Now, we got Jerome Powell, I call Jerome Powell, Uncle Jerry. So uncle Jerry, through all the 2021 was steadfast as well, and he said inflation is transient and we watched inflation rise last year, from 1.75% to seven and a half percent. We also as a result of this watch, mortgage rates rise because inflation is the enemy of interest rates, and we will watch 30 year fixed mortgage rates go from 2.5% to about 3.6 to 5%. So we’ve seen the impact here as well. Currently, the Federal Reserve is in the process of tapering their bond buying program. 

So when we went into a pandemic and march of two years ago, and the economy really got into a position to where it could get crushed very quickly, the Federal Reserve implemented what’s called quantitative easing. So that was their way of infusing liquidity into the marketplace to give us stability. And they did an amazing job. They put a ton of liquidity into the marketplace, part of the way of doing this is by purchasing mortgage backed securities and US Treasuries, and they did an incredible job. But now that the US economy is recovering, they have to kind of get out of quantitative easing. And they do that by tapering. So it just means that they buy less and less bonds on a monthly basis. So we’re in the process of tapering right now, which we’ll talk more about in a minute. But I would say what we’re seeing for the Federal Reserve is probably three rate hikes in 2022. So this year, and then probably three or two, or three, and 2023. So we definitely are going to start experiencing some rate hikes as we certainly should, because it’s been quite a while. 

So right now, we can definitely see interest rates and inflation still rise, especially in the beginning of the Federal Reserve acting because, you know, the first quarter percent rate hike, although we’ll be good to see is not going to be that impactful. On inflation, it’s going to take, you know, a small series of rate hikes for it to actually become impactful on inflation. So if the Federal Reserve can tame inflation, then eventually mortgage rates should drop too, might be from a slightly higher level, but we should see mortgage rates come down towards the end of the year. 

So just a quick recap to see if we see a pattern here. So we had, you know, burns going into Volcker, you had inflation rise from 7% to 14%. You had mortgage rates rising inflation from 12% to 18%. You had a rise in the Fed funds rate or rate hikes, that under Volcker from 11 to 20%. The response was inflation dropped from 14 to 5%. And mortgage rates dropped from 18 to 12. And then we saw the s&p down 30%. When Greenspan came in, we had inflation rise from 1.75 to three and a half percent. We had mortgage rates rise from seven to eight and a half percent. GREENSPAN hiked the Fed funds rate from 4.75 to six and a half percent. The inflation response was it came down from three and a half percent to 1%. And then the response in mortgage rates was that mortgage rates dropped from eight and a half percent to 5%. Again, with consequences of the s&p 500 dropping, and now we got Jerome Powell. So we’ve seen inflation rise from 1.75% to 7%. We’ve seen mortgage rates rise, actually, I should change this number, because it’s slightly incorrect now from two and a half percent, to about 3.6 to 5%. The Fed funds rate right now is at zero, but we anticipate in this year of 2022, we’ll see a rise from zero to about 1%. As the Fed funds rate increases, we should see inflation drop, and then as the Fed funds rate increases and inflation drops, we should see a decline in mortgage rates. Right now, stocks are extremely expensive. Certainly, there’s going to be some, you know, tightening from the monetary policy that’s going to have an impact in the stock markets. But we’ll have to wait and see what happens there.

As far as the wildcards, you know, there’s always going to be some unknowns going to every year. So first we got COVID, there’s just a big unknown, you, we have no idea what it’s going to bring to us this year, next year, the following years, it could be surprises that come to us in the future, it’s just an unknown, we’re gonna have to wait and see what happens. We also could potentially get some kind of stimulus in the future. There’s nothing on the books right now. But if we did get additional stimulus in the future, to combat a sluggish economy, certainly I would push stocks higher for a little bit of time. But it probably caused some mortgage rates to rise as well, because it would push a little bit of inflation into the US economy. 

And the big wildcard right now is going to be the Federal Reserve. So there’s kind of three different steps they have to go through here to combat inflation. So the first one that they’re doing right now, is that they’re stopping the bond buying program. So they’re in the process of tapering out of that. And they will be done purchasing new mortgage backed securities in March of this year. The next steps are going to be fed rate hikes, that’s probably going to start sometime between March and May. So the Federal Reserve will not taper out of their balance sheet and hike rates at the same time, they’re going to do them separately. So as soon as they finish the tapering, we have to look at the rate hikes and see what’s going to happen there. 

