Are Lower Mortgage Rates on the Horizon? (Rates Update Special)

Navigating the turbulent mortgage rate landscape has never been more crucial. In this special Rates Update episode, Jeff, an industry-seasoned mortgage broker lays out the economic influences impacting mortgage rates today. After 18 months of relentless rises, hitting a peak not seen since the nineties, the market seemed stalled — but there's a change in the wind.

Jeff breaks down the intricate relationship between inflation, the Federal Reserve's policies, government debt, and geopolitical uncertainties, and how these factors have driven rates to where they stand. However, the tides may be turning. With the Fed's recent pause on rate hikes, a decrease in inflation, and a potential shift in the geopolitical landscape, there could be a cap on rising rates, signaling a time of stabilization we've been hoping for.

This deep dive is essential for anyone with a stake in the mortgage industry, whether you're a professional looking to navigate these changes for your clients or a homeowner wondering how this could affect your mortgage. Jeff provides insightful analysis, backed by years of experience, to help you understand these complex dynamics and what they could mean for the future of mortgage rates.

Watch now to stay ahead in the game and understand why there's a reason to be cautiously optimistic about the direction of mortgage rates, and how this could influence the broader real estate market as we move into an election year. This is not just a rates update; it's a glimpse into the potential ceiling of this cycle and what comes next for everyone involved in the journey of home financing.

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LinkedIn: https://www.linkedin.com/in/jeff-smith-40627016/

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Episode Transcript

jeff (00:04):
Welcome to the show fairways and finance.
My name is Jeff Smith.
I've been in the mortgagebusiness for 16 years top
quarter percent LL nationwide.
And you know this podcast.
We want to talk about yourfinances, how to grow and
accumulate wealth and all thingsrelated to the mortgage
industry.
But we're golf lovers here aswell, so we're going to work in
some golf.
Don't worry for my golf loversout there.

(00:26):
We got you and I hope you enjoythe show.
Hey, welcome back to thechannel everybody.
Jeff Smith, fairways andfinance.
And man, it's been a great weekin the mortgage business and I
had to record a quick podcasthere to break this down.
It's been some dark days formortgage lenders and real estate
.
You know we've had rising ratesfor the last 18 months.

(00:48):
Just as early as a week and ahalf ago, we had mortgage rates
hit their highest level sincethe early nineties and it's it's
been a rough ride, you know,and it's been especially tough
because so many folks now aresitting on record low interest
rates that they refinanced intoor purchased into during COVID.

(01:09):
So if you've got a 3% mortgage,why on earth would you sell
your house and go buy anotherone with an 8% mortgage?
So that has really brought thereal estate industry to a
grinding halt and it just seemedlike there is no end in sight
for rates to slow down until wearrived here this week.
And so we've had a great last10 days in the mortgage market

(01:32):
and there's quite a few thingsgoing on.
So I wanted to break this downand just give you some insight
here on what we're seeing rightnow.
So rates have been rising for18 months and you put that on a
graph and they've just been on asteady climb for the last year
and up and down for the sixmonths prior to that.
The factors that have beenmaking rates rise, so quite a

(01:54):
few of them.
Inflation is one.
So inflation was very high.
It's come down a lot, but theeconomy is still strong.
So the threat of higherinflation or inflation going
back up is not fully over.
So the Fed is cautious withtheir policymaking because the
threat of higher inflation stilllooms out there with a strong

(02:17):
economy.
So strong economy isinflationary and so we still
have that threat of higherinflation.
Strong jobs numbers the jobsmarket has been very strong for
the last couple of years.
The economy as a whole has beenvery strong for the last couple
of years and we haven't seen amajor shift in the job market.
It is slowing down and it isweakening, but it's not
crumbling by any means.

(02:39):
Significant debt in the US andin countries abroad as well.
Governments are financing a tonof debt the us.
Here in the United States,we've had a strong economy for
the last several years and ourdeficits have been increasing.
We've been running recorddeficits, which is crazy,
because when the economy ishumming along, that's when we

(03:00):
should be paying down thedeficit, that's when we should
be paying down our debt.
And the opposite has beenhappening.
And so what happens?
When the government takes ondebt, they do it by issuing
treasury bonds.
They sell treasury bonds.
That's an investment for aconsumer.
It's a debt for the government.
And so when the government istaking out more debt, they're

(03:23):
issuing more bonds, addingsupply to the bond market, which
then pushes prices down andpushes rates up.
So mortgages become long-termbonds called mortgage-backed
securities.
As the government is floodingthe markets with more bonds,
that puts pressure onmortgage-backed securities to
rise, rates on mortgage-backedsecurities to rise, thus

(03:44):
increasing mortgage rates.
The Fed has been offloadingtheir balance sheet of
mortgage-backed securities.
So the Fed, when we wentthrough COVID and when we've
gone through other difficultdownturns in the economy, the
Fed will buy mortgage-backedsecurities to reduce supply,
which then increases the priceon the mortgage-backed

(04:07):
securities and that reduces therate.
So mortgage-backed securitiesare just like bonds when the
price goes up, the rate goesdown.
The opposite has been happeningfor the last 18 months.
The Fed has been offloadingtheir balance sheet of
mortgage-backed securities,adding more supply to the market
, along with the US governmentadding supply to the market.
That is pushing prices onmortgage bonds down and pushing

(04:30):
rates up.
The Fed has been hiking the Fedfunds rates, so that is the
rate that the Federal Reservecontrols, and they've been
hiking it for the last 18 months.
And while that does not have adirect impact on mortgage rates,
it raises rates throughout therest of the economy and as
overall rates move higher, thatputs pressure on mortgage rates

(04:51):
to move higher.
So that has not been helpingeither.
And then, finally, wall Streethas had short positions on the
10-year Treasury note for mostof this year.
So they've been placing a betthat the yield on the 10-year
Treasury note is going tocontinue to rise, and when it
does, the price on the 10-yeargoes down.

