If you’ve been paying attention, you’ve probably noticed that mortgage rates have quietly returned to closer to 7%.
While 7% mortgage rates seemed to be a thing of the past, they returned just as quickly as they disappeared.
For reference, the 30-year fixed rate averaged about 8% a year ago, before it began its decline to nearly 6% in early September.
It looked like we were headed for 5% interest rates again, and then the Fed rate cut happened. While the Fed itself did not “do anything,” its pivot coincided with some positive economic reports.
Combined with the “sell-the-news” event of the Fed cutting itself, interest rates rose dramatically. However, now might be a good time to remind you that interest rates tend to fall for a period of time after interest rate cuts begin.
Low rates often last over years, not months
As mentioned earlier, the Fed pivoted, also known as cutting the federal funds rate, in September. They did so after increasing their rate 11-fold during the tightening period.
Hence the word “pivot,” where they shift from raising interest rates to lowering prices.
In short, the Fed has decided that monetary policy is sufficiently restrictive, and it is time to ease things. This leads to lower borrowing rates over time.
While many wrongly assumed that this pivot would lead to lower mortgage interest rates overnight, those “in the know” knew that these cuts were mostly already in place, at least for the time being.
So when the Fed lowered interest rates, mortgage interest rates went up a little, but not significantly. The real move higher after the cut came after a better than expected jobs report.
Lately, unemployment has taken center stage, and a strong jobs report tends to indicate a resilient economy, which in turn leads to higher bond yields.
Since mortgage rates track the 10-year bond yield so well, we have seen a steady jump for 30 years.
After nearly reaching its peak in early September, it has completely reversed course and is now knocking on the 7% door again.
How is this possible? I thought the high rates were behind us. Well, as I wrote earlier this month, mortgage rates don’t move in a straight line up or down.
They can fall as they rise, and rise as they fall. For example, there were times when they fell by a full percentage point during their 2022 rally.
So why is it any surprise now that they won’t do the same thing when they fall? It shouldn’t be the case if you zoom out a bit, but most of them can’t stay the course and contain their emotions from dramatic moves like this.
It could take three years for mortgage rates to fall after the Fed’s shift
WisdomTree Head of Equities Jeff Weniger placed An interesting graph recently looked at how long mortgage rates tend to fall after the prime interest rate starts to fall.
He graphed six instances in which prices fell from 1981 through 2020 after initial price cuts. Each time, except for 1981, it took at least two years for interest rates to bottom.
If we combine all those periods when mortgage interest rates were low and use the average, it would take 38 months to go from peak to trough.
In other words, it could take more than three years for interest rates to bottom out after the Fed’s initial cut.
As it stands, it has only been one month since the key interest rate fell. But it’s important to note that interest rates have already fallen from about 8% a year ago.
Prices have now drifted back to around 6.875%, and it is not clear whether they will continue to rise before falling again.
But the bottom line for me, in agreement with Weniger, is that we are still in a declining rate environment.
Even if 30-year fixed rates reach 7% again, that is the case Lowest levels Over time as prices continue to fall.
This means we saw 8% in October, 7.5% in April, and we may see 7% this month. But this is still a lower rate of 50% each time.
The next stop point could be 6.5% again, then 6%, then 5.5%. However, it will not be a straight line down.
However, it is important to pay attention to the long-term trend, rather than getting caught up in the daily movement.
Mortgage Lenders Are Taking Their Time Lowering Interest Rates!
I’ve said this before and I’ll say it again for the umpteenth time.
Mortgage lenders will always take their sweet time lowering interest rates, but won’t hesitate at all when raising them.
From their point of view, it makes perfect sense. Why do they stick their neck out unnecessarily? They may also be slow to play at lower rates if they are not sure which direction to go next.
As a lender, if you’re at all afraid that interest rates will get worse, it’s best to price them in advance to avoid falling into the trap.
This is likely what is happening now. Lenders are Being defensive As usual, interest rates are raised in a turbulent economic environment.
If and when they see softer economic data and/or higher unemployment numbers, they will start cutting interest rates again.
But they won’t be in a rush to do so. Conversely, even one positive economic report, such as the jobs report that got us here, would be enough to raise interest rates.
In other words, we may need several weak economic reports to see mortgage rates fall significantly, but only one for them to bounce back higher.
So, if you’re waiting for mortgage rates to drop, be patient. They will probably come, but not as quickly as you expect.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
Source link
