It’s no surprise in this corner, but mortgage rates are up following the rate cut. Let’s discuss why.
Yesterday, ahead of the Fed’s rate cut, I emailed friends that I thought that yields on the long end of the yield curve would rise if the Fed cut by 50 basis points.
That is what happened. And yields at the long end of the curve are up again today so I expect mortgage rates will rise again tomorrow.
10-Year Note and 30-Year bond Yields
- 10-Year Yield Sep 17: 3.60%
- 10-Year Yield Sep 19: 3.74%
- 30-Year Yield Sep 17: 3.91%
- 30-Year Yield Sep 19: 4.08%
Yield on the 10-year note is up 14 basis points from September 17. Yield on the 30-year long bond is up 17 basis points from September 17.
Mortgage rates generally move in sync with the 10-year note not the Fed Funds Rate.
Yes! Mortgage Rates Rose
Matthew Graham at Mortgage News Daily wrote yesterday: Yes! Mortgage Rates Really Did Move HIGHER After The Fed Rate Cut
Interestingly enough, mortgage rates were already slightly higher than yesterday BEFORE the Fed announcement came out. The bonds that dictate mortgage rates are actually pointing to even higher rates tomorrow unless there’s a decent improvement overnight.
Here’s the kicker: nothing about today means much of anything for the trajectory for rates from here on out. There’s probably a slightly bigger risk that recent rate lows represent something of a floor until economic data makes a case that rates should go lower.
Two Things Happened
- Mortgage yields dropped in anticipation of Fed rate cuts.
- A 50-basis point cut was aggressive. The long end of the bond market is showing legitimate concerns the Fed is moving too fast, and it’s the long end of the curve that sets mortgage rates.
Should You Refinance Your Mortgage?
The Wall Street Journal reports Should You Refinance Your Mortgage? The Fed’s Big Cut Changed the Math
The headline is wrong. The Fed’s big cut did not change the math. Anticipation of a slowing economy and expected rate cuts are what changed the math.
If the Fed only cut 25 basis points it’s more likely mortgage rates would have dropped.
Headline errors aside, let’s look at the key question.
The 30-year fixed-rate mortgage averaged 6.09% this week, down from almost 8% in the fall of 2023, Freddie Mac said Thursday.
The decline in rates is offering many homeowners a chance to swap their current mortgage for one with a lower rate. Refi applications have more than doubled over the last seven weeks as mortgage rates fell, according to Fannie Mae.
With rates just above 6%, some 4.2 million borrowers could lower their rates by at least 0.75 percentage point in a refinancing, the most since early 2022, according to Intercontinental Exchange. The average refi candidate with a high credit score and significant equity in their home would save $299 a month by refinancing, ICE said.
Whether refinancing makes sense for you depends on how long it will take to recoup the upfront costs and start saving money.
If you can cut your mortgage rate by one-half percentage point or more, refinancing typically makes sense, said Jacob Channel, senior economist at LendingTree. But it is largely a timing question given rates are likely to keep falling and you may be able to cut your rate further if you wait.
Others may disagree, but I don’t recommend paying points to lower a mortgage rate ever. The reason is you have to make up those points when you refinance.
Why pay points over a long term, especially if you think you can refinance lower in short term. Also, I like to include all of the fees into the rate.
In retrospect, it was likely best to refinance a few days ago. But that is what I thought heading into the meeting.
If you can lower your payment and not have to pay any up front costs (or minimal costs) to do so, then go for it.
“The average refi candidate with a high credit score and significant equity in their home would save $299 a month by refinancing, ICE said.”
If so, they may have waited too long.
Dot Plot of Fed Projections Suggests 1-2 More Quarter-Point Cuts This Year
Yesterday, I commented Dot Plot of Fed Projections Suggests 1-2 More Quarter-Point Cuts This Year
Two Fed members project no more cuts this year. The median projection is a Fed Funds Rate of 4.4. percent at the end of the year.
As discussed above, further rate cuts may or may not mean anything to mortgage rates.
Fed Chair Jerome Powell said yesterday that rates are not going back to zero.
The secular low in bond yields and mortgage rates is now in the past. Factor in the fact that deficit spending is going to soar no matter who wins the election.
My conclusion is this slowdown in the rate of inflation is transitory.
But short term, a recession favors further declining yields at the short and long end of the curve, and that includes mortgage rates.
Jeff Green is busy getting deals on used EVS hahaha
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Some electric car brands are hemorrhaging value, with the worst losing as much as $600 a day. In this investigation, WIRED outlines which models to watch, why this is happening, and how you can game the market to your advantage.
https://www.wired.com/story/evs-are-losing-up-to-50-percent-of-their-value-in-one-year/
Mish if thats the case then how does the Fed miss that? Shouldn’t they have assumed that and only cut .25?
