What If Rates Never Come Down? The Big Short Lesson Behind "Buy Now, Refinance Later"
Mortgage rates have crossed 7%, and the usual advice is to wait for cuts or buy now and refinance later. Nicky P and Rob Brayton of Perfect Spiral Capital explain why both bet on the Fed, why a 2008 mortgage insider calls today's rates normal, and how building dry powder beats waiting.
“f your plan is structured around being able to refinance, that’s actually a dangerous situation to be in.”
When mortgage rates crossed 7%, most financial advice settled into one of two camps. One says to wait until rates come down before buying a home or expanding a business. The other says to buy now and refinance when rates drop. In this episode of Between The Lies, a weekly show about handling an uncertain economy with clear eyes and a plan, host Nicky P and Rob Brayton of Perfect Spiral Capital argue that both camps are making the same bet: that someone else will eventually make money cheap again. Rob worked in the mortgage industry during the 2008 crisis, and his view of what counts as a "normal" interest rate may change how you see the current headlines.
What We Covered
Waiting for lower rates and planning to refinance are the same bet.
The "wait it out" approach has a hidden cost. Every month spent waiting is a month your money isn't working, which is the time value of money. If rates don't fall, you've given up that time for nothing. The "buy now, refinance later" approach is riskier because the refinance is built into the plan. If the lower rate never comes, a household can end up house poor, with a payment that eats into everything else. A business that counted on refinancing to free up cash flow can stop growing. As Rob puts it, relying only on credit at whatever the market charges leaves you in a difficult position.
The cheap-money era was the exception, not today.
Nicky brought up The Big Short, the film about the 2008 housing collapse, because the same thinking fueled that bubble: people overextended on the belief that they could always refinance into something cheaper. Rob was in mortgage lending at the time. He recalls that a conventional first mortgage at 6 to 6.25% was considered a good rate. Measured against that history, today's rates are closer to normal. What stood out was the long period of artificially low rates after 2008, when borrowing cost almost nothing and a generation of buyers came to see that as the baseline.
“That’s why home prices are extremely high. It’s not because of the value going up. It’s just the money is worth that much less over that time.”
High home prices are a currency problem.
Rob argues that home prices are high mainly because the dollar buys less, not because homes have become more valuable. Years of heavy money creation have pushed up the prices of assets such as real estate and stocks, which is known as asset price inflation. Combine those inflated prices with more normal interest rates, and buyers face a much harder situation than the sticker price suggests. Rob also reported something he heard at a recent real estate investor meeting: many investors are turning to private lenders. The rates aren't necessarily lower, but the terms are more flexible and fit how they actually buy property.
Preventing every correction makes the eventual one worse.
Policymakers want a strong economy, low rates, and no recessions, all at the same time. Rob says that each attempt to prevent a correction pushes the problem further out instead of solving it. In his metaphor, the can being kicked down the road is no longer empty. It's a full fuel can that is starting to leak, and one wrong spark could set it off. Nicky compared it to a game of musical chairs where ordinary households are the ones left standing.
“If your system isn’t working for you, then it’s working in someone else’s system..”
Key Takeaway
Stop building your plans around a rate decision you don't control. As Rob put it, focus on what you can control and put systems in place that keep you capitalized through any rate environment. The goal isn't to sit on the sidelines with cash. It's to build a reserve of deployable capital, often called dry powder, so that when a correction comes, you can act on your own terms. Nicky summed it up: when conditions finally turn in your favor, you want to be standing on a stockpile ready to deploy, not shoveling yourself out. For the hosts, that system is the Infinite Banking Concept, a way of storing capital in a dividend-paying whole life policy that you can borrow against without asking a bank for permission.
Related Episodes
Episode 015: The 50-Year Mortgage and the Math Nobody Mentions
Episode 035: Consumer Sentiment Hits a Record Low and Michael Burry Says Stay Out
Episode 045: Bond Yields, the Fed, and the Rate Hike Nobody Wanted
Get the free toolkit at PerfectSpiralCapital.com/podcast. It shows what a better-positioned financial life can look like and the steps to get there.
“You don’t wanna be shoveling out when the advantageous part happens. You wanna be already standing there with a stockpile ready to deploy.”
FAQ
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Waiting assumes rates will fall, and nobody can guarantee that. Waiting also has a cost, because time your money spends sitting idle is time it isn't working for you. A better question is whether you're properly capitalized and able to act on your own terms, whatever rates do.
