Latest / Real Investor Radio Podcast / Mini Breakdown | Why $200B Didn’t Move Rates (And Why That’s a Problem)
Transcript
- Craig (00:01) Hey, welcome back to Real Investor Radio. It's Craig Fehr and Jack Bevier. Jack, it's good to see you as always, sir. Jack BeVier (00:07) Yes indeed, yes indeed. Happy Monday. Craig (00:09) Sir, I've got to tell you, ⁓ it was about a month and a half ago that we did ⁓ a Real Investor radio episode and we talked about the spring market. And in particular, Jack, we talked about ⁓ how the infusion of the $200 billion into mortgage backed securities that the Trump administration, the edict, ⁓ We thought you, you called it and you said that you thought that the spring market was probably going to be one of the best that we've that we would see in 2026. so two days after Trump directed the GSEs to buy 200 billion in mortgage backed securities, the secondary market tightened to about 18 basis points and the primary rates dropped about 15 basis points. your oppression. You said that it would be somewhere between 25 and 50. We didn't get to 25 or 50, but let's be honest, there was a war that was started. And that kind of threw things into a bit of a tailspin. Well, I just purchased gas this morning, Jack. I don't know about you, but the gas where I was, it was $3.99. And I felt it. I think that, and Jack, I don't know if I told you this or not. I did tell you, I'm sorry. Jack BeVier (01:26) For the cheap stuff, that's for the cheap stuff. Craig (01:32) I'm getting ready to sell a house and we're thinking about putting it on the market in ⁓ late April. And I want your thoughts, on... on what the market is looking like, what are you feeling? Dominion Properties, I'm sure has a lot of properties that they're gonna put on the market and that you guys wanna put on the market for sale to home buyers in the spring and maybe even early summer. But the question is, Jack, how are you feeling about that market still? And is that $200 billion of mortgage-backed securities, is it going to make a difference given the fact that we're a country at war right now and energy prices seem to be through the roof? How does this boil down to the American consumer, the guy who wants to go out there and buy a house, first time house for his family, or the guy who's putting his house on the market? And then frankly, because all we talk to is real estate investors every day, Jack BeVier (02:26) Yes. Craig (02:41) What's the sentiment right now? Jack BeVier (02:45) Yes, so I had this idea that, like you just said, that we were going to see a 25 to 50 basis point tightening in that. Even before the agencies started buying mortgage-backed securities, we saw a partial tightening, right? In anticipation of this new guy coming in and spending a bunch of money, the market tightened up a little bit. And then, like you said, then the war popped off and mortgage rates that we've seen the two-year, five-year, 10-year all widen out. Craig (03:04) Right. Jack BeVier (03:15) We've also seen a widening of credit spreads for mortgage-backed securities. And this was all before the GSEs didn't even start buying yet. They just started buying mortgage-backed securities like last week. And so ⁓ all those gains of the anticipation of Fannie and Freddie being a major play in the market, we lost it through an increase in the index and a widening of ⁓ credit spreads. And now, frankly, that 200 billion doesn't look like it's enough. It's not going to move the needle anymore. Against the backdrop of the Iran War, 200 billion just ain't going to move the needle. And so we've seen mortgage rates go up, despite the fact that Fannie and Freddie are now actively buying MBS in the market. They're trying to bring it back down, trying to bring mortgage rates back down, but it's not been enough. to really pull the market back down to even where we started the spring off. So I'm a little nervous right now. it's really, this is like, you know, we're thickened. I would say that the spring market has already started, at least in Maryland. It started about a month ago, three weeks ago, ⁓ showing activities up significantly. ⁓ And I'm nervous ⁓ about what's going to happen over the course of the next month or two here. ⁓ Craig (04:22) Yeah, me too. Jack BeVier (04:37) because I'm concerned that these higher mortgage rates are going to have a cooling effect on what was going to be otherwise ⁓ what I thought was going to be a pretty good spring. So I think we're a little in TBD at the moment. Right now, I'm still seeing a lot of showing activity. like it hasn't fallen off a cliff or anything. Craig (04:54) Showing activity Jack, showing activity or actual offering activity? Jack BeVier (05:00) Yeah, both. Yeah, both. It's been like pretty good. The past the past couple of weeks have been like pretty good, which ⁓ I've gotten multiple offers on a couple of deals. ⁓ I mean, we're not you know, we're pricing it. We're not pricing it like to