Latest / The Loan Daddy Podcast / 017 - When Will Mortgage Rates Go Down? What the Fed Actually Controls

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017 - When Will Mortgage Rates Go Down? What the Fed Actually Controls · The Loan Daddy Podcast

• 0:00
  SPEAKER_00: You could almost think about this like the Fed has their hands on the steering wheel, but the bond market, inflation, the economy, government borrowing will all influence which way interest rates go or which way that steering wheel is turned.
• 0:13
  SPEAKER_00: What's up, everybody?
• 0:14
  SPEAKER_00: Welcome to the Lone Daddy Podcast, episode 17.
• 0:17
  SPEAKER_00: Let's talk about the market today, as there is a lot going on.
• 0:22
  SPEAKER_00: As a real estate agent, do you need to be an expert on the bond market and global economic trends?
• 0:28
  SPEAKER_00: Of course not.
• 0:29
  SPEAKER_00: But having a basic understanding of what's happening in the market makes you way more than just a real estate agent.
• 0:36
  SPEAKER_00: It makes you a trusted advisor in the eyes of your clients.
• 0:39
  SPEAKER_00: And this is where we see that shift take place with agents where they go from being good to great.
• 0:45
  SPEAKER_00: When customers don't just want your opinion on anything real estate related, they need it and they value it.
• 0:52
  SPEAKER_00: And that's when you become elevated in the minds of that client or clients.
• 0:57
  SPEAKER_00: But I also receive a ton of questions from agents about the market and about interest rates, and there are so many misperceptions out there.
• 1:06
  SPEAKER_00: So I thought it'd be a good idea for this episode to dig into what it is that we're seeing.
• 1:11
  SPEAKER_00: Hopefully, after this, you'll come away feeling more educated and more informed about what's happening in the market overall.
• 1:18
  SPEAKER_00: And I'm gonna try not to speak in jargon or make things more complicated than they have to be, but I wanna give you the information so that you can confidently speak to your clients about what's happening.
• 1:28
  SPEAKER_00: As an agent, you probably have clients asking you some version of the same question.
• 1:32
  SPEAKER_00: And that question is when is the Fed going to lower rates?
• 1:36
  SPEAKER_00: But what they're really asking is when are mortgage rates going to come down?
• 1:40
  SPEAKER_00: And those are actually two different questions.
• 1:42
  SPEAKER_00: And right now, understanding that difference is so important because we have a new Fed chairman, Kevin Warsh, and we have a Secretary Treasurer, Scott Bessant, who is taking more of an active role in the bond market.
• 1:56
  SPEAKER_00: And there are some interesting things happening with longer-term rates, which is what mortgage rates are based off of.
• 2:03
  SPEAKER_00: So I want to simplify all of this and explain what you and your clients really need to know.
• 2:08
  SPEAKER_00: Okay, number one, let's start with the biggest misconception, and that is that the Fed does not set mortgage rates.
• 2:15
  SPEAKER_00: Write it down in pen, in Sharpie, get it tattooed.
• 2:18
  SPEAKER_00: The Fed does not set mortgage rates.
• 2:20
  SPEAKER_00: The Federal Reserve, the Fed, controls very short-term rates.
• 2:25
  SPEAKER_00: And that's the Fed funds rate.
• 2:26
  SPEAKER_00: And that's an overnight rate that banks charge each other.
• 2:29
  SPEAKER_00: It's actually a suggested rate, and it's usually a rate that lasts for 24 hours.
• 2:35
  SPEAKER_00: Mortgage rates are different, as most will last for 30 years.
• 2:39
  SPEAKER_00: A 30-year mortgage is a long-term loan, so they tend to be more influenced by the bond market, particularly longer-term treasury yields and mortgage-backed securities.
• 2:49
  SPEAKER_00: You could almost think about this like the Fed has their hands on the steering wheel, but the bond market, inflation, the economy, government borrowing will all influence which way interest rates go or which way that steering wheel is turned.
• 3:02
  SPEAKER_00: So the Fed can try to turn the wheel one way, but if the market's worried about inflation or government borrowing, then those market forces are going to force that wheel to be turned the other way.
• 3:13
  SPEAKER_00: You can also think about this in real estate terms, where a real estate agent and a seller may list a home at a certain price, but ultimately the market will determine what the value of that home is.