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It's risky if the plan only works with a refinance. If rates stay high or lending tightens, you could end up house poor, with a payment that leaves nothing for savings or emergencies. Many of the people hurt in 2008 were counting on a refinance that never came.
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Not by long-term standards. Rob Brayton, who worked in mortgage lending in 2008, recalls that a conventional loan at around 6 to 6.25% was considered a good rate at the time. The decade of extremely low rates after 2008 was the unusual period, and it's the main reason today's rates feel so painful.
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Largely because the dollar has lost purchasing power. Years of heavy money creation pushed up the prices of assets such as real estate, a pattern called asset price inflation. The home may be the same, but it takes more dollars to buy it.
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Dry powder is capital that's liquid and ready to use the moment an opportunity appears. People who had capital available in 2008 or 2020 could buy when prices dropped, while others had to ask banks for loans on the banks' terms. Building a reserve you control is how you get into that position.
Show full transcript
Episode 047 Transcript
Intro: What If the Iron Never Gets Hot? — [00:00:00]
Nicky P: Sometimes the best advice is to wait and strike while the iron is hot. But what if waiting isn't an option? What if that iron isn't ever going to get hot? What if those interest rates really never do come down? Welcome to the Between the Lies podcast, your weekly lesson on how to approach an uncertain world with positivity and balance.
I'm Nicky P, here with my good friend and money brain, Rob Brayton, from Perfect Spiral Capital, as he helps us navigate the snares and pitfalls in a world of "trust me, bro" economics. Stick around till the end of the video for the free toolkit, and if you like, please like and subscribe to the video.
Rob, what are the issues that you see with the status quo advice as it is?
Wait It Out vs. Buy and Refinance — [00:00:50]
Rob Brayton: Status quo, there's a couple of different camps that I tend to see as I'm looking at some of the different information that's out there. One is, let's kind of wait it out. Let's see if rates are gonna come down before we do some business expansion, buy the house, whatever.
And then there's some other individuals who are saying, "Well, let's just buy, and then we'll refinance when rates correct or come down." The trouble with both of those situations is twofold. On the let's-wait-around side, it's: what about the time value of money?
What happens if rates don't come down? We're starting to get some pretty good indications economically that rates aren't going to come down likely anytime soon, especially with the stance the Fed's been taking on trying to fight inflation and that sort of thing, even though we know that's a whole separate conversation about why it is the way it is.
The other part is, if your plan is structured around being able to refinance, that's actually a dangerous situation to be in, where you could be putting yourself in a scenario where you're actually house poor. Or maybe the business stagnates in terms of growth because you're in a situation where you can't refinance in the future in order to, quote unquote, "save some monthly cash flow."
So I see it as a tough spot to be in if you are having to rely solely on credit, and you don't have any other access to capital, and you have to go access it at market rates all the time. That can be a really difficult, challenging situation to be in for someone.
The Big Short Lesson — [00:02:45]
Nicky P: Well, the first thing that comes to mind is, I know we beat it like a dead horse, but The Big Short. So much of what happened in that particular environment is that people were overextending in large part because, "Oh, well, we'll always be able to get lower rates. Just wait till the rates come down and then I'll be able to refinance, bring the price down, bring the rates down."
And then what happens when, oh wait, we have historic and unprecedented basically zero rates for 30, 40 years? In many ways, the rates that we've had have been practically nothing for the entire time that we've been adults. To get real rates as they've been historically average, you'd have to go back to like the '80s, the '70s, and the rates there would make ours look impossibly low. Like they're basically giving us free money.
A 2008 Mortgage Insider on "Normal" Rates — [00:03:35]
Rob Brayton: I remember when I was in the mortgage industry, I was in the mortgage industry around '08, and normal conventional loans, first mortgage position, were typically around six to 6.25 if you weren't buying points. If you bought some points, you might get it down to just below six or something.
But that was normal, and those were considered good rates at those times. So the fact that we've actually come above that... that should be normal. It should feel more normal. Historically speaking, we are in a much more normal rate scenario. But to what you were saying, we were in an artificially driven low-rate environment for sure.
And the knock-on effects of that, I don't think we've truly realized them. We're starting to see some of it, right? With asset price inflation and so on, because the dollar has taken such a beating over that time. The debts just continue to go. Money printing's been unbelievably high over the last 15 years.