And then the one big unknown in the wildcard here is going to be the bond buying firm is still in so right now the Federal Reserve has a tremendous balance sheet, and they are reinvesting every single month into mortgage backed securities, and we’ll talk about that more in a minute and what the impacts are going to be there. So one thing that always sounds very common or intuitive to people is going to be fed rate hikes. And everyone you know, I’ve talked to countless clients over the last, you know, month and several months and I’ve always said, Oh my gosh, the Feds gonna hike rates, I need to go buy a house before the Fed hikes rates because mortgage rates are gonna go up. And there’s just this, this disconnect, or a lot of people think like, oh, the Federal Reserve hikes rates this year by 1%, the mortgage rates will go 1%, as well. And that is not the case at all. 

It’s a very counterintuitive process. So the Fed hikes rates because they want to calm inflation, you think about it like this, it really comes down short term spending for us as consumers. So if you’re thinking about buying a new car, and maybe your interest rate in that car right now is 1%. And you’re thinking, Oh, I can go buy this car because it’s extremely affordable. And then the Fed hikes rates, and they raise the borrowing cost on short term lending, potentially now buying a new car does not look as appealing because now the payment is higher than what you originally anticipated. So perhaps you pass on buying that car right now. So the short term lending rates that are affected, impacted by the Fed, re heights are certainly what’s going to calm down inflation. So that’s really going to be the combat of inflation, if you think about it like this. So inflation erodes the fixed return of mortgage rates. So what I mean by that is, if you’re an investor, and you have a 30 year fixed rate mortgage at 3%, and that’s your guaranteed rate of return for 30 years, you’re buying goods based on the rate of return that you’re getting. But if inflation is at 7%, then your 3% interest rate that you’re buying your goods off of is not keeping up with inflation. 

So if you’re an investor, the way to keep up with inflation is the next loan that you give the next mortgage that you make, it has to be at a higher interest rate, because it has to be in a position to keep up with inflation, because you’re just needing to keep up with your rate of return, and the ability to buy goods in the marketplace. So when we see the Federal Reserve combat inflation, that’s why we see mortgage rates come down. So Fed rate hikes usually will lead to lower interest rates, I did put asterisk here that says most likely, because we do have the one owner unknown right now is that the Fed balance sheet. So when the Federal Reserve started their version of quantitative easing, they entered into this process with the large balance sheet, but they really just added more and more mortgage backed securities and US Treasuries into it. So the Fed balance sheet right now for round numbers is around $8.7 trillion. And of that mortgage backed securities total about $2.6 trillion. 

So that means that they are the owner of those mortgage backed securities. So what the Federal Reserve is doing right now is if you have a conventional mortgage, Fannie Mae, Freddie Mac, 30, year fixed whatever it is, and they own the mortgage backed security, if you sell your home and you pay off that mortgage, or if you refinance, and you pay off that mortgage, the Federal Reserve right now is reinvesting that money and purchasing more mortgage backed securities. So the way that they run off their balance sheet is that when someone sells a home and pays off their mortgage, or someone refinances and pays off their mortgage, instead of reinvesting that they let the mortgage get paid off, and it reduces that asset off their balance sheet. So right now, the Federal Reserve is the largest buyer in the room for mortgage backed securities. And when you have an extremely large buyer in the room, like mortgage backed securities, it keeps the price down. And with mortgage rates, the more and more buyers that there are, the more that the mortgage backed securities are gobbled up.

It just causes mortgage rates to go down. So this is going to be an unknown. We have to watch this, you know, certainly if we start to see a lot of rate hikes and a big run off in the balance sheet, that’s going to be problematic, hopefully we don’t get to that position. But this is going to be one area to really pay close attention to, you know, stock markets right now in the US are the most overpriced markets in the world extremely heated, you know, Ray hice can definitely cause a price earnings multiple contraction. Like we said before, we anticipate to see about a 10% decline in the s&p 500. Because with tighter monetary policies just becomes retractions in the stock market.

One thing I will want to look at here is just what’s called the leash effect. So we’ve really seen kind of a steady increase of mortgage rates from around January 3, I would say even more from like November 8, so this is just a snapshot of mortgage backed securities and mortgage rates will go opposite of what the price of this is doing. But what’s interesting is this line that we have right here is what’s called the 25 day moving average. So the 25 day moving average, is the average cost of this mortgage backed security over the last 25 days. And there’s this thing called the leash effect. So the leash effect means that when the price of the mortgage backed security gets too far away from the 25 day moving average historically, the Leisha factor means that the average will snatch it back up, right. 

