Rates Have Dropped!
The start of August was highlighted by one of the best single days for mortgage rates in decades.
We’ve talked about for a while now about how Mortgage Rates will be closely watching the data.. and the data was music to Mortgage Rates’ ears.
- Jerome Powell spoke on Wednesday, 7/31 and didn’t deter that the Fed would cut rates at their next meeting on September 18th. Even though Powell didn’t comment that they WOULD cut rates, the fact that he didn’t push back when asked about the possibility of cutting rates, that was enough for the markets to read between the lines – mortgage rates improved.
- Friday, 8/2 – the Unemployment report was well over the 4.1% estimates and came in at 4.3%! The Fed had mentioned earlier this year they didn’t believe Unemployment would reach levels about 4.1%, so the fact that it has shows that the economy is hurting more than the Fed anticipated and the one release valve the Fed can use to help is cutting rates – mortgage rates improved again.
- Friday, 8/2 – the Jobs (Non-Farm Payroll) Report came in very underwhelming. The expectations were 175k jobs created in July.. the results were just 114k jobs created. This shows weakness in the economy – mortgage rates improved again.
Presidential Elections and Mortgage Rates
What impact does the Presidential election have on the Mortgage and Housing market?
- Each of the last two elections saw Mortgage Rates jump higher initially, then drop lower longer-term. If you go back over history, there’s no direct correlation on Presidential elections and Mortgage Rates. The market will react with how it thinks the Presidential winner will do inflation and the economy, but the market’s response evolves and changes over time, leaving it nearly impossible to predict exactly what outcome there will be on Rates.
- Housing values are something that do have much more consistency that we can track.
- During the 2016-2020 presidential term, house values went up 10% on average.
- During the 2020-2024 presidential term, house values went up 25% on average.
- The longer homebuyers wait, home values go up. We’re still at a shortage in housing supply and as rates continue to drop, this will only pick up more buyers, which will push house prices higher at a quicker pace.
Takeaway: if you want the best deal on a new home, the best price is available today.
Thank you again for making us “Kansas City’s #1 Home Mortgage Company”!
No New Highs is Important for Rate Outlook!
The above chart is the 10-year Treasury, which acts as a ‘floor’ for mortgage rates, which are about 1.50%-3% higher than the current 10-year Treasury rate (more info on this below in Newsletter).
Since rates spiked higher in 2022, there have been three attempts by the market to recover and drop lower.
The previous two attempts were met with a pullback and rates reaching even higher levels.
The latest drop in rates was met with a little bit of a pullback – as I’ve been expecting – but it wasn’t a new high… which is great news as it begins to create a new trend for lower rates.
It’s going to be a bumpy ride lower, but as long as we’re on an overall path towards lower rates that’s welcomed news for the Housing Market!
The Fed’s Rate Cut Expectations
There were already expectations of the Fed to cut rates beginning at their upcoming September 18th meeting.
Now with the additional weakness in Jobs and Unemployment, now the market believes the Fed will cut rates more aggressively.
What are Mortgage Spreads and why do they Matter?
This chart represents the “spread” between the 10-year Treasury (mentioned earlier in this newsletter) and 30-year fixed Mortgage Rates.
In a more “normal market” the difference between the 10-year and Mortgage Rates is 1.5%-2%.
For example, if you take today’s 3.9% 10-year Treasury and add 1.5%-2%, you would have average Conventional rates at 5.4%-5.9% – which would be fantastic news!
However, with how volatile today’s market is, Mortgage Investors and Secondary Departments have widened the “spread” to around 3%, which is why we see Conventional rates in the mid-to-upper 6%’s on average today, even though the 10-year is 3.9%.
With rates fluctuating so quickly these days, Mortgage Investors/Secondary Departments have built in added cushion to offset the risk.
If you think about when locking in an interest rate – on average for 30 days once you go under contract – the Mortgage Company has to deliver that rate, even if the market gets worse during those 30 days.
Since the market has rapidly worsened at times the last two years, Investors have had to bake that extra buffer into rates to stay in business because of how many spikes higher the 10-year Treasury has had the last couple years.
Also if you think about it, if rates improve by a good amount, we will move the client’s loan to another one of our Investors who would now be able to offer a better deal in that example.
The original Investor gets burned and has broken the promise to their Investors on the Secondary Market, which costs them.
Lastly, there are less and less buyers for Mortgage Bonds.
After closing on a home loan, a mortgage turns into a Bond, which is sold on the market – even if the same lender is servicing the loan.
If, for example, a 6.50% rate was given to the homeowner.. but by the time the loan closes and the Bond is being sold, the market happened to now be 7%, that is very difficult to sell that Bond at only 6.50% rate of return, when other Investors have Mortgage Bonds selling at 7% return to Investors.
These factors have all led to widened “spreads” in Mortgages.
The good news is that as the outlook continues to show that Rates will be dropping, Mortgage Investors will feel less risk and not only will the baseline Rates help, but we’ll get a double-boost as the market tightens up their “spreads”, hopefully back to the 1.5%-2% range, which would be an additional 1% drop in Rates.. on top of how much Rates naturally recover!
FAQ: When is My First Payment Due?
When you’re preparing to purchase your new home – remember that your Mortgage Payments don’t start up right away.
By default, you have no payments the month you close… no payments the following month… payments start up the Second full month after closing!
(There are some situations where the amount due at closing needs to be lessened and moving the first payment up to the First full month after closing can do that)
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Today's Mortgage Rates