That's why home prices are extremely high. It's not because of the value going up. It's just the money is worth that much less over that time. And when you're facing inflated asset prices, plus now you have a normal, or at least a more normal, interest rate environment, it's really tough for people to be able to afford some of those things, because they've been taught their entire lives, "Give us your capital and put it here, lock it away, and just go borrow."
And unfortunately, that's what we're seeing: some of the knock-on effects of how people are feeling that in the real world, whether that's business expansion, business acquisition, and even in the real estate markets and so on.
Half-Million-Dollar Homes and Private Money — [00:05:55]
Nicky P: Obviously, we kind of covered the one. What are some other ways that you think this advice is just kind of silly, aside from, say, the mortgage environment, which is just a mess? That's the best way to put it. This wouldn't have been a big deal, the rates that we're paying, if you're paying for $100,000 houses again. But when you're paying for half-a-million-dollar homes, which I think the average across America now is about a half mil...
Rob Brayton: Yeah, it's like 400 or something like that, I want to say. And it is. It's crazy.
Nicky P: Seems almost inconceivable. How would anyone own a house at those prices?
Rob Brayton: Well, I certainly feel for the average person that actually wants to buy a home, right? Their salary has not grown to be able to do that. It's tough. I was actually at a real estate investor meeting this last week, and a lot of these investors that are out there are much more likely to target private money, because they can do stuff with better terms. Maybe not better rates necessarily, but more effective terms that fit their ability to purchase homes and so forth.
It was really interesting to be a part of that and hear it from the inside and see how some of that stuff's going. But I think one of the areas that a lot of people aren't thinking about in these types of environments is the flip side of that: bond yields are getting stronger.
Some of the savers may make a little bit more on the money they have saved in high-yield savings accounts, CDs, that sort of thing. Now, granted, we're talking a quarter point. It's not massive, but it is a signal for a direction to move back upward. There's some positives in that, but we all know that's not necessarily gonna outpace and allow somebody to get to a point where it becomes easier in any way, shape, or form to go purchase a home if you don't have the capital or aren't structured for it.
Nicky P: Well, I mean, we've had, what, I think 11% inflation for the past two years total, I think is the idea.
Rob Brayton: I'd have to look at the actual M2 versus what it was, and it is in that neighborhood for sure. It's crazy high.
Nicky P: But my point was, let's take that next to the rate hikes that we've seen at the Fed and go, "Is this offsetting this entirely, do you think? No?"
The Leaking Fuel Can — [00:08:55]
Rob Brayton: Well, it's this whole aspect of trying to have your cake and eat it too from a politician's standpoint, right? Oh, the economy's great. Rates are low. Things are gonna keep going this way forever. And oh, a recession looks like it could happen. Let's do everything we can to prevent that.
That's bad. We don't want any corrections ever in the economy. And all that does is push that proverbial can down the road. And I would say the scary part about it is it isn't just a can anymore. It's a completely full, but now leaking, fuel can. And all it takes is the wrong rock, and that thing sparks and explodes, and we have a really, really bad situation that could take place.
And obviously we don't want that, but when that's what the policymakers are doing and the actions that are being taken, unfortunately those are the outcomes that it tends to lead to.
Nicky P: It's a little bit like a game of musical chairs, and we're the ones that are holding the bag, right?
Rob Brayton: Yes, sir. Sadly speaking, yes.
Control What You Can Control — [00:10:15]
Nicky P: What do you think is better advice to give? How should we look out at the landscape right now and think about it differently?
Rob Brayton: I would say it's important to think about what is in your control, and can you start changing or adapting or putting systems in place that allow you to be more in control in an economic scenario like what we're facing.
Because the more you have control over what's going on in your own world, your own personal economy, the more likely you are to be successful, and the more likely you are to have some capital when the right time to buy comes along, whether that's investments, real estate, et cetera. So it's not something where you should necessarily just sit with cash on the sidelines per se.
It's more so: what sort of systems are you putting in play that might put you in a better position one year, two years, eight years down the line to be able to capitalize where necessary? And by capitalize, I mean use the capital you've been storing up and can now deploy in a way that you are in control of as well.
So, just keeping it very straightforward, I'm really talking about capitalizing your own system, utilizing the infinite banking concept. That's really what we all focus on here at Perfect Spiral Capital. There's time value of money, and if your system isn't working for you, then it's working in someone else's system. So it's up to you whether or not you wanna take the control back and start creating and building the system that's gonna allow you to be in a position to do some of these things that maybe you wanna do in the future, or even right now.