They have to be thinking they need to not only get Mortgage rates lower to jump start housing transfers and new construction, they alsoneed to jump start the refi game as that spurs they economy with home improvements and new cars and european vacations. And they did not do that, yet at least.
Fed said they had sworn off meddling in economy and wanted to return things back to the twin mandates based upon economic data.
With the 50 basis cut they have preempted the market once again and are meddling.
Initial market reaction is that Fed actions indicate a longer term move to reinflate. Long term bonds want more yield and Gold higher.
Powell could have just followed the market but he choose to Goose along with everyone else who went along, cepting one.
If it is not meddling then:
Was it a political response to pressure in an election year?
Was it to bail out some Banking system breakdown?
Was it based upon internal analysis the economy is on verge of failure?
There are three basic elements comprising long-term interest rates: (1) a “pure” rate; (2) a risk rate; (3) an inflation premium.
The pure rate presumably reflects the price required to induce lenders into parting with their money in a non-inflationary and risk-free situation.
The risk rate is measured by the yield curve in conjunction with the bond’s duration (counter-party credit quality, & repricing/liquidity, investment alternative, etc.).
The inflation premium is the expected interest rate differential added to compensate for the future rate-of-change in inflation.
The truth is that the inflation premium injected into long-term yields is not a constant function of the rate of inflation. The slope of real yields varies as a function of the supply and demand for loanable funds.
QE increases supply and reduces demand.
QT does the opposite.
And the gov’t is crowding out the private sector (reducing income and raising taxes).
We no longer leverage for ANYTHING, including Home Sales. HOW, we downsized and pay cash. When we did have a small mortgage on our Mountain Home, with a $99,000 Balance, we had a variable rate (back in the 2000’s) and the adjustments never made sense to then re finance, as Mish suggests and we finally just paid it off as I could not justify paying ANY interest.
Premature, bad analysis, bad inputs. Mortgage rates don’t always follow 10yT, this is a myth. During inversion, rates follow much shorter dated due to convexity. Opposite is true during steep YC , where mortgages converge to 30yT rate. Today, new mortgages much more closely correlated to FFR. old mortgages tracking closer to 7-10yT because duration is similar.
Mortgage market is in disruption due to many factors – servicers not willing to pay up for rights due to refi risk, low volume increasing market inefficiency, Fed+treasury yield curve control making convexity hedging different, liquidity funding issues… Spread is too high and higher 10yT plus uninversion will eventually converge 10y and MBS rates closer to historical norms.
Besides, using unofficial average MBS rates one day after FOMC is just lazy analysis. Is this Bankrare? Zillow? Where?
– The WSJ reports: Should you refinance?
> Based on what? Simply because the % fell by a little. They are looking for the “Fools Rush In” theory, that won’t happen this time, because it takes money to make money in this situation, and most people are broke.
– Whether refinancing makes sense for you depends on how long it will take to recoup the upfront costs and start saving money.
> Exactly, and we’ll said Mish!
– If you can cut your mortgage rate by one-half percentage point or more, refinancing typically makes sense.
> Based on what exactly? That is not necessarily the case at all!! There are way too many factors to get into here, but that’s a fools errand to assume that, just because somebody said so…
– If you can lower your payment and not have to pay any up front costs (or minimal costs) to do so, then go for it.
> I agree, but way less likely in todays markets, I would guess, than ever before in my lifetime (40+ years) of using Banks. But I could be wrong on that.
– Fed Chair Jerome Powell said yesterday that rates are not going back to zero.
> Who can possibly believe OR rely on anything this man spews out of his mouth? I mean even Himself…
– The secular low in bond yields and mortgage rates is now in the past. Factor in the fact that deficit spending is going to soar no matter who wins the election.
> The Deficit Spending is going to “Crush” any chance of a turnaround anytime soon IMO…
Fed cuts rates but stock and housing market yawn. Makes one wonder if the fed still has any influence.
Go back and check: the S&P, etc hit new highs. NOT DRAMATICALLY, but new highs is no a “yawn” situation. The market may well continue to levitate slowly. I have a $6200 S&P500 Target in my analysis, using LONG-TERM MM’s.
i would gave up borrowing money for anything including home purchases in my early 40s. a huge mistake from 20s to 40s. so much better to never have a note payment on anything including shelter or even investment property. if i cannot buy it i don’t borrow to own it. but to each her own.
This has been our approach since I was 40 and I am now over 70. WE SIMPLY DO NOT WANT TO OWN SOMETHING ahead of our Cash. We do not borrow, period and our kids are doing the same. They live MORE modestly and pay cash for AUTO’s, Homes, Clothing, etc. They are not fancy diners, either I can Congratulate ME for influencing them. One of then is 50 and is about to retired early because this oldest one is a saver! I am proud of him.
Perhaps, the mortgage market is able to see through the bogus inflation numbers that the fed appears to be relying on as well many investors.
And the bogus job creation numbers that are primarily a result of deaths and severe injuries caused by covid shots.
