What's the verdict on adjustable rate mortgages?

Richard: [00:00:13] Welcome to the latest edition of MPA TV. I'm Richard Torne Empire's US News editor. And today we're going to be talking to another very special guest. She's Odeta Kushi, deputy chief economist for First American Financial Corporation, who specializes in analyzing and forecasting trends in the real estate and mortgage markets. That includes poring over quarterly surveys and any data related to home ownership. She is highly sought after by the media and appears regularly on US TV, offering well measured and judicious insights on the sector. Her research has also been published in leading trade publications, including The Wall Street Journal. And why not say it? Mortgage Professional America? Hello and welcome, Odeta. 

Odeta: [00:00:57] I'm glad to be here. 

Richard: [00:00:59] Very happy to have you on the show. Now, I'd like to start, but you have a very large social media presence and you appear a lot on US TV. How important is it for economists to reach out to a more lay audience to explain complex economic and housing data? Do you see it as one of your roles? 

Odeta: [00:01:15] Absolutely. I think communicating a complicated economic concept in a way that is understandable to a general public is is absolutely part of my job. Ultimately, economics is a social science. We're trying to study people's behavior, how consumers make decisions. And so I think it's absolutely crucial that that people understand kind of the message and the takeaways from from all of that poring over data that we do. So I absolutely see it as a key part of my job. 

Richard: [00:01:48] I ask this because more and more these days, we hear non-experts weighing in with their opinions. How much that how much does that irritate you? 

Odeta: [00:01:55] Not irritating. And necessarily, you know, I think we all have have a role. You know, I spend all day looking at data and then I try to communicate it. But economists can be wrong as well. As we know. Right, there's all sorts of differing opinions in the economics world, specifically in housing economics. You can see that in the array of forecasts that we provide every every quarter. And so I think there's there's a lot of room for everyone to be involved in the discussion. 

Richard: [00:02:22] Now, let's let's pour into those details a bit more. I've interviewed you a couple of times before. The last time I think was in December 20, 21. A lot has happened then since then. Now, you said in an interview this was back in August that double digit house price growth was unsustainable, yet home buying is as costly as ever. Now, you said more recently that you think inflation may have peaked and you've spoken a lot in the past about affordability and how inflation would have an impact on that. How likely is the US to fall into a recession and how would that impact on the housing market? 

Odeta: [00:02:58] So I would say that I think the risk of recession is higher today than it may be was a couple of months ago. With that said, I'm not I don't necessarily I'm not calling a recession in the next 12 months. I think the economy is still is still quite strong. You can see that in the in the jobs numbers. The labour market is quite strong. And even in the latest GDP numbers that were released for the first quarter, we did see a negative number come in for GDP. But if you look at consumer spending, which is two thirds of economic growth, that came in at a positive number, showing that consumer spending is still strong despite all of the inflationary pressures that we're facing. And so I do think that the risk is is higher for for recession. But I'm not I'm not calling it yet. 

Richard: [00:03:46] There seems to be a lot of talk lately about arms. There are evidently upsides and downsides to adjustable rate mortgages. But what's your view on them? Are they a bit of a gamble? You know, borrowers do run the risk of being unable to pay their mortgage if rate shoot up. 

Odeta: [00:04:00] You know, I think arms in the early two, thousands gave arms a bad rap. Right. But the arms of today are not are not like the arms of the early 2000. They're much more regulated and really focused on the consumer's ability to repay. So right now, the arms offer a lower a lower interest rate on a mortgage than a traditional 30 year fixed rate mortgage. And so it can it can give you a little bit of a boost in house buying power, if you will. And and it might be the right fit. I mean, it depends on on the borrower, but it could be a good fit for someone. And like I said, I think that the share of arms just increased to to the highest level since 2008. And that's just a lot of folks trying to get a lower interest rate, lower mortgage rate. And you can get an arm that's fixed for ten years and then you have the variable rate after that first ten years. And so it could absolutely be the right fit for someone. 

Richard: [00:05:00] Now, I've asked this question to other experts, other economists, and that is, you know, we can't talk about the housing sector today and ignore what's happening in the rest of the world and more specifically in Ukraine. You know, without ignoring the scale of the human suffering there, I have to ask you, as an economist, how do you think sanctions on Russia are going to impact on the housing sector and on people's day to day lives? You know, we see the cost of fuel shooting up in many parts of the world and I think it's beginning to affect the US as well. 

Odeta: [00:05:30] Absolutely. You know, the devastating war in Ukraine has certainly been felt here on US soil when it comes to prices. Like you said, people are feeling it at the gas pump and the Fed is certainly feeling the pressure to act and to kind of aggressively tackle the inflation problem that we're facing in the US. From a housing perspective, higher inflation expectations tend to put upward pressure on the ten year Treasury. And so. Lower mortgage rates. We've seen mortgage rates kind of anticipate Fed tightening for the last couple of months. And I think if inflation does not slow, then than we could expect the Fed to get more aggressive when it comes to Fed tightening and and maybe mortgage rates to move up even higher. 

Richard: [00:06:16] Okay. I'd like to talk a bit more about you and why I have to ask you, what attracted you to the world of real estate in the first place? And and why did you decide to become an economist? 

