The Fed’s Rate Cut and It’s impact on Mortgage Rates​​

Welcome to this Monday morning, it's Monday, what's today, the 23rd. Great to be on with everybody back. Kate did a phenomenal job at everything the KCM research team has collected on projections for next year. And this week, we are sort of going to kind of unpack what the Fed did last week. You know, I think it's probably one of the biggest, you know, decisions that we've seen in quite a while. And we're gonna really kind of dive deep into that. But I got a chance over the last several weeks to see so many great KCM supporters and friends and folks that are out there that we don't get a chance to see at so many different events and gatherings. You know, we start this week or every week off talking about what's most important in real estate. And we're going to do that this week and really kind of talk through the impact of the Fed's decision, what that means, what that means going forward, so that, you know, you can explain what is happening in the market to those that you serve. So, you know, our topic today is everything about the Fed's rate cut and its impact on mortgage rates. You know, we saw the Fed come in and cut the Fed funds rate last Wednesday, a 50 basis point cut a little bit more than what was maybe expected by the market. And then we actually saw mortgage rates kind of creep up. But what I want to do for the next few minutes is I want to take a step back. I want to kind of show you what set this up. And then I'm going to talk about something that very few people are talking about. And then what we're watching at KCM through this journey, what are the sort of indicators that we want to stay focused on? We're going to do that. You know, if you're a KCM member, you're locked in on that. If you're not a KCM member, I'm going to go ahead and encourage you right now to start a free trial, because you're going to want, you know, as we go through this sort of transition in our business, you're going to want to stay connected to a source of knowledge. But we'll talk about what we're watching. And then really, I want to give you something that I think is going to be very sort of enlightening for everybody in our business. And that is, what will this then mean for folks that are thinking about selling? You know, how does this unlock inventory, folks that are thinking about buying? And then ultimately, I'll wrap up with how do you share this message and be the educator? I believe over the next, call it 100 days between here and the end of the year, those that are out in the market that are the educator will win in 2025. You know, we're talking about starting, you know, finishing this year strong and starting next year even stronger. Now is the time to do that. But, you know, all of this with the Fed was set up just a few weeks ago in Jackson Hole, Wyoming, when Fed Chairman Powell said this, he said, the time has come for policy to adjust. Okay, so the Fed meets out in Jackson Hole and sort of, you know, is there, then they come to their meeting in September. But he said, look, we're going to do something different. They cut the Fed funds rate by 50 basis points. Now, here's what's important to remember. The Fed does not control mortgage rates. The Fed funds rate is the intraday, the overnight lending rate that banks charge one another to borrow money. Okay, now it has an impact on mortgage rates, but you see everybody out there going, the Fed cut rates, and we actually don't see that impact. A lot of the impact of the Fed cut last week was already priced into the market. You know, still sitting at a great place in the low sixes on the average 30 year fixed right now. But everything that we do, not only at KCM, but on the deep dive and everything that you see from KCM is for this reason, this core sort of belief that most agents know what's happening. The good ones can understand it and, you know, kind of go, okay, I get it and I understand, but only the great agents can explain it. And that's what our time together this morning is. I want to give you the words to explain it. And I'm going to encourage you, if you are thinking about how do I explain this, go back and watch this deep dive again, take notes, take even, you know, pictures of the screenshots maybe as we go through it, because you can explain what is happening in the market to those that you serve. And I'm not suggesting that everybody on the call that it's a great agent across the country needs to become this expert in the secondary mortgage market, what the Fed's doing and all that, not saying that at all. But what I'm saying is we have an understanding of what's going on. So the Fed comes in, they say it's time for policy to adjust. They make a 50 basis point cut last Wednesday. Why are they doing that? There's two specific reasons. There's two, there's a dual mandate the Fed has, which is price stability and maximum employment, right? We want prices to be stable. And oh, by the way, over the last couple of years, prices have been anything but stable, gone to the grocery store. We know that, we know things have gotten more expensive. And we know right now, unemployment has slightly risen. And so if you want to see that, like, what does that look like graphically? This is it right here. This is a look at inflation going all the way back to the beginning of 2020. You see the rise there and sort of coming back down to this target of 2%. The Fed's saying, okay, we're heading in that direction. We see progress, and we feel like we can make a cut in the Fed funds rate. They also see unemployment ticking up slightly. You go back to the unemployment shooting up during the pandemic and sort of coming down and sort of riding this wave and maybe starting to tick up. Now the conversation is going to be, can the Fed now engineer what they're going to call a soft landing, not end up, the economy end up in a recession, but sort of have this Goldilocks economy, not too hot, not too cold, and proceed forward. And you better believe that housing is a big part of that. And housing has been a big contributor over the last several years to inflation, the rise in the average home price across the country. And certainly everybody, I think on the call is very familiar with that. But the Fed takes this action because of the things they're seeing in the economy, creates this news. And we wonder, okay, what is that going to mean for mortgage rates going ahead? I want to give that to you. What do we believe, based on what we're seeing will be in front of us. First thing I would say, this Reuters study, we've covered this several times, but it's been updated. Most economists believe there will be three rate cuts this year. We just saw the first one last week. And so two more, and that could be two rate