• 3:25
  SPEAKER_00: The Fed can set the Fed funds rate, but it doesn't get to determine what the cost of a 30-year fixed mortgage is.
• 3:32
  SPEAKER_00: And we actually saw this happen quite recently.
• 3:35
  SPEAKER_00: At the end of 2024, the last three Fed meetings of that year, the Fed lowered rates three times for a total of 1%.
• 3:43
  SPEAKER_00: At the time, rates were right around 6.5% to 6.6%.
• 3:47
  SPEAKER_00: I remember at that time that real estate agents were calling me and advising their clients that they were telling them to wait because interest rates were only coming down.
• 3:56
  SPEAKER_00: Fast forward only a month to January of 2025.
• 4:00
  SPEAKER_00: And by the end of January, interest rates were at 7%.
• 4:05
  SPEAKER_00: So interest rates went up about a half percent, despite the Fed lowering rates three times at the end of 2024.
• 4:12
  SPEAKER_00: We're going to get into why this happens, but I think for right now, it's just important to understand this concept that what the Fed is doing and the relationship between what the Fed is doing and mortgage rates.
• 4:23
  SPEAKER_00: Because when clients are telling you that they're waiting for the Fed to lower rates, how are you responding to that?
• 4:29
  SPEAKER_00: Are you saying, great, that makes perfect sense?
• 4:32
  SPEAKER_00: Or are you able now to have more of an informed conversation with them or at minimum refer them to your preferred mortgage lender to have more of an educated conversation about all this?
• 4:43
  SPEAKER_00: So again, the Fed cut does not automatically mean lower mortgage rates.
• 4:49
  SPEAKER_00: So you're probably asking yourself now, so what actually does move mortgage rates?
• 4:53
  SPEAKER_00: And there are a lot of factors involved with with all this.
• 4:57
  SPEAKER_00: But for purposes of this episode, I want to remember four of them.
• 5:00
  SPEAKER_00: And that's inflation, economic growth, government debt, and confidence.
• 5:05
  SPEAKER_00: So let's let's dig into all that very quickly.
• 5:08
  SPEAKER_00: If investors believe that inflation is going to remain high, they're going to demand a higher return to lend money for 10 to 30 years.
• 5:17
  SPEAKER_00: You could think about it like this.
• 5:18
  SPEAKER_00: If I'm a bank and I lend someone money, and let's say they're paying me$1,000 a month, and inflation continues to rise, that$1,000 a month is no longer going to be able to buy me the same amount of goods and services that I was accustomed to.
• 5:32
  SPEAKER_00: So now to that next customer, we need to charge them$1,200.
• 5:36
  SPEAKER_00: And then let's say inflation continues to rise.
• 5:39
  SPEAKER_00: Then that third customer, we need to charge them$1,400, and so forth.
• 5:44
  SPEAKER_00: So if the economy is very strong, or sometimes economists will say running hot, then rates will have to stay elevated.
• 5:52
  SPEAKER_00: This can get very tricky, and the decision makers have to be very careful.
• 5:56
  SPEAKER_00: If things are great in the economy, then people will be spending more money.
• 6:00
  SPEAKER_00: And if people are spending more money, then that can cause inflation to rise.
• 6:06
  SPEAKER_00: And if interest rates started to drop at a time like that, then people would just borrow money at very low rates and continue to spend more, which would cause the economy to overheat and inflation to rise even further.
• 6:21
  SPEAKER_00: And then there's government debt.
• 6:22
  SPEAKER_00: The United States has to borrow a ton of money to pay off their debt and refinance debt that is coming due.
• 6:30
  SPEAKER_00: Which means the Treasury has to continue to sell treasury securities.
• 6:36
  SPEAKER_00: And you could think of treasuries like any other type of product.
• 6:39
  SPEAKER_00: If there's a large supply of treasuries, then you need enough buyers in the market to absorb it, supply and demand.
• 6:48
  SPEAKER_00: And if investors aren't willing to purchase treasury securities at the current yields or rates, then the yields or rates have to rise to make it more attractive for investors.
• 7:02
  SPEAKER_00: So, in other words, if I'm an investor and these treasury securities are paying me 2% a year, that might not move the needle for me.
• 7:12
  SPEAKER_00: Why am I investing in the government, in the US government, and giving them money to pay off their debt when the return that I'm getting is minuscule?
• 7:23
  SPEAKER_00: So the government would have to make it more attractive for an investor to invest that money.
