The Truth Behind Interest Rates

This epsiode breaks down the common misconception that Federal Reserve rate cuts directly lower mortgage rates. In reality, mortgage rates are driven by long-term factors like mortgage-backed securities and the 10-year Treasury yield, not the Fed’s short-term rate decisions. Deb explains how inflation, economic data (like CPI, PCE, jobs, and retail sales), and investor behavior ultimately dictate where mortgage rates go. While Fed cuts can signal economic shifts, markets often price in those expectations ahead of time, which is why rates don’t drop the way people expect. The key takeaway: today’s “normal” mortgage range is likely in the mid-5% to mid-6% range, and waiting for dramatically lower rates may cost buyers more in rising home prices and lost time, making it smarter to buy when financially ready and refinance later if rates improve.

Transcript

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Hey everyone, welcome back to All Things Home Loan, Credit, and Real Estate. I'm your host, Deb, the Mortgage Queen. So let's start learning. Hey, it's the Mortgage Queen where we turn chaos in the market to maybe some common sense thoughts here. Today we want to talk about the truth about interest rates and what really drives them. Mortgage interest rates, Fed funds rate, all that stuff and the correlation between the two or the lack thereof. First of all, let's talk about the one thing that's the most confusing to people. The mortgage rates and the Fed funds rate do not correlate in regards to when the Fed Fed funds rate drops, Federal Reserve drops the uh short-term rate, it does not drop the mortgage rate. So if you hear, hey, the feds drop the interest rates a quarter of a percent, you're not gonna have mortgage rates drop a quarter of a percent. It's just not gonna happen. And every single time this happens, we have the same conversation. Oh my gosh, the feds dropped the rates by a quarter of a percent. So now what are mortgage rates? Uh, they're actually higher. We should have locked you two days ago before the feds talked. I mean, that's just plain and simple what it is. If you look at historical data, that's just what it is. I I can't tell you that I've ever seen in this market when the Fed drops the rates, the mortgage backed securities get better and um the mortgage rates drop too. It just doesn't happen. Look at the history, it's just not there. So the Federal Reserve, they dictate our lives when it comes to car loans, HELOCs, credit cards, those type of things, the short-term debts. They have control of the short-term debts. The mortgage-backed securities, which have all of the control of that in the 10-year treasury, have all the control of the mortgage rates. They're actually a group of investors that um go out in the open market and they're buying and selling, basically. The mortgage backed securities are buying and selling. It's like this here's a stack of papers, aka mortgage loans. Here, investor, how much do you want to make on these? And based off of economic conditions, they'll decide how much that interest rate's gonna be. Obviously, it seems pretty extreme when you're like, oh, there's some guy sitting at the top of the food chain saying, well, today I want to make an extra one and a half percent, so I'm gonna take rates from six and a quarter to seven and a half. No, we can't, we can't really do it. It's not gonna really do that's not how it works. But uh, there is a trend of okay, what we're what are we seeing in the market going up, going down? Hey, we better price accordingly, and that's where those mortgage-backed securities come in with the 10-year treasury. When the feds cut the rates, the short-term rates, um it's usually because they're seeing the economy start to slow and inflation is cooling. They want to spark the economy, so they'll bring those short-term rates down just a little bit. And um it does have an effect on the long-term bonds, um, but it's not immediate like everybody thinks. Hey, the Fed funds drop a quarter, interest rates on mortgages drop a quarter. It's just not that way. Um, we usually see about a month before the rumor of what the feds are gonna do to the rate. We usually start seeing what the right the rates are gonna do and they start ticking down just a little bit. Absolutely, before the feds meet, if the rumor is so high of yeah, they're gonna drop the rate, we want to lock your mortgage rate before the feds meet. Everybody's like, hey, okay, now it's dropped a quarter, let's lock. No, we should have locked two days ago. That's what we should have done. We're ahead of that, we watch it. Um, so why the Fed rates don't always mean lower mortgage rate is just as I said, they control the short-term short-term money. Mortgage rates are long-term money. It's that simple. Have you ever had a car loan be 30 years? No, you don't want your car loan to be 30 years. You probably feel like you pay your car loan for 30 years because you're constantly having to pay for one, but um, mortgages are 99% of the time, I'd say this is a dev statistic. They're gonna be 30 years. Car loans anywhere from three to seven, probably, depending on what kind of a car loan it is. Um, so when the Fed starts cutting the rates, they're saying, hey, we we think the economy needs a little bit of breathing room. And bond investors don't trust that. They look at whether the inflation is actually trending lower or um the broader economy as a