Warsh likely to be confirmed next week, but rate cuts may not follow
Mortgage brokers have spent the better part of two years fielding the same question from clients: When are rates coming down? The nomination of Kevin Warsh as the next Federal Reserve chair gave many in the industry reason to hope the answer was finally close.
That hope may be misplaced.
Warsh is likely to clear his Senate confirmation in the coming days, and while the political machinery has largely fallen into place, the rate relief many brokers have been waiting for is not part of the package, according to one veteran broker.
Amir Nurani (pictured top), broker-owner at Left Coast Leaders in San Diego, said the industry has taken Warsh’s nomination to mean big rate cuts. He argues Warsh’s own track record points in a very different direction.
“Most people were excited about this because they were thinking that a new Fed president automatically means interest rates are going to come down because the market’s kind of hungry for that right now,” Nurani told Mortgage Professional America. “The market doesn’t realize that Kevin Warsh has a history of favoring higher rates.
“He was actually somebody who opposed the zero-rate environment during the COVID time. And so he is somebody who gravitates towards economic policy or monetary policy that actually makes sense.”
Nurani believes Warsh will bring a more disciplined hand to a central bank he sees as overly cautious under Jerome Powell. But disciplined does not mean loose. The macro backdrop makes rate cuts even less likely. Inflation remains elevated, global conflict continues to push oil prices higher, and those costs ripple through everything.
“We are in an environment that is inflationary by every definition,” Nurani said. “In fact, we might actually be in a stagflationary environment where our economy is contracting, and we’re seeing inflation kind of run rampant. That is not the environment where any Fed can lower interest rates. If we are in a stagflationary environment, rates are going to be on hold.”
Turning on the money printer
Nurani draws a sharp line between two tools available to the Fed, and his read is that Warsh reaches for quantitative easing rather than rate cuts.
“Both low interest rates and printing money are both inflationary, but the downstream effects of both are a little bit different,” he said. “When you print money, you stimulate business. When you lower interest rates, you invigorate the consumer. And so, invigorating the consumer is not what I think is going to happen here.”
Under that scenario, businesses get support, but mortgage rates stay where they are. Brokers who have been telling clients a new Fed chair means cheaper financing are going to need to adjust that message.
The implications for home prices are significant, and Nurani says brokers should be putting clients on notice. If the money printer turns on, residential real estate gets more expensive whether rates move or not.
“I think that when you take a look at where things are at right now, even in the face of layoffs, even in the face of an inflationary environment, if the Fed does start printing money, homes are going to start getting more expensive,” Nurani said. “You have REITs that are holding on to them. You have people during an inflationary environment, both investors and individuals, who seek safe havens in inflationary defense. And housing is a great mechanism for that. Specifically residential housing.”
That is already driving the conversations he is having with his own clients.
“That is exactly the messaging right now,” Nurani said. “That’s actually what I’ve been telling customers. Housing is not going to get any cheaper. If these things happen, you will pay more for every single house.”
What will cause the Fed to cut?
The labor market is where brokers should be watching for any real signal on rate movement. Nurani sees a healthy debate ahead inside the FOMC, but he is skeptical of the headline jobs numbers.
“I’m taking the job report with a grain of salt because honestly, the numbers that the BLS puts out can be inaccurate,” he said. “What I don’t take with a grain of salt is the unemployment numbers, because those are real checks that are being written. I think we are going to see unemployment start ticking up. And I don’t think that the conversation for rate cuts comes until unemployment gets about 4.6% or 4.7%.”
The composition of those layoffs matters too, and it cuts directly to broker pipelines. The workers being displaced in recent rounds of white-collar cuts are the same clients brokers depend on most.
“Your home buyers are not individuals working at fast food restaurants or individuals who are making sub-$50,000 a year,” Nurani said. “Those are not the people flooding the markets to buy homes. White-collar jobs where you have the six-figure positions, those are the ones that are actually out there buying homes. So yes, I absolutely do think that the slew of layoffs is going to hurt and impact demand for housing.”
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