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What a joke.

Updated: Jun 6

Yesterday was May 10th. The most awaited May 10th of all time for loan officers. Lenders who couldn’t tell you what PCE or CPI stands for have been waiting for this day for months. Waiting actually doesn’t accurately describe it – the hype within our industry about this day would make one believe that money was going to start raining from the sky. There is a very well known economic expert in the real estate space named Barry Habib and every morning he translates the market, the latest economic news, the 10 year treasury and inverted or diverted or subverted yield curve to all of us loan officers. It’s important to note that in order to be a loan officer you do not have to have any sort of financial or economic degree. I don’t believe you are even required to have graduated high school. This guy has a pretty big task in making complex issues digestible to a wide audience of loan officers.


The most important day of 2023.

He has been telling us to circle May 10th because this CPI report would finally show a big move on inflation that would improve mortgage bonds. If you’ve been following inflation readings then you know we’ve been on a slight decline for several months. Any sort of improvement on inflation is good, but this slight decline just hasn’t felt in line with the aggressive, speedy measures the Fed has been taking to curb inflation – such as jacking interest rates to their highest level since August of 2007. It’s been painful and it’s felt like inflation should be responding more notably.


There was some speculation on why that was the case. Why is inflation being so stubborn? A lot of it has to do with how long quantitative easing had been going on – the Fed has in fact been holding rates low, pumping sugar into our economy since well before the pandemic. Really since the Great Recession. They’ve been artificially stimulating the market. Then during the pandemic they really got after it, dropping the Fed Funds rate to zero which led to mortgage rates in the 2’s and to put some icing on this already sweet cake, they passed out stimulus checks too.


Then there was the American way that didn't help with combatting inflation. Even as the cost of goods went up, Americans didn’t stop spending. They just started swiping. Consumer debt accelerated at a record pace. So it took a while for spending to catch up because the credit cards had to max out first.


The other thing stifling our success on inflation readings has been shelter costs. We’ve talked about that here before but there is a problem in how that data is collected. It is problematic because shelter makes up a huge component of the CPI (which stands Consumer Price Index by the way. PCE stands for personal consumption expenditures). The rent component of the shelter reading is a moving average of current market rental rates. To get this figure, the Bureau of Labor Statistics samples tenants only every six months and updates their index when the rent reported changes. For owner occupied homes, the BLS just calculates an owner’s equivalent rent. Basically what the market rent on that house would be.


There are two issues with this method.

One, the six-month sampling window gives one sixth value to the most current month, while the remaining prices feeding the panel data could be up to 6 months old. Then, we also know rents only change at the end of lease terms - which is typically annually. So all of the data collected is months or almost a year behind what the current rent would actually be if that home were up for lease today. The hope was that shelter readings would catch up by May and we’d see some major DEFLATION on yesterday’s reading.


Well, it didn’t happen. But we also didn’t get hosed.

Core inflation decreased from 5.6% to 5.5%. Shelter costs did finally appear to hit a crest point. However, used cars became the new bully on the block – up 50% year over year. It kind of feels like if it isn’t one thing, it will be another but that’s the pessimistic attitude of a lender who feels like the last 12 months have been unfortunate for her cardiac and digestive health. If we look at the actual numbers and bonds, it was still a good news day. At market close, mortgage bonds were in the green 34 basis points and today, Thursday, the improvement has continued. (Note: I'm writing this late Wednesday night and just willing that to be a fact.)


I read articles that we might see rates in the mid-5’s this summer. I also read that the Fed Futures market is now building in a 100% chance of a Fed rate CUT this year. 100%. As in certainty. So that’s cool.


You know what else happened yesterday?

Some other fun news came from FHFA yesterday. They are walking back the controversial, highly politicized loan level price adjustment based on DTI. All those articles you saw about Biden and socialism and the wealthy being punished for having good credit and large down payments so that affordability could be boosted for the irresponsible leaches of society….well that all still stands, kinda. (Reference this video for the facts and make no mistake, well qualified borrowers are still getting better interest rates than those with low down payments and poor credit.) There was a loan level price adjustment that was actually a big deal in my opinion but didn’t make a lot of headlines. This very one, in regards to debt to income ratios over 40%. I took issue with this one because it comes down to income qualification which some simply do better than others.


Some lenders aren’t experts at qualifying income for self employed borrowers and making sure to add back in the deductions that are permitted to be factored into qualifying income. Other lenders are way too conservative in how they give you credit for commission, bonus or overtime income. All of that impacts your DTI. So I had tried to raise awareness on this because it would be really important to make sure your buyers are working with lenders who are excellent at making every dollar of income earned boost a buyer's buying power. It wasn’t the sexiest piece of the controversy, so I didn’t get a lot of traction with that….

Which is fine. Because just like that, it’s done. Walked back. Over. What a joke. A fun little prank they played on all of us. On to the next curveball they decide to throw my way. I’m fine. Really. Thank you for asking.

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