So if we’ve seen and mortgage rates go opposite of what this is doing. If we’ve seen, you know, a big reduction in cost of mortgage backed securities, which means we’ve seen a rise of interest rates. It’s kind of ripe right now to see a little bit of a pullback to watch this leash effect, come into play and draw us back to slightly lower rates. And we might start to see this, as soon as today we’ll have to keep an eye on it. This is a snapshot of the same mortgage backed securities, same 25 year moving average. And it just shows you that every single time the Alicia leash effect always pulls it back in right, when mortgage backed securities got too high here, and the 25 day moving average increases smash it right back in every time you see mortgage backed securities get too low, it pulls it back in. So if you look at where we are, right now, we’re just kind of in a prime position to see a little bit of calming in the interest rate market to see the leash effect on a hold itself together and watch it a pullback. So we’ll have to wait and see what happens there. 

As far as our rate forecast for this year, you know, we would anticipate that we’re going to see rates rise to the first half of this year. While we’re experiencing inflation, we think we’re gonna see mortgage rates move to about 3.75%, give or take a little bit. Certainly with the Federal Reserve, hiking rates, and potentially a slightly slower economy in front of us, we also think that on the second half of the year, we’re gonna see rates come down, and we think we’re gonna see rates come closer to 3%, possibly even a little bit under three, it’s going to depend on where we start from, you know, around June or July of this year. So that’s going to be our prediction and anticipation for markets this year, would be to see rates rise up to 3.75%, and then pull back down closer to the 3% range, as we get throughout the year. A lot of our clients right now, we are not suggesting that they pay points to buy their rates down. If you’re purchasing a home right now, and you’re taking a you know, a slightly higher rate than you anticipated. If we know we’re going to see inflation combat by the Federal Reserve, then we’re going to want to wait and see if there is going to be a refinance opportunity towards the end of the year. So we wouldn’t advise paying fees and buying rates down.

As far as housing is concerned, there’s just some incredible contributors to the housing market that are just keeping it extremely strong and robust. Apartment list tracks, rents across the United States. And when they looked at the year of 2021, rents had increased by 18%. So certainly, if you’re a homebuyer and you’re looking at rates, potentially increasing, I’m sorry, rents and potentially increasing definitely makes homeownership more and more appealing. So we’ve seen an extremely high rise in rental rates. And we’re probably going to see a high rise again through all of this year. Also, when we look at employment. Our December jobs report showed that we had 651,000 jobs created for the month of December, we also had unemployment go down from 4.2% to 3.9%. That’s down from its high, which was about 16%, in the midst of the pandemic, you know, we had about 20 million unemployed people. So we’re pretty much back at almost pre pandemic levels right now. So housing is definitely impacted by jobs, because the economy drives everything. So this is going to keep us in a robust housing market for this year. 

As far as inventory and population is concerned, you know, it’s interesting to see that the population has just increased dramatically. So when we look at this, you know, from the year 2000, to now, we’ve seen about 47 million households created an increase in the US. So household is when two people come together, and they joint finances right. So you had 47 million new households created in the US over the last 21 years. But new housing hitting the market has only increased by 20 million people have 20 20 million houses. So we’re not even at a position right now where we’re just keeping up with supply and demand. And that’s definitely going to keep us in a strong housing market that we’re in right now. Just because of the imbalance that we’re experiencing. 

On January 8 of this year. So just 10 days ago, 11 days ago, The Economist put out an article, and they were looking at housing across the world, because housing all around the world has just gone through a boom. And the question is, you know, can it really last? And in the United States right now, if you look at buyer demand, we are short, and we’re behind by available homes, affordable homes by 3.8 million houses. So when the demand is there, like we’re seeing right now we got 3.8 million homes that were behind. It’s just going to propel the housing market to stay strong. You know, I don’t know that we’ll definitely continue to see these double digit gains, it would be nice to see that calm down, because I don’t think that’s very sustainable. But we’re still gonna see a strong housing market for several years in front of us.

