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024 - The Fed Held Rates Steady. Here's What to Tell Your Buyers · The Loan Daddy Podcast

• 0:00
  SPEAKER_00: Having this type of information and understanding what is really happening and what this means, and that the Fed are raising or lowering their rate, it is not, does not directly correlate with mortgage rates, will lead to a lot more productive conversations with your buyers.
• 0:16
  SPEAKER_00: What's up everybody, and welcome to the Lone Daddy Podcast, episode 24.
• 0:20
  SPEAKER_00: This is a bit of a different episode because uh about within the last hour or so, the Fed came out and made their rate announcement, and then that was followed by a press conference by the Fed chairman Kevin Walsh.
• 0:31
  SPEAKER_00: And I want to react to it and talk about what was discussed during that press conference and ultimately add some color to it, and then talk about how us in the real estate business how we can use this information to speak to our prospective buyers, okay?
• 0:47
  SPEAKER_00: So to start, the Fed held rates steady, so they remain at 3.75 to 4%.
• 0:54
  SPEAKER_00: One thing we've talked about in the past is the Fed rate is a suggested rate that banks charge each other, and it's for 24 hours.
• 1:02
  SPEAKER_00: That's important to know because there's not a direct correlation between the Fed rate and mortgage rates.
• 1:09
  SPEAKER_00: Mortgage rates typically are for 30 years.
• 1:11
  SPEAKER_00: So this Fed rate is for 24 hours.
• 1:13
  SPEAKER_00: It's different.
• 1:14
  SPEAKER_00: But I do say there's an indirect correlation.
• 1:17
  SPEAKER_00: There's still a correlation there.
• 1:19
  SPEAKER_00: So as the Fed rates increase or decrease long term, you will see that mortgage rates will follow that same trend.
• 1:28
  SPEAKER_00: It just will take time.
• 1:29
  SPEAKER_00: So in this case, they did keep rates steady, which was expected.
• 1:34
  SPEAKER_00: This didn't catch anyone off guard.
• 1:36
  SPEAKER_00: But oftentimes, which what is the case with this is the press conference that follows tends to move the markets one way or another more so than the announcement itself.
• 1:47
  SPEAKER_00: And because the market wants to see how is the Fed interpreting what's happening in the economy and everything with markets, whether it's the bottom market, whether it's the stock market, is forward-looking.
• 2:00
  SPEAKER_00: So how are they projecting things out?
• 2:02
  SPEAKER_00: And the three main things that the markets and the Fed is talking about is oil, which is related to what's happening in the war and geopolitical issues, inflation, and AI.
• 2:14
  SPEAKER_00: And AI is one of the biggest drivers, if not the biggest driver of equity markets and the stock market right now.
• 2:22
  SPEAKER_00: And there's so much talk with AI as far as how it's going to impact the labor market.
• 2:27
  SPEAKER_00: It's still early.
• 2:28
  SPEAKER_00: There's still so much that most people don't know projecting out what it's going to do, but that's a major factor that is being talked about.
• 2:37
  SPEAKER_00: Now, out of those three, the main thing that I want to talk about is inflation.
• 2:42
  SPEAKER_00: Inflation is the number one driver of mortgage rates.
• 2:46
  SPEAKER_00: And with this Fed announcement, there are 12 voting members.
• 2:50
  SPEAKER_00: The vote was 10 to 2, meaning 10 Fed members voted to keep rates steady.
• 2:55
  SPEAKER_00: And there were two Fed members, that was Beth Hammock and Lisa Cook.
• 2:58
  SPEAKER_00: They uh dissented from that vote.
• 3:01
  SPEAKER_00: Their suggestion was to raise rates by 0.25%.
• 3:06
  SPEAKER_00: Now, the reason they're saying that, and we're gonna go into the the press conference as well, as far as what Kevin Warsh spoke about, the reason that they would want to raise rates is because they feel that inflation is way too high.
• 3:18
  SPEAKER_00: And Kevin Walsh did echo that sentiment, but not in such a strong manner.
• 3:25
  SPEAKER_00: Essentially, what he's saying is yes, inflation is higher than where we want it to be.
• 3:30
  SPEAKER_00: With that being said, we're taking every possible measure available to us to lower inflation.
• 3:36
  SPEAKER_00: So the market seemed to like that initially when he was talking about that, because he's just again reiterating to the public that the Fed's main goal is to bring inflation down to 2% or below.