sell, but we're pricing it like where we you know, we're not we're not going for it. We're like, you know, I think it's going to sell. You know, if we think it's going to sell for 550, we're pricing it at 550. We're not going forward at 575 and praying. We're just like, no, I get this thing going. ⁓ But then I'm getting like, you know, three offers at 550. Craig (05:04) Define pretty good. Right. Jack BeVier (05:29) ⁓ So that's been good. Craig (05:30) Jack, do you remember a time back in 2009, 10, 11 where the entire world was saying, nobody's buying, no homeowners are buying houses right now and you and I are out there just flipping houses like they lost the recipe. But there was a real time there, Jack, where you couldn't, it wasn't 2004 through 2008 where you could price the house at anything you wanted. expect multiple offers and escalation causes. and man, I, Jack, I talk to guys every day that are just still in that mindset that they can price that house top of the market beyond anything else, expect showings and offers. And I think it takes real balls, real balls in this shift, Jack, to price your house at a place where it's going to sell in 30 days. And maybe Maybe you price it a little bit lower than you think the market is and maybe if you're lucky you get some competing offers. Like that takes a lot of balls to do but don't you think that we're kind of back in that time? Jack BeVier (06:41) yeah, I definitely think that. think that's just the move right now. Cost of capital is high. ⁓ I don't perceive that the market is so strong that like this, think I'm terrified of a stale listing right now. It could be the kiss of death. so like, I there's real downside to that. And especially if you're in that like above, with the rental economics don't make any sense. Like we're $400,000 plus ARVs, the rental economics don't make any sense whatsoever. Stale listing is like, Craig (06:53) Yeah. Jack BeVier (07:11) the existential threat. like, I'm, you know, we're listening to we're making sure that every box is checked in terms of making sure that like, these listings are tight, you know, like, no, no blue plastic on the appliances, no dust whatsoever, the stage, we're attending the staging, like set, you know, appointments so that to make sure that they don't like give us the cheap shit. ⁓ Doing open houses on a regular basis to get that active feedback. putting a lot of energy into trying to get that pricing right the first time. And by the way, I'm a prime example of this. From 2021 to 2025, actually the whole time, we were at put it up on the market, it'll sell shop. I was not checking every box. was not doing all of the best practices. Because there was so little inventory and... Craig (07:52) Yeah. Jack BeVier (08:06) home buyer demand was strong enough that I just didn't have to. just kind of wasn't worth the energy. ⁓ I don't believe that anymore. I'm like actually hiring real real estate agents and not just like listing the thing and we're putting a tremendous amount of effort into making sure that everything is tight. And so that so that when we drop price, I know that that was what was necessary, right? Like it's the only variable we've isolated is that the price is not ⁓ is not correct. And anyway, so that's been working so far this spring. ⁓ But I'm much more uptight about it this year than I have been the past five years. Craig (08:44) Jack, how close are you with markets around the country because we lend in all 50 states with the exception of Nevada? How close are you right now with, know, maybe it's just my algorithm in Instagram. It's doom and gloom. It feels like at times, but like every day get like, you know, sellers are outnumbering buyers for the first time and blah, blah, blah. And you know, we've got massive slowdowns. Like how close are you with? ⁓ the broader markets around the country and sort of like what people who listen to this show are dealing with if they're trying to flip houses right now. Like what do you see? What worries you amongst our hard money portfolio, let's say? Jack BeVier (09:24) Yeah, I mean... I do think that the country is a different points, different innings based off of where you are geographically. Like if you were in the sun belt, 2025 was the bad year. We saw big nominal price declines in Texas markets, Florida markets, especially West Coast of Florida. Jacksonville was seeing price declines in 24 and 2025. Those markets. Craig (09:54) K-Corel, number one foreclosure city in the country right now. Jack BeVier (09:58) Yeah. Yeah. And I think that ⁓ but I think that the markets that had a tougher time in early 2025, I think they're like mostly past it at this point. Like I think that we've seen the worst of it in Texas and in Florida as using those examples where and then you've got the opposite is happening where the Northeast is popping off because there's no new inventory there. They haven't been handing out permits. They've still got a