• 7:28
  SPEAKER_00: So then you'll have to say yields or rates go to 4% or 5% or reach that threshold where it makes sense for people to start investing.
• 7:35
  SPEAKER_00: And when that happens, and when treasury yields start to rise, mortgage rates rise as well.
• 7:41
  SPEAKER_00: Now enter Kevin Warsh.
• 7:43
  SPEAKER_00: He is our new Fed chairman, and this is where things do get very interesting.
• 7:48
  SPEAKER_00: Warsh appears to have a different philosophy when it comes to how he manages the Fed compared to the previous Fed chairman, Jerome Powell.
• 7:58
  SPEAKER_00: For years, the market became obsessed with what the Fed was going to say.
• 8:03
  SPEAKER_00: Every word from the Fed chairman was analyzed.
• 8:06
  SPEAKER_00: What does this sentence mean?
• 8:08
  SPEAKER_00: Why did the Fed chairman put this word in instead of that word?
• 8:11
  SPEAKER_00: What do they think about inflation?
• 8:13
  SPEAKER_00: What do they think about the labor market?
• 8:15
  SPEAKER_00: The previous Fed under Jerome Powell would tip their hand, in essence.
• 8:19
  SPEAKER_00: The thinking was, let me give the market an idea of what we, the Fed, are thinking.
• 8:26
  SPEAKER_00: And then you, the US market, will act accordingly based on what we're going to do.
• 8:31
  SPEAKER_00: Now Warsh has flipped that.
• 8:33
  SPEAKER_00: He wants the market to do the work for themselves.
• 8:36
  SPEAKER_00: So he's saying, US market, ignore us entirely.
• 8:40
  SPEAKER_00: He's saying just do what you have to do, and based on what you're doing, we'll act accordingly.
• 8:46
  SPEAKER_00: In other words, we want you, the US market, to signal to us what to do instead of the other way around.
• 8:52
  SPEAKER_00: His philosophy is let the Fed set monetary policy and then allow markets to determine prices rather than constantly trying to guide investors, right?
• 9:04
  SPEAKER_00: He's less interventionist.
• 9:06
  SPEAKER_00: And there is an important lesson here for agents, and that is don't become obsessed with predicting every Fed meeting.
• 9:13
  SPEAKER_00: So if the Fed cuts rates, for example, and the 10-year treasury yield, a longer-term treasury, goes up, that's way more important for your customers who are getting mortgages than the Fed rate cut itself.
• 9:29
  SPEAKER_00: So if you thought things were interesting under Kevin Warsh, things get really, really interesting under the Treasury Secretary Scott Bessent.
• 9:36
  SPEAKER_00: And don't forget, the Treasury and the Federal Reserve are two different institutions with different jobs.
• 9:43
  SPEAKER_00: So again, Wars is essentially saying let markets function.
• 9:47
  SPEAKER_00: Let markets do what markets do.
• 9:49
  SPEAKER_00: Meanwhile, Besson has become more willing to step in when the Treasury market isn't behaving the way that the Treasury would like it to.
• 9:57
  SPEAKER_00: One example is the Treasury's bond buyback program.
• 10:02
  SPEAKER_00: So one thing they announced recently is that they would be buying back longer-term Treasury securities.
• 10:08
  SPEAKER_00: And again, the key phrase there is long-term.
• 10:11
  SPEAKER_00: That relates to mortgage rates.
• 10:13
  SPEAKER_00: So what does this really mean and why is it relevant?
• 10:15
  SPEAKER_00: First of all, it's important to understand the difference between the yield and the price.
• 10:21
  SPEAKER_00: And you can think of yield almost like that rate of return.
• 10:24
  SPEAKER_00: And you probably see this a lot if you read the New York Times or the Wall Street Journal or any business section of a publication, you'll see that when bond prices fall, yields rise.
• 10:36
  SPEAKER_00: Or when bond prices go up, yields go down.
• 10:39
  SPEAKER_00: There's that inverse relationship.
• 10:41
  SPEAKER_00: Imagine that you have a bond that pays you$40 a year and you paid$1,000 for that bond.
• 10:47
  SPEAKER_00: That means you have a 4% rate of return.
• 10:49
  SPEAKER_00: You're getting a 4% yield.
• 10:51
  SPEAKER_00: But let's say that bond is out there for$1,000 and no one wants to buy it.