• 3:52
  SPEAKER_00: And inflation is is is that hidden tax on us.
• 3:55
  SPEAKER_00: Inflation is defined as too many dollars chasing too few goods.
• 4:00
  SPEAKER_00: And if inflation is going up, it's deteriorating the money that we're earning.
• 4:06
  SPEAKER_00: And why is this so important in the mortgage space and with mortgage rates?
• 4:11
  SPEAKER_00: The reason for it is because if I'm a bank and I'm lending someone money and that person is paying me$1,000 a month and inflation is going up, well, that$1,000 a month is no longer going as far as it once did.
• 4:24
  SPEAKER_00: So that means for the next person that we charge money to, we need to we need to charge them$1,200 a month.
• 4:29
  SPEAKER_00: And if inflation continues to rise even further, we need to charge that third person$1,400 a month and so forth.
• 4:35
  SPEAKER_00: You can also think about this as if an employee gets that standard raise at the end of the year or the beginning of the following year for 3%, their salary just increased by 3%, but inflation is at 3%, they essentially did not get a raise.
• 4:50
  SPEAKER_00: Their income is essentially flat in that hypothetical.
• 4:54
  SPEAKER_00: So this is why inflation is so important for the economy overall.
• 4:59
  SPEAKER_00: So as inflation rises, and as you see economic data that comes out that would lead that that would lead someone to believe that this is inflationary.
• 5:08
  SPEAKER_00: For example, if a robust jobs report comes out and it shows that there were a lot more jobs created than anyone anticipated, that would not be a good thing for mortgage rates in the short term because that's inflationary.
• 5:20
  SPEAKER_00: And this is one of those misconceptions in the market, and this is why it's so important that we understand this so we can communicate it to our clients that if the Fed were to raise rates, raise their rate, you could see mortgage rates drop in that instance.
• 5:38
  SPEAKER_00: It doesn't always happen, but it certainly can happen.
• 5:41
  SPEAKER_00: The reason for it is because if you're raising rates, you are aggressively fighting inflation.
• 5:47
  SPEAKER_00: And the mortgage market and the bond market would like that, and you could see mortgage rates drop.
• 5:51
  SPEAKER_00: On the flip side of that, if the Fed were to lower rates, lowering rates that means that people are gonna spend a lot more money, they're gonna borrow money, they're gonna spend a lot more money, and that could drive mortgage, that can drive inflation higher, which would drive mortgage rates higher as well.
• 6:06
  SPEAKER_00: During the press conference, there was a question asked why didn't the Fed chairman, why didn't the Fed vote to raise rates now if they're aggressively fighting inflation?
• 6:18
  SPEAKER_00: And it was a great question, and you know there are theories out there, there is the the the midterm elections coming up in six days, so it's possible that they want to wait until the elections pass.
• 6:29
  SPEAKER_00: And I don't mean that in a political sense, meaning they're doing it for political purposes to appease one party or another.
• 6:38
  SPEAKER_00: I mean in the sense of if there are changes as a result of the midterm elections, policies could change, which can impact the economy, which the Fed wants to see.
• 6:50
  SPEAKER_00: Furthermore, there's another meeting happening on December 8th.
• 6:54
  SPEAKER_00: So there's a lot of economic data coming out between now and then.
• 6:59
  SPEAKER_00: So it makes sense the Fed would want to pump the brakes a little bit and see what that data shows and then make a decision from that point on.
• 7:08
  SPEAKER_00: Okay, so for us in the real estate space, how can we use this information to better ourselves and better communicate to buyers?
• 7:18
  SPEAKER_00: So, number one, and this is something we've talked about in the past, most of the news out there regarding real estate and regarding Fed announcements like this are going to be negative.
• 7:27
  SPEAKER_00: And when you have a prospective buyer who's out there in the market and they're shopping and they're looking at properties and they're going to open houses, their mind is very attuned to information and real estate data.
• 7:38
  SPEAKER_00: They're looking at it.
• 7:40
  SPEAKER_00: It's being fed to them.
• 7:42
  SPEAKER_00: If you go on Street Easy or Zillow, your algorithm's gonna know that you're looking at properties and they're gonna feed you information.
• 7:48
  SPEAKER_00: Most of what they're gonna feed you is going to be negative.