Odeta: [00:06:26] Yeah, it's a great question. So I was I was born and raised in a small Eastern European country of Albania, and I moved to the US when I was very young. And I think the seeing, the stark difference between an economy, the Albanian economy, which was just opening up to the world at that time to coming to a well established kind of economy in the US. I was just trying to understand what what was driving these differences in economic growth, not just between a well established kind of capitalistic economy here in the US versus the closed economy that I was used to in Albania. But even in the in the former communist countries, some countries were growing faster than others. And so really trying to understand what was driving that growth. And so I decided to study economics in college and then of course in graduate school. And when I was when I was in school, one of the things that that made me realize that I chose the right field is that economics is so interdisciplinary. I think to be a good economist, you obviously have to have those math skills and be able to understand math and statistics. But I truly believe that to be a good economist, you also need to have a good understanding of history, politics, government, all of these different subjects to to really understand and have the right toolkit to to analyze the economy. And so I think having that interdisciplinary view has been really helpful in my career. And yeah, you know, the rest is history. Housing, economics specifically is I did a focus on privatization actually when I was in graduate school studying how mass privatization contributes to economic growth in some of these countries, which kind of took me down the path of trying to understand property rights and yeah, eventually kind of landed in the housing world and it was a great decision. I love it. 

Richard: [00:08:20] Well, you've actually led me nicely into the next question. I was going to ask you this anyway, because you describe yourself as Albanian American, and Albania has a very rich history, but many people old enough to remember the Cold War still associate it with a very particular form of communism that was practiced there. It was isolationist, and it had closed its borders to the rest of the world. The perception at the time was that it was almost like a mediterranean North Korea. Now, needless to say, the country has changed beyond recognition since then. But how do you reconcile what must be two very different views of the world and the way the really almost like existential views on the world? 

Odeta: [00:08:57] Yeah, it's I think, you know, it comes back to me, I think back to property rights, you know Albania in in the early well for many, many years, you know when I was born it was just coming out of that isolationist period and the lack of property rights in the country, because everything was was centrally planned, right? There were no kind of private property rights in the country. And so I think the lack the lack of that really slowed the ability for the economy to grow. And that was one of the things that I studied in graduate school. And then, of course, there's all the social aspects, you know, the freedom of speech that that we lack during that time among the the lack of freedoms for for other things as well. But it's such a stark difference when I, when I came to the US to, to see the businesses thriving and even the grocery stores that were so full of choices. Right. Because we have all of this competition in this country that didn't exist. I think it was incredibly overwhelming as a kid to go from from that environment to to a country with so much choice. 

Richard: [00:10:02] I have to ask you, how often do you come up against other and I've asked this question to to some other economist colleagues. But how often do you come up against other economists? You don't quite share your predictions or your vision. Is there or is there an unspoken bonhomie amongst you? 

Odeta: [00:10:17] I think there's there's certainly differences. You can kind of see it in the in the wide range of forecasts in the industry. There seems to be agreement on on some key issues. I think everyone's mostly everyone's pretty aligned on the fact that we're facing a supply shortage in the housing industry just from from looking at the data that's available. But certainly there are areas of disagreement, and I think that's great. I think that it opens up the opportunity for healthy debate and academic debate. And I think that that's that's really good. That's that's where good ideas come from. 

Richard: [00:10:55] I haven't asked this question before. Economist. But how often do you check or backtrack to see how how close or off you've been in your predictions? 

Odeta: [00:11:03] I check all the time. I test all the time because, again, we're social science. We're studying we're studying people and consumer behavior and firm behavior. And as much as we like to think that people are rational economic robots, they're just not. And so it's always important to kind of go back and update your forecasts and update your assumptions and make sure that that the next time you do a forecast, you're learning. And I think that's that's really important. So we don't make the same mistakes over and over again. 

Richard: [00:11:37] Is that why it's often difficult to predict trends because of unpredictability in human behavior? 

Odeta: [00:11:44] Some things are easier than others. There are some measures in the economy that are what we call kind of mean reverting. And then there are just some things that are tougher to forecast, interest rates being one of them. Interest rates are notoriously difficult to forecast because they're tied to so many different things. So mortgage rates, for example, are loosely benchmarked to the ten year Treasury yield. And that ten year Treasury yield can move around based on so many different factors. Geopolitical conditions, economic conditions. You know, a war somewhere else in the world could cause a flight to safety in US Treasury bonds. And so there's just so many different factors that, you know, I can't predict war and so it's very hard to forecast interest rates, but there are some things that that are maybe a little bit easier to forecast. 

Richard: [00:12:32] Two, fairly standard. Well, one fairly standard question to to end, and what is the most satisfying aspect of your job? 

Odeta: [00:12:40] I think this kind of comes full circle. It's it's being able to talk to consumers of our of our blog, of our data, being able to connect with people online and explain kind of what's going on in the housing and mortgage finance world in a way that that's really easy to understand. And I think that's that's really the best part of my job when people have questions and I'm able to answer them, when I'm able to help someone make a decision, an informed decision, I think that's probably the best part of the job. 

Richard: [00:13:12] Finally, if you could give a piece of advice to your younger self starting in industry, what would it be? 

Odeta: [00:13:18] I would say it's to remember that we study people. Economics is the study of incentives and and how consumers and firms are making choices and are responding to incentives and just always keep that in the back of your mind. Not not get too caught up in the models and just remember to take a step back and think through what are people actually doing? How are people actually responding? And yeah, that would be my advice. 

Richard: [00:13:50] Well, thank you so much for joining us today. It's been great having you as a guest on our show. 

Odeta: [00:13:55] It was a pleasure. Thank you so much. 

Richard: [00:13:58] Thank you, too. To all our viewers for watching. I've been your host, Richard Torne, and we hope you'll join us again soon for another edition of MPA TV. May you all have a happy and successful week. Goodbye.