In addition, we have millennials. So I actually love this slide. And I think that this really talks a lot into where our housing market is going as well. So, the oldest millennial right now is 39 years of age, and the average age of a first time homebuyer is 34 years old. So the average age of a millennial right now is 29 to 31. So the two biggest motivators that we see when someone thinks about buying a home is marriage and kids. And I don’t know about anyone else on the call right now. But you know, if you think back to when you bought your first home, probably marriage or kids was somewhere in there with being the catalyst for making it happen. So what was really crazy to look at is right now, the average age of a millennial today, you know, would be slightly pushing 33 years old, if we looked at first time homebuyers. But for the next five or five or so yours in front of us, the population of millennials increases year after year after year. And then with the population increase, that means that you have a higher amount of first time homebuyers entering into the marketplace. And we’re really lucky where we live in, you know, Boulder in the Front Range area because our economy is really strong here. And a tremendous amount of first time homebuyers that were able to help do really well financially have money saved up or they’re getting gifts from their parents. And Millennials as first time homebuyers are certainly coming into this marketplace. And they’re going to propel housing even, you know, farther over the next five or six years because just the sheer volume of people coming in as first time homebuyers. So that’s going to have another impact for us. 

As far as home appreciation is concerned, Goldman Sachs thinks in 2022, we’ll see 16% appreciation, Zillow says 14% and Fannie Mae says seven half percent. You know, I think we’re gonna see appreciation, you know, maybe in the high double digits. What’s crazy right now is if we use you know, this present moment in time for a housing market right now, it would tell us that we’re gonna see high double digit appreciation, because the market is ferocious right now, probably more so than I’ve actually ever seen. So it’s something we’re gonna have to keep an eye on, I might be slightly off on my appreciation prediction there. But we’ll have to see what happens. 

2022 housing is definitely being impacted right now, by really a carryover from last year. So 2021 had a tremendous amount of people that couldn’t buy a home because the inventory wasn’t there. So you have all those buyers coming over. And then historically, we usually get a bump of inventory in the fall. And if we look at our statistics, from the end of 2021, we didn’t get the Normal Bump of inventory that we had some houses coming in the market, but it wasn’t the normal bump that we thought we’d usually see. So now you have less inventory there. And you have now a rush in of buyers that are watching rates go up and they feel like they had missed the boat or they’re gonna miss the boat. So now they want to jump in, I think purchase mortgage applications are up by 20% Right now, year over year, because you have a tremendous amount of buyers jumping in to get into the game. So 2022 just has a lot of fuel on the fire, so housings gonna remain strong, and 2022 demand could soften a little bit as we get into the middle of this year, just because we’re going to see rates rise, but it’s definitely going to be robust, supply chains going to be tight, it’s going to have a little bit of an impact on inventory. 

Certainly, new construction may experience some challenges, their supply chains, but you know, overall, we’re going to see housing remain strong, and certainly push up as far as prices are concerned. Also, we’re going to see rents easily rise in the 5% range. So when you’re watching rents rise on a year to year basis. And your theme of buying a house, it certainly makes homeownership more appealing because the cost of living is just increasing from a rental perspective. So we think we’ll see high single digit appreciation, which is still providing a tremendous amount of wealth, opportunity and the process of purchasing a home. 

A couple items really just for everyone to be aware of, and changes that we’re seeing in our market. One of them revolves around a second home. So January 5 2022, the FHFA put out an announcement that FHFA governs partially Fannie Mae and Freddie Mac, and they’re specifically targeting second homes, and they’re going to have a very large impact there. So starting April 1 of this year, you’re going to see mortgage rates on conventional loans for someone who’s buying a second home anywhere from a half to 1% 1% Higher which is a huge change as far as mortgage rates are concerned. The reason why is because the second home market and second home purchases have increased by as much as 100%. And when FHFA looked at the amount of second home purchases that were taking place, a lot of people were buying these and then also using them as investment properties like Airbnb, or vacation rentals. Fannie Mae and Freddie Mac are committed to having a sufficient amount of liquidity in the marketplace for primary resident purchasers and their focus is always going to be on primary residences. So that’s why we’re starting to see this impact coming down the road for conventional mortgages on second homes. So certainly jumbo mortgages are going to pick up the slack here. And what I mean by that is jumbo loans are not governed by the FHFA. And if someone’s looking at purchasing a home, without a doubt, after April 1, you’re gonna see lower interest rates on a jumbo mortgage for a second home than you will on a conventional. So if you have anyone out there that’s in the process of looking for a second home, this is something to talk with them about because it is going to be impactful in the marketplace.


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2022 Interest Rate & Market Prediction SLIDES


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