Inconceivable!
Fedex down $30 share (-10%) after bad earnings. Yikes!…..JPow cut just in time.
Tom Hanks could’ve seen that coming…
https://www.fedex.com/en-us/about/diversity-inclusion.html
What’s your point? DEI exists because there aren’t enough people (the whole demographic death spiral) so the brain trust implemented this for the racists and bigots to understand that they’re being replaced.
There is no way to undo the demographic death spiral. Median age of American female is 40, not exactly child bearing age.
Everything happens for a reason…..and then you can profit from it.
Talked to some Fed Ex customers lately? I have. While it is a small sample, it is clear the service is diminishing in quality. Drivers don’t care. Parcels get lost. Wrong addresses. They’ve been videoed throwing parcels, and NOT fired.
As you say, everything happens for a reason; good and bad.
BTW, your reasoning reeks. DEI is NOT about ‘death spirals’ although it can cause one.
Oh look, Nike shares up 10% after hours.
https://about.nike.com/en/impact/focus-areas/diversity-equity-inclusion
I don’t know anything about NIke. Never bought their shares, or worn their overpriced shoes.
With ‘Wilson’…his volleyball of a head companion?
BTW, Fed Ex is also a bell-weather company. Demand is down. Yet another clue as to what lies ahead. Zero has an interesting commentary:
https://www.zerohedge.com/markets/fedex-plunges-after-missing-across-board-cutting-guidance-weaker-demand-trends
Millennial that moved out of my mom’s basement last year into a 1br $1,200 rental unit here making just above minimum wage with my small family while I watch all the illegals get free hand outs. Thanks FED and Biden for making it impossible to ever own a home. I hope it all crashes and burns.
“The average refi candidate with a high credit score and significant equity in their home would save $299 a month by refinancing, ICE said”.
This translates into $107,000 over the life of a 30 year mortgage. Rates matter so much more than Kamala’s measly 25k.
The 25k is really a gift to the home seller. If that ever is enacted all home prices will go up by 25k. Nice work Camela
IMO the President (Whoever wins) can do very little to help lower house prices. They don’t control rates, they don’t control zoning and they don’t control all cash offers from hedge funds. The 25K would help if it is offer on new homes mostly because builders will try to capture as much of that by building more (it does not matter if they pass that the the buyer). That incentive should increase supply and therefore lower prices in the long run. The other thing would be taxing head funds that invest on purchasing big lots of houses to put them up as rentals (They tend to sit empty if they don’t get tenants). That will need congress so hard to do.
At the end of the day it is up to the counties to provide incentives to builders and regulate the Airbnbs so that the new supply is not wasted.
Insurance is a different matter specially in CA and FL since it is regulated at the state level.
Deporting 10 of millions of illegals will lower housing costs.
Not if they can frame or hang drywall; or cook some tacos for those who do. 🙂
Because before we had 10 million illegals flood the country we were not building houses and starving for tacos?
You have waaayyyyy too much faith in government and you give them waayyyy too much control. They shouldn’t be extorting the taxpayer for that $25K (or for student loans or immigrants or reparations or countless other things they blow money on) … but if they do … it should be across the board. I could see one or 2 of my rentals going into the homeowner space (I wouldn’t evict anyone for it … but next turnover could easily become a sale as prices will go up via simple rules of supply and demand).
Yes, if that goes in, my next rental turnover will almost definitely be a sale. Assuming she doesn’t get the marxist cap gains rates that she’s looking for. Cap gains is already a scam as, if it’s not adjusted for inflation … then you get to pay real taxes on fake money
The average life of a mortgage is likely less than, or equal to the holding period of the house, assuming there is no refinancing. Years ago, the average ‘life’ used to be about 7 years. BTW, I haven’t needed to do the calculation on financing/refinancing since the last property I financed, so I’m out of practice–it’s basically a present value calculation.
The point is, simple rules of thumb don’t always give the right answer. Done properly, it is actually pretty complex, considering closing costs, discount points, fixed or variable rate, mortgage term, and interest rate projections. I also refused to include property taxes etc in the mortgage. Commercial mortgages are more complex with prepayment penalties, etc, but the same approach.
During the high-interest rate 80s, I refi’d a property as interest rates declined from about 18%, taking advantage of variable rates, and then fixed rates (for houses) as the economy stabilized. Given the switching was every other year or so as rates came down, I never paid discount points. They were a profit center for the bank, not the borrower.
Regarding Kamal’s $25K, one reason might be to provide a deposit for non-savers, luring them into houses they can’t afford. In my experience, if the borrower can’t save a reasonable deposit, they probably cannot afford the mortgage.
Closer to 10 years now
Makes sense with the high prices and interest rates. It was easier to be upwardly mobile when prices were 80% lower.
Don’t forget the near immediate value of the $25k proposal for buying voters in November.