significant supply shortage. So Northeast is ironically, you and didn't and didn't experience a big run up like the Sun Belt did. So it's you're seeing really low days on market up in the Northeast. I think that there are markets like Washington, D.C., Baltimore, Philadelphia that haven't paid the piper yet in terms of the mistakes of 21 to 24. And those are still working their way through the system because those judicial foreclosure systems and judicial and, you know, tenant friendly eviction processes and long ratification timeframes because the courts are involved in foreclosures, just delay, right? Put those markets on tape delay. So the issues that Florida and Texas had in 2025, I think those markets are having in 26 and maybe 27 also. ⁓ So I think that regionally there are different things going on. ⁓ But that's kind of my impression of like the different where different markets are in different endings. Craig (11:26) So in terms of the 200 billion that was or is to be infused into mortgage backed securities, I hear you right and I feel the same way, like any difference for the average home buyer in terms of 30 year mortgage rates and maybe even the bond market in general, it's already been priced in. If we see maybe an end to the Iran war without any escalation, maybe do we get to that 25 bips to 50 bips decline by the end of the year? Jack BeVier (11:58) I think it's like. Right. Yeah, that's that. Yeah, like that's the end. But it doesn't feel that strong. Like the problem is like the Iran war as a backdrop is just such an overwhelming force like that makes the 200 billion like a complete waste of money. Like who gives a shit? You know, it's like the market. It's a who gives a The 200 billion is who gives a when you got the Iran war going on. And I mean, you know, just generally speaking, this war has not been good from it. It's not been good from politically from right now. He has no off ramp that I can see. Craig (12:21) huge. Jack BeVier (12:40) and it's dragging out and this may lose this may lose the republicans the midterms like this this was a big stumble right markets hate it markets hate it dude they do not like it Craig (12:45) I didn't know we were going there, Jack. I didn't know we were going. So I think from a strategic, you know, military standpoint, it's been something to watch. you know, like it's been an all out win from a strategic military standpoint. we're basically unchallenged. But from a public sentiment, look man, if I go to the gas station and I'm used to paying in over the last several months of the Trump administration, two and a half bucks a gallon, And now I just paid 399 today, approaching 410 in some places in Maryland and other parts of the country above five bucks diesel at above six. And there appears to be no off ramp in sight. Yeah, I'm getting skittish as fuck. And I don't want to have to like I don't even want to imagine what the world looks like six months from now or eight months from now for when we're when we're in a midterm election season. It's going to be a bloodbath. And I can't imagine what the next two years of this administration would look like if the Democrats take over at least half of Congress. ⁓ Yeah, it's going to be. Look, and Jack, I think you and I have always said for the two years that we've been doing the podcast that it's not about politics. Like, I don't care what side you're on. It's about how it it translates to Main Street and investors that we deal with on a daily basis. And I think when you've got that kind of turmoil that could be coming in DC ⁓ eight months from now with a divided Congress, I think the next two years of what happens in this country is straight up gridlock and all bets are off in terms of what the economy does. Jack BeVier (14:41) Yeah, I agree with that. But like it was so like. Because of the Iran war, we've seen an increase in rates, both the index and the credit spread. And the question or conversation is like, you know, because we're to have inflation because of oil prices, you know, maybe we're not going to get the rate hikes that we thought and. And so cost of capital goes up because they're worried about inflation. And it's been a head scratcher for me because I'm like, but wait a second, like oil prices, like monetary policy, we're going to increase interest rates because we have higher oil prices. Like high oil prices are not going to stop the Iran war or make it cheaper to pull crude out of the ground. why is the ⁓ treatment, why is the medicine for oil driven, oil driven inflation, monetary policy? Like it doesn't make any sense to me. If anything, it's the opposite, right? Like people are getting hurt at the gas pump. consumers are getting hurt at the gas pump. So inflation is making them have less money in your wallet. And you're going to increase interest rates so that they have even less money in their wallet. Like aren't you You're going to drive you're going to drive us into a