EZ Mortgage Monitor – September 16, 2024

It’s Fed Week!  Isn’t that exciting?  Well, maybe not quite like that first powder day of a new ski season, or the start of college football season, but still exciting, right?

Maybe not?

Here’s what we know.  The Federal Open Market Committee is going to lower their target Federal Funds Rate, which is the overnight rate at which banks lend to each other, during Tuesday and Wednesday’s meeting.  By how much?  That’s the bigger question.  They’ve been telegraphing for weeks, or arguably even a couple months, or more, that we’re most likely going to see a .25% decrease, the first decrease in about 54 months.

I’ve been saying that’s largely baked into the cake.  We first hit the current mortgage interest rate level in the wake of July’s Employment Report issued on Friday, August 2^nd.  Since then, the market’s bounced around, and is now back to that point, or in some scenarios a touch lower.  As I’m fond of saying, interest rates don’t usually move in a straight line.

Nevertheless, some people are thinking/hoping for a .5% cut with Wednesday’s announcement.  Their premise is the Fed is already behind the curve of a softening economy, and needs to act boldly. In fact, the CME Group’s Fed Watch tool (https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html) says there’s a 67% chance of a .5% cut.  I’m in the minority.  I don’t think they’ll do that.  But what if they do?

Something else you hear me say all the time is predicting a data point is one thing, but predicting the market’s reaction to it, is a whole other. 

I think a .25% rate cut will be basically a non-event.  It’s already priced into everything we’re seeing in mortgage rates.  I think their tone of the policy statement and subsequent press conference by Chairman Powell will reiterate their measured, data-dependent stance, and their belief that inflation is continuing to fall towards their 2% target rate, and they’re comfortable with their current policy stance.  I’d call that an 80%+ chance event.

But what if they do cut by .5%?  What happens then?

You could see the stock market rally believing the era of cheap money is rushing back towards us!  In that instance, bonds (and remember mortgage backed securities trade like bonds) could actually worsen, with prices falling and yields rising, as they compete for the money flowing into equities. 

Or, you could see the stock market sell off, because the “why” behind a .5% interest rate cut is because the economy is on softer footing than expected, so what problems lie ahead?!  What about that dreaded recession?  In this case maybe bonds rally, and yields fall further?  Or, maybe everything sells off and people move to cash?  Who knows?

And that’s the point.  It’s almost like Waiting for Godot.  You can do a lot of waiting, and talking, while life passes you by.

So where will rates go from here?  I believe lower.  I don’t think there are many who disagree with that.  But how long that’ll take, is anyone’s guess.  After all, I have been saying rates will shift lower for about two years now.  And I’m finally right!  As to how low might they go?

There’s a theory about the neutral rate of interest, or r* (r star).  The theory goes that there’s an interest rate that is neither stimulating nor restraining economic activity and growth.  It’s a rate that allows the economy to run at full employment, without inflationary pressures.  The goldilocks economy, to use one fable’s terminology.

There are economic models that try to capture where the neutral rate might be, but they’re just theories.  The neutral rate cannot be directly observed.  It can only be inferred.  It’s like the economic Holy Grail, and could be completely mythical.

As Robert Kaplan, former President of the Dallas Federal Reserve Bank said in 2018 “One challenge in moving toward a neutral stance is the inherently imprecise and uncertain nature of estimating what constitutes “neutral.” This judgment is more of an art than a science and involves observing and analyzing a wide variety of factors.”  (https://www.dallasfed.org/news/speeches/kaplan/2018/rsk181024)

So, like Waiting For Godot, it’s about what is happening while you’re waiting for something that may or may not ever happen.

Using housing as an example, there are still some 350,000 purchases happening every month.  For people who found the right home that met their needs and budget, and bought that home last fall, at the peak of the current rate cycle, many of them have refinanced, taking their interest rate from the mid 7%s or so, down to the mid 6%s, without incurring any closing costs, because they’re able to choose an interest rate that offsets them.  That can net you significant monthly savings.

But, if you own a home with a mortgage at those higher rates, and you’re waiting for them to get even lower than they are now, you’re costing yourself money each month you wait.  Whereas if you book your gains, cost-effectively refinancing now, you can just repeat the process down the road.  And, for most people, we suggest just taking those savings and applying them back towards extra principal payments, accelerating your loan payoff and not re-amortizing your loan.  But, everyone’s circumstances vary, so how you use those savings is always up to you.  Either way, they’re likely there for the taking.

I think that trend is likely to continue.  It’s not going to be a straight line.  It’ll likely look more like a sawblade with a slow downward angle.  There will be peaks and valleys, as usual, but the overall downward trend should remain.  At least barring any unforeseen shocks to the system, which seem prone to happen periodically.

It’s just math.  And, we do our best to outline the math behind your best options, whether you’re buying or refinancing.

With that, here’s your snapshot of where rates started this week.  Call or email if you, your family or friends have any questions or would like to discuss refinancing, or buying a home.  Cheers!

E