• 7:51
  SPEAKER_00: We know that because you're gonna get a lot more clicks and more views as a news outlet when things are negative versus if they're positive.
• 7:59
  SPEAKER_00: So these are things that we're combating.
• 8:00
  SPEAKER_00: So getting ahead of this and being aware of what's happening separates you from so many other people who are out there.
• 8:06
  SPEAKER_00: And you know, along those same lines, there's so much misinformation out there.
• 8:10
  SPEAKER_00: And it's it's interesting because right before the Fed chairman spoke, I was watching CNBC and there was a panel discussion, and one of the anchors proposed a hypothetical.
• 8:19
  SPEAKER_00: And he said, if the Fed announced today that they were going to drop their rate by 1%, what do you think would happen to the 10-year Treasury?
• 8:30
  SPEAKER_00: And the 10-year treasury is important because that's more of a long-term rate, not like the Fed rate.
• 8:35
  SPEAKER_00: It's the it's it's a long-term rate, which more correlates with a 30-year fixed mortgage.
• 8:40
  SPEAKER_00: So he said if the Fed raised their rate by 1%, what would happen to the 10-year Treasury and in turn mortgage rates?
• 8:47
  SPEAKER_00: And the correct consensus amongst the panel was the 10-year treasury would go up, meaning mortgage rates would rise.
• 8:54
  SPEAKER_00: So you could have clients in a situation like this and say, I'm waiting for the Fed to lower rates.
• 8:59
  SPEAKER_00: I'm waiting for them to lower their rate.
• 9:02
  SPEAKER_00: How are you going to respond to that?
• 9:03
  SPEAKER_00: Right?
• 9:04
  SPEAKER_00: Having this type of information and understanding what is really happening and what this means, and that the Fed raising or lowering their rate, it does not directly correlate with mortgage rates, will lead to a lot more productive conversations with your buyers.
• 9:20
  SPEAKER_00: Also, I think in times like this, it's so important for people to understand that for every 1% drop in rate, that deems five million people eligible for a mortgage.
• 9:33
  SPEAKER_00: I'll say that again.
• 9:34
  SPEAKER_00: For every time rates drop by 1%, 5 million people are eligible for a mortgage.
• 9:41
  SPEAKER_00: They will qualify for a loan.
• 9:43
  SPEAKER_00: This doesn't mean that immediately 5 million people are running into the market to buy a home.
• 9:47
  SPEAKER_00: But what it does mean, it's going to create a lot more competition.
• 9:50
  SPEAKER_00: So when you have someone saying that they're waiting for rates to drop, well, so are so many other people.
• 9:55
  SPEAKER_00: And when that happens, what's going to happen?
• 9:58
  SPEAKER_00: What's going to happen is that the home prices are going to rise.
• 10:01
  SPEAKER_00: It's natural.
• 10:02
  SPEAKER_00: It's important that we communicate that as well to buyers.
• 10:06
  SPEAKER_00: Another message that's important is we need to reiterate to buyers how important it is to lock in the price of the property.
• 10:17
  SPEAKER_00: That's way more important than the rate.
• 10:19
  SPEAKER_00: With an interest rate, you can always refinance later.
• 10:22
  SPEAKER_00: You can recast your payment later to lower that monthly payment.
• 10:27
  SPEAKER_00: Whenever you're buying a property, you want to lock in that price of the property before the prices increase.
• 10:34
  SPEAKER_00: That's so, so important and so valuable for us to be able to communicate that.
• 10:39
  SPEAKER_00: Another thing is adjustable rate mortgages have been really attractive in a market like this.
• 10:44
  SPEAKER_00: In some instances, there could be a 1% difference between a standard 30-year fixed and an adjustable rate mortgage.
• 10:52
  SPEAKER_00: It's not a one size fits all.
• 10:53
  SPEAKER_00: It doesn't mean that everyone is eligible or qualifies for an adjustable rate mortgage or it's the right program for every buyer.
• 11:01
  SPEAKER_00: But it's something for you to know.
• 11:02
  SPEAKER_00: It's something for you to think about.
• 11:03
  SPEAKER_00: And when someone says that rates are too high, and I say this all the time and I will always say it, a great response to that when someone says that rates are too high, the response is, what do you need rates to be?
• 11:15
  SPEAKER_00: And let them pause and think about that.
• 11:17
  SPEAKER_00: Where do they need the rate to be?