recession, increasing interest rates. Craig (16:09) Don't you? Lord knows there are many people calling ⁓ for a recession ⁓ at some point during late this year. ⁓ My question to you on that is. It aren't most of the decisions that are made in our industry, Jack, bond driven, bond market driven as opposed to Fed rate policy driven. Jack BeVier (16:36) Yes. Craig (16:37) And so my question for you, as we've been talking over the last half hour, why would anybody be, why would there be a flight to the long end of the market right now rather than a short end of the market? Like if anything, why wouldn't there have been a flight to the two and the five right now because of all the uncertainty, and I gotta put my money somewhere, why wouldn't we have seen the bond market This is always this always gets me. It's it's an inverse I get that so like more money floats to the two and the five that means that the Treasury Goes up. Yes Let's say let's say that Okay, I'm sorry. So given that why wouldn't we see lower Treasury right now? ⁓ Yields right now then higher Jack BeVier (17:23) goes down. Yeah, right. So like it's the hey, we don't like what's going on with the Iran war because you did something that we didn't expect. And now we're like worried about what that's going to do for oil prices and how that's going to affect the global economy broadly. So we're going to increase. We're going to increase, you know, increase the cost of capital, whether it's the index or the credit spread. But if there was a full on crazy war. then there would be a flight to safety and money would flow into treasuries and push rates back down. Craig (18:08) And you would think that would be short end of the curve rather than the long end of the curve, right? I'm not going in the 30 year, I might be going in the short end. Yes, no? Jack BeVier (18:19) Sure. I'm with that. Yeah, I'm with that. then you have this. since the inflation is driven by oil prices, not by an overheating economy, you actually hiring oil prices are going to have a cooling effect on the economy. so to me, that's been a head scratcher. So here's the punch line. So I looked it up or I went to Gemini and I was just like, I don't understand this. I apparently was asleep. I was drunk the night before I was hung over and I missed this this day of ⁓ econ 102 and why are we addressing oil inflation with monetary policy? And so the argument back according to Gemini is that if prices of the pump stay high, then workers will demand higher wages to offset those higher prices. And then if it persists, so if oil prices stay high, Craig (18:50) Right. Jack BeVier (19:18) then workers demand higher wages and then companies pass that through to the consumers with higher prices. And so to teach everybody a lesson, to tell everybody not to, right? To like, beat everybody into submission. The argument is, no, you should actually just beat them all down and like, and raise interest rates to like crush the consumer's ability to have any negotiating leverage over his employer. That's a sense I'm paraphrasing and I'm adding my snarky you know, commentary on it. But ⁓ that's the logic in increasing interest rates to deal with inflation is you're actually worried about the consumer having power over over the market. And so we're going to shove them, know, we're going to shove them down. ⁓ So I thought that was like some a dark approach to this, because if because if we believed that there was an ⁓ exit coming in a month or two, this is just transitory inflation based off of a one time conflict, you know. Craig (20:14) Right. Jack BeVier (20:17) ⁓ And then you get into the conversation which leads you down the path of like well, what's his off-ramp? Does he have an off-ramp? Is he actually gonna be able to contain this thing or did he just like, you know step on a hornet's nest and that he's gonna be dealing with it for the next, you know, eight months. So anyway, I just wanted to bring that up. I learned something this week. Thanks Gemini ⁓ for filling in the gaps that I failed in college. Craig (20:41) By the way, for anyone ⁓ who is not up on Gemini, it's 100 % right all the time. So whatever advice you got from a Jack has to be correct, because AI is never wrong. AI is never wrong. Which by the way, reminds me, Jack, that you, me, and David Moses have released a new podcast called Forked AI. You can find it at forked.ai. That's the number 4kd.ai. And we're really excited about it. So I had to get in that shameless plug in there for that. tell you, I'm, ⁓ you know, we're, 120 episodes into this podcast, which I couldn't be more proud to do with you, but man, that one is turning into a lot of fun. So anybody who's at all, even tangentially interested in AI, you should be listening to fork.ai. ⁓ We were having a lot of fun with it and I think we're putting out some great content on it. So check that out. We'll end this one here. That's Real Investor Radio. and we'll see you on the next one.