scale. Like, what is the broader economy doing? We don't trust the feds, so we're gonna do our own independent checking and make sure what is really inflation doing? Is inflation going up or down for a short-term thing? What is our trajectory going forward? And then they price accordingly. Um, so even though the feds have dropped the rates, I think I don't even know how many meetings in a row that they've dropped the rates for the Fed funds rate, um mortgage rates haven't dropped like that. They they've come down. I mean, we hit um on our down payment assistance loan. There was a short period of time that we were in the upper sevens, low eights. I wanted to cry when I saw that on our rate sheet for our down payment assistance loan. Um, and they're like in the low sixes, high fives now. So they've definitely come down, just not in the increments that the Fed funds rate have done. Um if the inflation proves to be you know sticky or the job data stays strong, um, the bonds will stay high. That's just what it's gonna do. Mortgage rates won't follow those cuts as fast. Um as investors buy the treasuries, the yields drop. You really think like the whole supply and demand thing when when you have so many goods out in the market and nobody's buying them, then the cost of that goes down. When there's a whole bunch of things being bought, then the prices go up. It's the whole supply and demand kind of concept there. Um the mortgage rates uh follow one benchmark. Really, it's there's a benchmark for it, and it's the 10-year treasury yield. Um, so if you're watching what the 10-year treasury yield is doing, you're gonna the mortgage bonds are gonna follow the same suit. So if the 10-year treasury is going up, you're gonna see the mortgage rates go up. If the treasury is going down, you're gonna see the mortgage rates go down. It is that simple. Um sometimes investors get nervous. They uh sometimes they sell bonds even when the Fed is cutting, and um and sometimes that's what keeps mortgage rates elevated for a little bit longer. Um they have to look past what the Federal Reserve is doing. The the Federal Reserve is taking care of kind of like a a short-term problem problem. The feds are like or and uh you know, the bond buyers, the people that are in the mortgage backed security business, they they're carrying that in over 30 years. So they're looking trajectory out. Um, inflation risk, uh, what is the global demand out there? They're looking at so many more things. Um ultimately the biggest driver is gonna be your inflation. And there's multiple levels of inflation, different reports of inflation. Um, the CPI, the PCE, um when inflation data on those reports show that the prices are cooling, um, the investors will relax a little bit. The yields will drop, mortgage rates are usually follow that. But when inflation comes in hotter, um, especially hotter than they expect, uh, even just one of those categories, um, say energy or shelter, uh, the bond market panics, the mortgage bounce mortgage rates will bounce right back up. Um, so inflation going up causes an issue to the mortgage rates. It's giving it's been kind of a tug of war lately. If you look at what's gone on with the mortgage-backed securities and the Fed cutting, we got ourselves in a royal mess in 2020 because there was just so much fake money tossed into the market. And it caused inflation to be out of control because everybody was buying everything under the sun because they had so much money from all the government subsidies, and then the treasuries were just being bought up, and there was just so much money. And the sad thing about it is it's all fake money. It's like dude in the basement printing money and he's just handing it out, caused a huge issue with inflation. Um the problem is we've never really been in this market before. You look at 2020 and interest rates were in the twos and threes, that's never gonna happen again. We don't want it to happen again. Plain and simple, we don't want that to happen again. If you look at the economics uh behind that, it is not okay. You don't want that. Really, in my opinion, in all my years, I really feel like a strong economy sits when interest rates and the mortgage rates are between the five and a half and the six and a half market. If you if you look at the the place where the market or the uh the economy has been the strongest, that's kind of where mortgage rates have been. The problem that we're having right now is with the COVID money and all the money moving around, prices just skyrocketed. And then I I feel like they they skyrocketed in the wrong way. We've got houses in our area that were worth 85 to 125,000 and now they're 250 to 300, that they're really not worth that. I don't, and I'm probably going to be the one person that everybody hates by saying this, but just because when that was all going on, um you had somebody coming from an outside area with cash or a lot of extra money to be able to put down, and they say, hey, I want that 1300 square foot home, and I realize it's only worth$250,000, but I'm willing to spend$325. And real estate agents were writing the contracts for it, appraisers were matching the values, and I don't really feel like it was a true market condition increase. And yes, I'm sure there's going to be haters. I know there's going to be haters that think this, but I just do not think that the escalation of our prices is a true depiction of what it is. I think there was a lot of