That's where it's important to think differently about the system that you're operating in and who controls that system.
Nicky P: The advice isn't necessarily to change. It's the place at which you need to be when the advice is ready for it. The idea is that when the environment does kick in and make things easier or more advantageous, you want the advantageous part to be on the growth part.
You don't want the advantageous part to be on the unburying part. You don't wanna be shoveling out when the advantageous part happens. You wanna be already standing there with a stockpile ready to deploy.
Dry Powder and the Next Correction — [00:13:05]
Rob Brayton: There's some colleagues in the IBC space, and one of the things I've heard is having dry powder available. If you don't have the dry powder when it's needed, then you're the one who's having to go hat in hand and beg for it, and you're the one who's gonna be beholden to somebody else's rules. But if you have at least some deployable capital, it puts you ahead of the next person to be able to capitalize on those scenarios and be in a great position.
Obviously nobody has a crystal ball, but think about it. If you wanted to be in the market and you were properly capitalized through, say, '08, '09, or even further back, or let's say 2020, and then you see this massive correction in the market, and you've been studying some different areas really well, and you know what sectors you wanna be involved in, and you see that the prices have come way below where your initial thoughts of maybe stepping into that space were, now you have that ability to just jump in. And because you know it so well, you might go bigger on that position than maybe anybody ever would have in the past.
But it's because you know it. It's because you're really well-versed in that particular area. Now, you can scale that out to businesses, you could scale that out to real estate, whatever it is, right? But know what you're going to invest in, so that when you're ready to deploy that capital, it's much more of a sure thing, because you're controlling most of the environment in which that thing is being acquired.
Mortgage Rates Cross 7% — [00:15:05]
Nicky P: Right on. It's not a complicated topic, obviously, today. I'm curious, was there something specific that spiked it in your brain that's going on in the news right now?
Rob Brayton: Yeah. There's a lot of news out there about mortgage interest rates, right? A lot of people getting, I would say, overly excited in a negative fashion that rates have crossed that 7% barrier, and they're really worried about the housing market and all this stuff. And it's like, well, what are you gonna do about it? You can't just lower the rates just because.
And I get that a lot of the economy revolves around the real estate markets and so forth, but at some point, there's gotta be a correction. If the average household making $100,000 a year, both people working, using average incomes, can barely afford a home, that tells you something's wrong within the market.
Nicky P: It's just funny, Rob, 'cause I've never heard of the average income in America being 100K.
Rob Brayton: It's about 50,000 a person, so.
Nicky P: Last I knew, it was 70K for both people, the average.
Rob Brayton: Oh. I don't know. The figures I saw were about 52,000 per working adult.
Nicky P: 50,000's a pretty good job in America. Most people are in the 30 to 40K range.
Rob Brayton: Yeah, I don't know what the median is, but that would be a good indication.
Nicky P: Let's not argue over getting to median, folks. Take care of yourselves, take care of your families, and do what it takes to get above median.
Rob Brayton: Yeah. It's all about producing value, right? The more value we produce, the better off we're gonna be, for everybody around us.
Nicky P: Well, and the more capital you're capable of deploying, the more value you're inevitably going to have, 'cause then you get to be the guy that people go to for money, as opposed to having to go to a bank for money. And immediately you're taking one middleman, hat in hand, out from between you and your finances.
Free Toolkit — [00:17:20]
Nicky P: Well, Rob, what can you tell us about this toolkit that you have for our guests today?
Rob Brayton: As we've been talking about, there's a lot of different stuff to learn about, and education is obviously great. If you're watching this show and you're understanding some of this stuff, clearly you're interested in money. But it's also about taking action and doing something tangible. So head on over to perfectspiralcapital.com/podcast and click the link there. You'll be able to get access to a free toolkit. It's designed to give you a heads-up in this current financial environment that we're in, and give you some great insights as to what you can do to help put yourself in a better position next week, next month, 10 years from now.
Nicky P: What it's really good at is showing you what that better world can look like and how you get there.
Rob Brayton: Yeah, absolutely.
Nicky P: So like he said, folks, perfectspiralcapital.com/podcast. Go grab the toolkit, find out how to make your life better, and then join us here next week for more of what's going on in the news and the ways to take it more positively in life. I'm Nicky P. Have a good one there, folks. Stay capitalist.
“If you don’t have the dry powder when it’s needed, then you’re the one who’s having to go hat in hand and beg for it.”