• 10:56
  SPEAKER_00: So what happens when you're selling something that no one wants to buy at that price?
• 11:01
  SPEAKER_00: The price will drop.
• 11:02
  SPEAKER_00: So in this case, let's say it dropped from$1,000 to$800.
• 11:05
  SPEAKER_00: You're still getting that$40 a year in return.
• 11:11
  SPEAKER_00: But now, because it's off of an$800 bond, your rate of return is now 5% instead of 4%.
• 11:20
  SPEAKER_00: $40 a year divided by the$800,000 bond, that's$1%.
• 11:25
  SPEAKER_00: So in this example, this rate just went up from 4% to 5% because of lack of demand for that treasury.
• 11:34
  SPEAKER_00: So it's the same payment, it's a lower price and a higher rate.
• 11:38
  SPEAKER_00: So now think about it this way.
• 11:39
  SPEAKER_00: Think about it like housing.
• 11:41
  SPEAKER_00: If there are a lot of homes for sale and not enough buyers, sellers may need to lower their price to attract more buyers.
• 11:48
  SPEAKER_00: The bond market works the exact same way.
• 11:51
  SPEAKER_00: If there's a huge supply of treasuries and not enough demand, that price will have to drop to attract more buyers.
• 11:59
  SPEAKER_00: But here's that piece again.
• 12:01
  SPEAKER_00: When prices fall or bond prices fall, the yields go up.
• 12:06
  SPEAKER_00: And higher treasury yields can put upward pressure on mortgage rates.
• 12:11
  SPEAKER_00: So now let's go back to Scott Besson.
• 12:13
  SPEAKER_00: The treasury stepping in and buying back a lot of those bonds creates another buyer in the marketplace.
• 12:22
  SPEAKER_00: Going back to that real estate example, this is like a seller buying back their own properties that they have listed.
• 12:31
  SPEAKER_00: So by doing this, they can improve liquidity in the market and bring yields down.
• 12:39
  SPEAKER_00: And there's obviously a debate about this.
• 12:41
  SPEAKER_00: Besson says that these programs are about making sure that the Treasury is operating effectively.
• 12:48
  SPEAKER_00: Critics worry that if the Treasury becomes too focused on preventing long-term yields from arising, it starts looking less like market maintenance and more like interest rate management.
• 13:01
  SPEAKER_00: And that is the role of the Fed, not the Treasury.
• 13:05
  SPEAKER_00: So Warsh wants the Fed to take a step back and allow markets to play a bigger role in determining where long-term interest rates should be.
• 13:15
  SPEAKER_00: If investors decide they need a higher rate of return to own a 10-year treasury, then Warsh is saying let the market determine that.
• 13:24
  SPEAKER_00: Besson, on the other hand, has shown more of a liking to intervene in what's happening in the market when he deems or the Treasury deems that the Treasury isn't functioning properly.
• 13:37
  SPEAKER_00: And that's why the Treasury has increased their purchases of long-term bonds.
• 13:42
  SPEAKER_00: So just to sum this part up here, Wars is saying let the market determine where long-term rates should be.
• 13:49
  SPEAKER_00: But Besson is saying, yes, that's true, but sometimes the Treasury has to step in due to certain market conditions to ensure that the markets are functioning properly.
• 14:01
  SPEAKER_00: And the debate is over where that line should be drawn.
• 14:05
  SPEAKER_00: So are you simply making the Treasury work better, or are you starting to influence where longer term rates are?
• 14:12
  SPEAKER_00: And that is so important to us in real estate because these longer term rates, which aren't talked about enough, have more of an impact for us in real estate and in the mortgage world for our customers than the Fed funds rate.
• 14:26
  SPEAKER_00: And that's it.
• 14:27
  SPEAKER_00: So I know that that this can get a little dense, but hopefully I was able to break it down in a digestible way.
• 14:33
  SPEAKER_00: And I would recommend watching this a few times just so you can really understand and again confidently speak to your customers about this stuff.
• 14:41
  SPEAKER_00: Speaking of which, what are you hearing from your customers?
• 14:44
  SPEAKER_00: Did everything that I just outlined make sense to you?
• 14:48
  SPEAKER_00: Do you have questions on any of this?
• 14:50
  SPEAKER_00: If so, please email me at scottnadlerteam at ccm.com and I will see you on the next episode.
• 14:58
  SPEAKER_00: Bye, everyone.