[David] Thank you very much, Matt. Appreciate it. Good report. Lot of ground covered there, especially when you look at where we’re at. You’re looking at where the 10-year Treasury was at its high for the year on May 19th. It was at a high of 4.686. We’re sitting right now today at 4.607, so we’re bumping up towards the highs. Really interested in getting your thoughts, Bill. Are we gonna pierce that previous high? Or are we gonna be kinda sitting here for a while, my friend? Thoughts on all that we’ve heard to this now.
[Bill] You know how the standard, investment tagline is, “Past performance does not guarantee future results”?
[David] Yes. Yeah, that’s a great response.
[Bill] Past performance tells you where we’re headed. So we talked last week about an Ed Yardeni piece that made a pretty compelling argument that said the 10-year is gonna be between four and five for a decade. And , in his long-term view, we’re probably, halfway through that, let’s say. And he did an interesting comparison back to the, early 2000s. I started looking at something, and it’s funny because Le- Les made a comment in his newsletter about this and I had already come up with what I was gonna talk about, and it says the exact same thing. So shorter term, since 2023, and this, the five and a half Fannie MBS security has been in a narrow two-point range, basically between 99 and 101. And to quantify the timeline so out of 48 months, there were only three months where the entire month traded above that two-point range, and there were seven months where it traded below that range for the entire month. Which we’re not talking about, one, two-day moves or that. But, that’s our past performance and there’s been a lot of… In that timeframe we’ve had all the volatility around the Ukraine war and energy implications, military, all the geopolitical stuff. And, then we throw in now Iran and the Middle East and a lot of the same things, and yet the market still seems to stick in that range. I know. Yeah. And, Les has been saying for a while in his newsletter because, if you don’t have the answer, you turn it into a question, Are we gonna see 420 or 480 on the 10-year first? I guess right now I would say the odds of hitting 480 first are probably a little higher because we’re closer to it. But that’s not a really strong conviction- Yeah … one way or the other. And to Matt’s point, a lot of that now is going to be driven by the Mid East and the geopolitical and the war frankly. And I always find it fascinating when people are stepping back looking at rates and they say, we had the one-off effect of tariffs, and we had to work through the post-COVID inflation,” and you have a one-off event. And then you had the one-off event for, the rise in oil prices after the Ukrainian war started. And now you have the, in air quotes, “one-off event” in the Middle East. When do one-offs become the norm? The new norm. Yeah. Yeah.
[David] We are seeming to be in that. Now, does this mean that… they talk about the worst of is, happens just before the storm ends and we get to seem they get the highest winds and then things just clear out and things like that. Are we in the midst of a storm of sorts, Bill? Or are we in a place where, this is the new norm? I get the rate trading range we’re in. Yeah. I could buy on that for long term, but some of the volatility that we’re seeing, and especially as we’re testing some of the highs again. So- I’m gonna give a quote from Larry Ellison, right? Who probably a lot of folks don’t know was a hyper-competitive sailor. Big boat, ocean racing stuff. Yep. And- Hydrofoil type … call it 10 years ago, let’s say, I don’t remember exactly when, they were in the Sydney to Hobart Race and dealing with a massive storm. And all of it, things started to calm down a lot, and the crew that was on deck, there’s starting to be a little bit of high-fives like, ” God, that was brutal, and we survived it.” And he goes down and looks at the radar, and you hear an, “Oh,” fill in the blank. He’s like, “Guys, I don’t know how to tell it to you, but we’re in the eye of the storm. So the worst part is still to come.” And I just… and I’ve been saying this for a while. I don’t feel like the Middle East situation is going to end just by slowly petering out. Yeah. Yeah. Us, us slowly pulling out and the s- and the Arab states taking over where… the void that we leave. I agree. Yeah. So what you’re saying, get back to work, do loans. Doesn’t matter. So when you look at this, Alice, when you’re looking at these kind of trends and you’ve been- you have got great reflection on this. I love your thoughts of reflection as you look over this.
[Alice] Right now I’m really thinking through what Bill said about being in the eye of a storm. And so we keep coming in and out of these storms. You listed them all well. And so no matter where I’m at, if I’m in the eye of a storm, and then when you ask people what are they working on, they’ll say it, always has AI in it. You ask people, “What are you working on?” The words AI will be in that sentence somewhere. Yeah. So if you’re in the eye of a storm plug that into your AI and see what it says you should do next. I’m curious. Yeah. Take what Bill said and, go, “All right. I’m in the eye of a storm. I need to reduce my costs. My rates are not gonna move out of this window from what you guys are saying.” And I agree. Historically, this is where we should be. To get back into the 2s and 3s is not healthy for our country. Yeah. For starters, don’t forget, your savings go down with that, right? The banks are gonna be… There’s a lot of consequences that go with that. So this is a healthier range to be in, but if it’s the eye of the storm, does that mean this could get worse and we- we’re not gonna go down between that 4 or 5, we’re gonna go over the 5 potentially at some point, in the future. So Bill, I’d like your thoughts on that. Okay, we’re gonna stay in this range. You mentioned 4, 4.80. Could we bounce out of that range being in this, the eye of the hurricane?