cuts this year, that could be three, but here's the important point. We're not talking about if they will, we're talking about right now how many there will be. And there are a couple of things that I will guarantee you. One, generally speaking, and Laura Tune said it very well, the Fed's half point cut decision was the beginning of six to eight rounds of further cuts well into 2025. The very next cut will occur after the presidential election. The justification is cooling inflation in recent months and lighter job gains, meaning jobs aren't growing at the point that they'd like them to see that. So you have a couple, two or three rate cuts this year, more rate cuts next year, and it starts to create this path of what's ahead. Now, this will have an impact on the 30-year fixed mortgage rate. And if you look at what forecasters are saying, every one of the forecasters that we follow here at Keeping Current Matters agrees on this point, they will come down over the next six, 12, 18 months. Now, I've said this many, many times, the one thing I'll guarantee you, if you try to predict mortgage rates, you will be wrong. And I'll say this too, I mentioned being on the road over the last several weeks and being on a lot of planes. And I was on a plane on Friday and we were coming in and I heard something I'd never heard before. And it was this, we started to come down and the plane started to shake a little bit, which is not unusual. And these big planes are sort of designed to handle that. But the plane started to shake and the pilot came on real quick and he said, everybody put your seatbelt on low and tight. And I thought, I could have used not hearing that on this flight. But here's what I will guarantee you, the ride down will be a bumpy ride. It will be volatile, we'll see some good rates, we'll see rates pop up, but it will not be a straight line. That is one thing that's becoming very, very clear. There will be incoming economic data, which will cause the Fed to say, maybe we will, maybe we won't, but it will be a volatile market. Here's my coaching. The reason for that is we may see times where you see somebody who's buying, they have an opportunity to snag a great rate, take it, don't get greedy. Don't say, well, we might get this next week because we're going to see a market that I believe is volatile. And forecasters say, look, this is the trajectory that we're on is down. And so we want to keep that in mind. The thing that I mentioned before, Fed does not control the mortgage rate. They don't do that. You want to stay consistent with that, but it's policy decisions weave into the broader economic picture and inform and influence borrowing costs. So one of the things that we're watching as KCM, our team, our research team on this topic, and I'll give this to you. There are things that you want to be aware of. And again, we're going to stay on top of it for you. But the first thing is the 10-year treasury yield. So if you know anything about the 10-year, over the last 50 years, the 30-year fixed mortgage rate in the 10-year treasury have had sort of this symbiotic relationship. They move in unison. And so last week, when the Fed came out and made their decision, we were watching the 10-year treasury, and the 10-year starts to go up a little bit. A lot of reasons for that, sort of the market going, is this really what's going to happen? And sort of some dissension in some of the Fed leaders saying, we don't know if we should have done that. So some economic pieces that weigh into that. I talked about how this rate cut was already priced into the mortgage market. But we want to watch the 10-year. What's happening there? Is it rising? Is it falling? Because that's going to be an indicator of where this mortgage market is heading. Second thing we want to watch is the spread. You see there, the average spread of 175 basis points, or 1.75%. Maybe it's an easy way to remember that. But we want to watch the spread between the 10-year and the 30-year fix. And what we know is, over the last couple of years, this is a look going back to the beginning of last year, the spread has been higher than the historical average. If you see on the left side of this graphic, 270-ish basis points was the height back in the beginning of 2023. And I always think of the spread as a measure of fear at the market. It's a measure of what's going to happen, where are we heading. And we're coming out of two years of this challenging mortgage market, which has contributed to affordability being at its lowest point in the last 20 or so years, rising costs, rising prices of homes. It's made it much more affordable to go out and buy. But as that spread starts to come down, we'll see even more relief in the mortgage market. And we've already seen a little bit of a drop in the spread since last year. And that's a good thing. So much of the 10-year, we're watching the spread. And even Rick Sharga, who love Rick and does some phenomenal work, he said this, if the gap between yields on the 10-year and the 30-year fixed mortgage rate were back at a normal level, we'd see mortgage rates somewhere between 5.2 and 5.6. So let me sort of paint this picture for you. We're seeing the Fed take action. We know the things that we want to watch. And so there's the old saying, Bill Harney always says this to me, the map will appear when the car's in motion. The map is starting to appear for what the next six to 12 months will look like based on the Fed's action. Now, will we get down to the historic norm and the spread? I don't know about that. But we'll come off of where it's been. We'll definitely see relief in the mortgage market. And we're already seeing that, right? Since the beginning of July, started out at call it 7%. Now we're knocking on the door right at 6%. So we're already seeing that progress. And I mentioned over the next 100 days between here and the end of the year, that will set up the 2025 market. And I believe right now, sharing information of what's happened to the average mortgage payment in your area, the savings that people can now have will be critically important. I can tell you, anything that we share as Keeping Current Matters on savings and borrowing costs gets so many shares, so many likes, because it's what people want to hear. They're interested in that now, right? We talked about several months ago that 70% of potential buyers abandoned their search because of affordability of last year. They just said, you know what, it's gotten too expensive. It's not something that we can do anymore or we want to do anymore or whatever the reason is. And I'll just give you a quick example here. If you go back to April of this year, compared to now, the savings in the average mortgage payment in this country have come down $365. That's the average on a loan amount of about $400,000. And you may be in a market where it's a multiple of that, it's twice that. But that's what I want to be talking about. I want to be showing people, hey, if you're somebody that abandoned your search because of that, and I'm going to get into a couple of surveys that our team found that are phenomenal about what this means for sellers and buyers. But this is the impact of the Fed's decision. This is the impact of the trajectory that we're on. And I would think as we go through the next several months, you're going to want to do that. And I'll tell you, one thing that's coming up is last year in October, mortgage rates peaked. You have a great chance to say, hey, a year ago, this is what the average mortgage payment where we're at was, and now here's what it is. And you'll get some people's attention, I will guarantee you that. I think that it causes many people to say, well, we'll wait. Business Insider said this, waiting until next spring or summer should also give more inventory to choose from, but you'll likely be up against greater competition since it's peak buying season. This will bring more people into the market for sure. There is an opportunity right now for people that are thinking about doing something to take advantage of this market, take advantage of more inventory in most markets out there and make a decision. I mentioned a couple of surveys that I want to cover real quick as we wrap up this deep dive that I think are probably the most important pieces of what we'll talk about today. And the question on many agents' minds, I think it's a question in our business is what is it going to take to unlock inventory? There's so many homeowners across the country that have a preferred interest rate and good for them, preferred mortgage rate on their home. And they're like, we're good, we're not going to do anything. But the question is, what would it take for them to do something? Let's cover these real quick. Bankrate did a study, which mortgage rate at any would you need to be comfortable doing something, selling your home this year? This is the first one for sellers. 35% of potential sellers set a rate less than 6% would get me interested. Now that's important. We know there are a ton of people that are on the sidelines right now that decided not to sell, decided not to make a decision. The 35% said we get below six and then I'm going to do something. Another 30% said we get below five and I'm interested. Now, the question on the table is in the next 12 months, will we get there? I don't know. I think that's a tall order, but you saw Rick Sharga's quote that the spread comes down, we get into that range. So you're talking in these first two bars, two thirds of the potential selling market saying we're interested now. And listen, I believe this morning as we talk about this, this is what we're playing for between here and the end of the year. This is what communicating with people about where are you at and what are you thinking about if you thought about selling your home, you thought about buying a home, what now becomes possible. But if you look at this bank rate study, it shows you the two thirds of the market starts to get in play below six and then below five. So something we want to keep in mind. Second piece, what about buyers? We know there are a lot of buyers out there. We know a lot abandon their search too. Both of those things are true. Well, they asked the same question, which mortgage rate, if any, would you need to be comfortable moving ahead in buying a home this year? Rate less than six, 52% are like we're in. So it brings more buyers back into the market. Rate less than five, 47% said we're in. These don't add up to 100 because it's just asking this question. They're like, okay, we are in. So we see half of potential buyers are like, we get below six and we're good. We're ready to go. And so I believe this sets up what next year will look like. And I'm certainly not coming with this completely rose colored glass approach. I think there are still challenges in the market that we will face, but I think we will not see the headwind that we saw over the last couple of years. But also I believe this, the professional agent that's great at communicating what exactly is happening that is confident in their knowledge will absolutely win in the last hundred days of this year and certainly in 2025. You know, I don't hear anybody calling for us to get back into threes and Greg McBride over bank rates said this, the hope for lower interest rates needs the reality check that lower doesn't mean we're going back to the threes or 3% mortgage rates. And maybe some folks think that based on the last couple of years, but don't see anybody calling for that. I think going into next year, we certainly, and I think it's very likely we could dip our toe into the fives this year. But, but expect that, that sort of volatility, that up and down pace and mortgage rates is we go forward. You know, I think one of the things what would cause Tim, I see there, Tim, what would cause the spread to get less between the 10 year and the 30 year? I'll tell you this, more certainty in the economy and less uncertainty. So as we see more indications that yes, inflation is coming down, no unemployment's not going to skyrocket. As you see more certainty, you'll see the spread start to come down. Okay. So that's the question. Nobody's got a crystal ball, but that's what we're looking for. Also what's a major contributor to uncertainty is the election. Right. So once you get through the election, we get into next year, I would expect things to get more certain. Now wrap this way right here, being the pricing expert, being the expert out in the market, our goal is to give you what you need to do that. You know, one of the things that's becoming very clear is that if something's priced right in today's real estate market, it's selling. If it's not priced right, it's not selling. And so we want to give you everything you need to do to be the educator to the clients you serve. We get together on the deep dive every week to give you what you need to be the educator out in the market. And I'll kind of wrap where I started off, only great agents and only KCM members, really those that are connected are able to explain what's happening in this market. My hope is that over the last few minutes that you have what you need to be able to explain this market. If you are a member, you can go into the member area, grab all of these slides and communicate to your clients exactly where we're at right now, but more importantly, what's ahead. So grateful for everybody being on the deep dive. We'll see you back next week on the deep dive and hope you have a great week ahead.