fake money in the market, and there was um a lot of unnecessary price increases that didn't need to happen. And now we're all paying the price for it, every one of us, because we have five and a half to seven percent interest rates on homes that are worth$50,000 to$150,000 more than they should be. And that's just plain and simple my opinion. I'm sure there's plenty of people who want to argue with that, but that is definitely my opinion. I have some appraiser friends that would agree with me, but appraisers get beat up pretty hard with real estate agents when they don't hit value. And um, mortgage companies sadly are kind of in between because we we want to make sure that we have collateral that's sufficient for the loan that we're doing. Um, but uh yeah, that's a rabbit hole. I probably better not do. Um okay, so let's talk about the different reports. Um, CPI. Here's, and I'll I'll put this in the comments, but you've got a couple of different reports to really watch to see what the mortgage rates are going to be doing. The first one's gonna be CPI, the consumer price index. Um, it's it's kind of the head headline inflation number. It's the one that you're gonna kind of see the most of. And then you've got the core CPI. Um, it it actually is the same inflation number, but it takes away the food and energy out of that report. And then you've got the PCE, which is uh PCE, which is the personal consumption expenditure. Um that's the inflation report the feds like to watch. That's the one that they they bank the most of their data off of, is that PCE report. And then you've also got the jobs report, and that's basically showing how hot or cool the labor market is. And then you've got um retail sales. Basically, what what's going on with retail sales? If there's a lot of people out buying things or not, that's gonna indicate what's going on in the economy too. If everybody's pulled back, like, wait a minute, let's go back to that supply and demand thing. Nobody's buying anything, prices have got to come down. If everybody's buying everything, prices will go up. And then, of course, the 10-year treasury yield. Um, that's really the pulse that keeps like what's going on, that 10-year treasury yield. Um when all of those show a consistent softness, like slower price glow, slower price growth, um maybe a weaker job report, that's when you're gonna see these mortgage rates drop. But what's happened is you know, inflation feels like it's in check, and then all of a sudden they have a really good unemployment rate come in, or inflation um is is seems like it's in check, and um and then employment rate uh goes goes up a little bit. It's just inflation controls this piece of it, but also the employment rate and the retail sales. Um it's just really important to remember we're not going to the 2.75 to 3.5% rates ever again. We're not. You've got to hunker down and decide this is our reality. The the amount of money that was gone that I trillions of dollars. I don't even remember how much was in there that the feds dumped into the mortgage-backed securities to get those rates falsely low. It's just not gonna happen again. We've got quantitative easing, is quantitative easing is what that was called. And now we're dealing with quantitative tightening. Now I think they're gonna go away with that. That's slowly going away. I don't think you're gonna see quantitative easing ever again. I think you're going, well, I can't say ever, but some time down the road if that's gonna happen. We are in a normalized market. If nobody had messed with the markets five years ago in 2020, 2021, this is probably where our rates would have been. Like we would have just kind of bounced from this 5.5 to 6.5, 5.5 to 6.5, and we just had this up and down because it's a healthy trend. If you look at the if you really look at it, it's a healthy trend. Um the really the real lesson here is we've got to stop watching the feds like their Santa Claus. They're not coming to give you these amazing gifts. Um when they do cut, it's a signal. It's not, it's not a like magic wand. Oh my gosh, we're gonna fix the economy because we dropped the rates. No, it helps a little bit when we're gonna go buy a car. Um mortgage rates just live in a different world. They they are run by investors and inflation expectations, and really the global demand for safe money. Like we want our money in the safe place, and and we expect the people who buy mortgage back securities to keep our money in the safe place. Um, so really, if you want mortgage rates to drop, then you you've got to have steady disinflation, it's gotta stay steady, and a bond market that feels safe. Everything's just okay. And um we can't have inflation too low because that puts us in the wrong direction as well. Inflation too high, of course, we saw that that puts us in a wrong place. But um, my my final takeaway from this is you've got to look at your finances and your budget and decide, you know what, this is my reality. If I want to become a homeowner, my interest rate could be five and a half, it could be six, it could be six and a quarter. You're talking obviously a substantial amount amount of money difference over the life of the loan, but you also are paying 100% interest when you're paying rent. That that meme came out years ago. You're paying 100% interest when you are paying rent. Now, of course, there are some people who are just more comfortable renting. That's just the way that it's gonna