[Bill] Yeah. Absolutely. if you take the 420 to 480 range and expand that question to say, when we break out of that, is it more likely to be higher or lower? I think it’s higher.
[Alice] Higher is the only way that’s going out of the eye of the hurricane.
[David] We may see some recoveries down on some news occasionally where we get some dips, but I think this is the new rate. I really like that analogy that sailing with Larry Ellison about the, Ellison’s boat. There’s boats that sink. These are professional sailors that sink in that race. They get caught in these storms, and they sink. These are not inexperienced people. And I think this, the metaphor that we have here for our listeners is, folks, is this the norm or is this a storm? , We are in a place where you manage well through this. I am getting an increasing number of phone calls from people that are looking at our industry. You look, that are very smart, very smart individuals that have done well in tech. Now, does tech, all tech solution. Anyone who’s been doing well in tech doesn’t mean they can survive and do well in mortgage. We’ve seen that with Amazon, we look at that in Microsoft and things like that. However, we are in a new world with AI, and we’re seeing more solutions come alive as a result of Palantir engineers getting involved in some mortgage initiatives. You have P- Peter Thiel, one of the brightest guys. Now, that guy’s mind is just really bright. So I think we’re in a bit of a storm that is going to sink some more big boats, and we’re seeing that through Union Home. Alice your former employer b- that you retired from just now did another acquisition. They’re continuing to do that. Bill Kostreba is seeing this as an opportunity. He goes, ” One solution, build a bigger boat.” And he keeps doing so and go through that. Bill, your thoughts on the- sinking of boats. Yeah
[Bill] As you’re going through that, got me thinking there’s a, segment of an industry that is betting massively right now on US but in US housing, and that’s Japanese home builders, it seems like almost every week there’s another home builder that’s being acquired by- Yeah … a Japanese home builder. And some of the why is pretty straightforward, right? Japan’s got, an aging population. not a prime I do find it fascinating how much, as an, industry that they are focusing on investing in home building in the US. Is it- ‘ Cause from what I’ve heard, it’s not that they’re investing in home builders throughout the world. No. They may, but I haven’t really picked up on that. But there’s certainly a lot of focus, and against, not on the top 10, but there’s a lot of things that I’ve seen in, call it 20 to 50. So they’re still pretty sizable home builders. it’s a big investment that’s taking place that, again, says a lot about somebody’s view on US housing in general.
[David] Yeah. It’s a great observation, man. And what Bill, what I’ll add to that was, is that a couple weeks ago Pavan Agarwal s- owner CEO of SunWest, as well as owners founder of Celigence, which is the Angel AI platform had invited over w- the largest private equity firm in Japan. And they flew over, and it would just coincided with Japan playing in the World Cup tournament in Dallas at the particular, pinnacle moment to move on or not. And so I got to meet all these people. There was a large room full of th- this Japanese private equity firm, some of which didn’t speak any English at all. And so I listened to a presentation through a interpreter about what they’re saying about housing and their investment in housing, and their investment in bringing capital into the market. Billions of dollars, dollar going into the housing building, but also creating almost a competitor to Fannie and Freddie. That’s what they believe in this. They’re seeing something about this housing market in the US. Now, they’re investing in other countries, things like that. But by and large, they were talking very bullishly- About the housing market here but how they’re going about it is they’ve gotten, they’ve taken some, they’ve gotten burned, and they’re taking a little bit different approach to it, so it’s very interesting to see what’s going on. I think they’re onto it. It’s a bright group of individuals that run this firm. Had the privilege to get to do sit down and talk to them, have dinner with them. So I think we’re in that trend, a continuum. My money is on the over long-term view of housing here in America because I think our best days are yet ahead as a country. We’ve got our challenges, but we’ve got a whole new population that needs housing, and you look at the number of people of that younger age demographic that have not yet bought a home. This is a good time to do so. They’re gonna be building. We have a supply issue. How one of the solutions is building more homes, and we’re gonna see that happening certainly. So good comment there all the way around. And we could go on and on about all that,