(05:13):
So they've bought the 10-yearat X number of dollars and
they've got a short position tosell it and rebuy it at a lower
number of dollars at a futuredate, and when they do that they
make a profit on it.
So what we've seen happenrecently is, over the last
couple of weeks a couple of bighedge fund managers have come
out and said they think that 5%in the 10-year is the cap, that

(05:37):
it's not going to move anyhigher than that, and they're
liquidating their shortpositions.
So, while that's just a smallpercentage of all the short
positions that are out there,that was helpful for the markets
to see that some in Wall Streetare seeing 5% as the ceiling,
and last week the 10-year yieldhit 5.01% and then moved lower.

(05:58):
So it hasn't broken above that5% threshold.
So those that's six of the mainthings that we're seeing that
are putting pressure on rates tomove higher this year.
But now here's what's changing.
So the Fed is likely done.
Hiking rates their last ratehike was in July.
They had their meeting here inNovember and elected not to hike

(06:21):
rates at this most recentmeeting.
Their next meeting is in D.
Sorry, they had their meetinghere in October.
Their next meeting is inDecember and that at that
meeting the markets are bettingthere's an 86% chance that the
Fed does not hike rates inDecember either.
And so the Fed has been usingthis mantra of we need rates

(06:44):
higher for longer.
That does not necessarily meanthey need to hike rates more.
They can just leave the Fedfunds rate where it's at for a
longer period of time, but notcontinue to hike.
And so a lot of people arestarting to think, now that the
Fed is done hiking the Fed fundsrate, which would relieve a lot
of pressure on rates and,indirectly, on mortgage rates.

(07:05):
We're seeing inflation is lowerand, as I mentioned, inflation
is still a threat, but it isless than half of what it was at
the peak.
So while it remains a threat,it's also significantly lower.
So that is helping withmortgage rates.
And we have instability abroad.
So we've had the Ukraine Russiaconflict, we now have the

(07:28):
Israel Hamas conflict, and thecombination of those two is very
destabilizing and there's a lotof uncertainty about how is
this going to play out.
I mean, this could go a lot ofdifferent directions.
If it were to break into aregional war, you know, that
could send the global economyinto a recession.
So there is lots of risk from ageopolitical perspective.

(07:51):
When we see risk or when we seea downturn in the economy,
that's always favorable towardmortgage rates.
Some of those short positionsfrom the hedge fund managers
that I mentioned are now beingsold, and so when those short
positions are liquidated theyhave to buy treasuries, and then
that reduces supply, pushesprices higher and brings rates

(08:15):
down.
So we're seeing that start toplay out now and furthermore,
with that, if we see the 10-yearyield continue to come down, a
lot of these short positionswill be triggered to
automatically be re-bought, andso then they're going to have to
rebuy those positions at asignificant loss, and then
that's going to further reducesupply, pushing prices higher

(08:37):
and yields lower on the 10-yearand other bonds.
So that all would be extremelysupportive of mortgage rates.
And the Treasury announced thisweek their newest round of
borrowing, and so in July theyannounced what their budget was
for borrowing, and it wassignificantly higher than
expected.
That shocked the markets, andwe've really been on a quick

(08:58):
rise with mortgage rates sinceJuly.
Well, now this week theTreasury announced how much they
need for their next round ofborrowing.
It came in $76 billion, lessthan the markets anticipated
still a high number, but it wasless than the markets
anticipated, so that was helpfulas well.
And then the last thing thatwe've got working in our favor

(09:18):
right now is we're heading intoan election year next year and
you know politicians areincentivized to keep the economy
looking as good as possible inan election year, right, so we
may see rates come down furtherbecause of that fact.
So all of those factors areworking toward putting a cap on
rates and hopefully having 5% onthe 10-year yield on the

(09:42):
10-year Treasury be our ceilingfor this most recent cycle.
Is it the ceiling for this mostrecent cycle?
It's way too early to know.
This has only been playing outfor a week and a half, but I
feel excited about it.
I'm optimistic that maybe thisis the ceiling and hopefully it
is, and we're going to know inthe coming months here as things
continue to progress.

(10:02):
But for right now we're in agreat run with mortgage rates.
We'd love to see it improveeven more from here, and even if
mortgage rates could just stopmoving higher, I think everybody
could get used to where they'reat and then eventually the
market is going to pick up.
So wanted to shoot this podcastout to you real quick to give
you the latest scoop.

(10:22):
Hope you have a great rest ofyour week.
Hey guys, thanks for listening.
I hope you enjoyed the show andgot some valuable information
out of it.
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(10:43):
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