• 11:18
  SPEAKER_00: And in turn, where do they need their monthly payment to be?
• 11:21
  SPEAKER_00: And oftentimes when they say where they want the rate to be, there are adjustable rate mortgages that are at those rates right now.
• 11:28
  SPEAKER_00: And those are great options for most clients.
• 11:33
  SPEAKER_00: And the reason I'll say that is because most people in any market, and these statistics have held true for over 120 years, most people will refinance, payoff, or sell every six and a half to seven years.
• 11:46
  SPEAKER_00: That's so important for buyers to know.
• 11:50
  SPEAKER_00: And it shows the value of an adjustable rate mortgage when that spread, that differential between a 30-year fix and ARM is so wide.
• 11:58
  SPEAKER_00: So if there's a 1% difference there, and statistically speaking, you're probably going to be in that property for five to 10 years anyway, this might be or could be the perfect program for you or for your buyer.
• 12:13
  SPEAKER_00: And the last thing that I think is so important for agents and for buyers to be aware of right now is temporary buy downs.
• 12:21
  SPEAKER_00: These are really great programs and they become more popular during times of interest rate volatility.
• 12:30
  SPEAKER_00: And there are different kinds of temporary buy downs.
• 12:33
  SPEAKER_00: Maybe we'll do a separate episode and we can go through the different kinds.
• 12:37
  SPEAKER_00: But the most common temporary buy down option is what's called a two-one buy down.
• 12:41
  SPEAKER_00: And the way that it works is let's say, hypothetically speaking, mortgage rates are at 7%.
• 12:46
  SPEAKER_00: For the first year of the loan, that client's rate will be 5%.
• 12:50
  SPEAKER_00: For the second year of that loan, the client's rate will be 6%.
• 12:53
  SPEAKER_00: And the third year of the loan, the rate will go up to the original rate of 7%.
• 12:58
  SPEAKER_00: Now, let's say the difference between 7% and 5% for the year is$10,000.
• 13:06
  SPEAKER_00: And then the difference between 7% and 6% for the year is$5,000.
• 13:11
  SPEAKER_00: So$10,000 and$5,000 is$15,000.
• 13:14
  SPEAKER_00: You would need the seller to give you a credit or a concession of$15,000 for you to be eligible for this program.
• 13:23
  SPEAKER_00: Now, why would a seller do this?
• 13:25
  SPEAKER_00: Now, by the way, it could be done by a developer or a builder as well.
• 13:29
  SPEAKER_00: But why would they do this?
• 13:31
  SPEAKER_00: They would do it in instances where their property is not selling.
• 13:35
  SPEAKER_00: It's been on the market for 200 days, 250 days, we're getting into the colder months, they're getting desperate that they want to sell.
• 13:43
  SPEAKER_00: You could propose or make your offer and say, I want to get a fifth in this hypothetical, I want to get a$15,000 seller credit and take advantage of a 2-1 temporary buy down to lower my rate for the first two years of this loan.
• 13:56
  SPEAKER_00: If you're a seller, again, and your property's not selling, it's worth a conversation.
• 14:01
  SPEAKER_00: So these are great programs.
• 14:03
  SPEAKER_00: Again, there's other ones where you can do a 1.0 buy down where it's 1% lower for the first year.
• 14:07
  SPEAKER_00: You can do a 321 buy down where it's 3% lower for the first year, 2% lower for the second year, and then 1% lower for the third year.
• 14:16
  SPEAKER_00: If you have questions on that, please feel free to reach out to us.
• 14:19
  SPEAKER_00: Scott NadlerTeam at ccm.com.
• 14:22
  SPEAKER_00: You can also DM me and I can go through different scenarios for you and your buyers to see what would make the most sense.
• 14:29
  SPEAKER_00: That's it.
• 14:30
  SPEAKER_00: That's all that I have for today.
• 14:32
  SPEAKER_00: I think being aware of what's happening in the market and understanding the importance of these Fed meetings is important for you to know and important for you to be able to communicate what's happening to your buyers and to your sellers.
• 14:45
  SPEAKER_00: Questions on any of this or questions that you're getting from your buyers that you're struggling to answer or being able to communicate to them, reach out to us, DM us, and we will help you navigate those conversations.
• 14:56
  SPEAKER_00: Thank you so much, and uh, we'll see you on the next episode.
• 14:58
  SPEAKER_00: Thanks, bye.