be. But if you're feeling the itch to buy a home and you're like, you know, I'm just gonna wait for rates to drop a little bit more, don't. Absolutely don't. Because say you lock your interest rate today at 6.5, and a year from now the rates drop to 5.5. In a standard appreciation of the market, you're more than likely gonna be able to refinance that mortgage and get it into a little bit lower rate. Uh same thing of if I lock my rate at 6.5 right now and I'm able to buy a$300,000 house, standard appreciation goes up, and two years from now, I'm like, okay, rates are at 5.5, I'm gonna buy. Maybe the prices have gone up$20,000 to$40,000. Did you just save yourself much money? No, you didn't, because you still paid rent at 100% interest, and you still have the um uh higher price. Great, you have a lower rate. It's just not, it's more of a if this is a dream to become a homeowner, then sit down and create a budget. Let's get you all lined out and figure out how to become that, because that's ultimately what you should be doing. Not running from these higher prices, not hoping that the interest rates are going to come down and waiting for that day. No, jump in. If the right thing for you to do is to become a homeowner, let's line it out, let's look at the whole big picture of it. It's it's like the time is now, it absolutely is now. It is a buyer's market in this current environment and take advantage of it. It's super fun to have people going into these two one temporary buy downs and understanding the end result of what that looks like. Um, permanent buy downs, sellers are willing, willing to pony up money to be able to get some of these um uh homes off the market. Builders right now, they're I think there's a lot of builders nervous. They're overbuilt in certain aspects. Uh, some of our builders slowed down because they've been through the economy slowdown before. And so they they scaled back their builds, but there still is a lot of new builds on the market and opportunities to do um permanent buy downs and temporary buy downs and all that fun stuff to take advantage of a lower payment for the first year or two. Um, I just want to leave one good point uh here that we have to just remember the Federal Reserve, the Fed funds rate, does not control mortgage rates. They are not directly correlated with each other. There is an indirect correlation, and there are definitely some market trends that you can watch and see like when you should lock in comparison to when the rumor of the Fed funds rate is going to turn into reality. But at the end of the day, my tip to you is mortgage rates could come down a little. If homeownership is a dream of yours, then jump in. Let's walk through the path of that. Let's look at monthly payments, let's get you on a budget. Maybe it's not tomorrow, you're ready to go, maybe it's in six months. Maybe we line you out with how you can save for a little extra money for your down payment so that you can bring in a little bit more and help your whole situation just a little bit more. Maybe you just learn to save money over the next couple of months and it lines you up to feel better about a home loan and uh your ability to make a mortgage payment. My huge word of advice is if any of you listeners are out there living in your mother's basement or your dad's basement or your grandma's basement and you're paying no rent, number one, you should be ponying up some money. Maybe you're paying utility, maybe you're covering groceries, I don't really care. But if you're not paying any rent, an actual thousand to fifteen hundred dollar rent payment, you better have that thousand to fifteen hundred dollars in a savings account you can't touch somewhere. If that money's just going out in the wind to whatever coffee shop you go to, or drink shop, or dinner every night, or whatever the case may be, that is dumb. You absolutely need to get that money shoved into a savings account that you cannot touch, that you'd actually physically have to go to the bank to get the money out of, so that it's super inconvenient. And get yourself lined up on some sort of a savings account getting built. Moms and dads, if you have kids living in your basement and you're not charging them rent, great. If that's what you've worked out, great. Then you demand them to start putting money into savings or they can get the crap out of your basement. That's just what happens. Start getting yourself in a financial position where sure you can live in mom's basement, help each other out, have the ability to have multi-generations together. That's great. But you better all have savings accounts or some sort of income that won't allow a savings account, some sort of schooling going on that's helping you just get through this hurdle. Um, but if you're just sitting in mom's basement, rolling in the dough, not having anything to show for it in your savings, shame on you. Parents, or if you're if you're letting this happen, shame. Shame on you. Anyways, all right. Um, I'm done with my my soapbox. End result Fed funds do not control mortgage rates, do not get that in your mind. You absolutely need to um understand there's a correlation, but then there's not. Watch the 10 year treasury, watch what inflation's doing, and you'll have a pretty good idea of what's going on with the mortgage rates. Have a good day until next time. Thanks so much for listening. I really appreciate it. So stay tuned. We are gonna learn some more next time.