As always, it has been difficult to determine the path forward for mortgage rates.
They are never easy to predict, but since the new administration took over, it has been even harder.
You can blame it on a few things, whether it is the dove-led government terminations, customs and wider trade war or the general uncertainty about it all.
For example, FHA said last week that it will no longer allow non-permanent residents to get a mortgage loan.
In short, you just don’t know what you wake up to on a given day, making the prognosis so much harder. But now it seems that storm clouds are brewing and it can finally push prices lower.
Bad news begins to become good news again for mortgage rates?
There is a saying of mortgage rates that bad news pushes them lower. The general idea is that a slower economy leads to lower inflation, which in turn leads to lower interest rates.
When it gets tough, investors seek security in boring investments as bonds, namely US treasury as the 10-year bond.
They tend to move out of risky stocks and into bonds for their perceived security and guaranteed return, even if lower.
However, when stocks are no longer expected to surpass, a lower return is better than no return.
Conversely, if the economy (and inflation) runs hot as it has for the past several years, monetary policy would have to tighten and interest rates would rise.
That’s exactly what happened and explains to some extent why the 30-year-old fasting rose from less than 3% to 8% over the course of less than two years.
But things were kind of confusing in the last few years because bad news and good news were mixed.
This was essentially due to the fact that inflation was Fed’s number one goal, and any excessive growth in wages or employment was seen as the greatest risk to the economy.
E.g. Forced financial data in 2023 better than expected financial data bold to pump the brakes on any expected speed cuts.
This was apparently good news because it meant that the economy was still growing and healthy, but it resulted in high priority rates and a stock market late in the year.
[Where would mortgage rates be today if Kamala won?]
Rate cuts vs. a recession
As the recession fears rose rose rose, Fed finally turned and signed that signalized speed cuts were coming, which led to a stock market rally. Of course, this “bad news” was presented as “good news.”
Powell explained that the economy was in a better position with moderation of inflation, but that downward risks of unemployment increased, which justified the rates.
Then we went into a kind of “soft landing” narrative, where bold managed to penetrate the needle with rising inflation and slow down economic growth and unemployment.
Then an unexpectedly hot August Jobs report was delivered in early September. Good news was good news as the stocks climbed up and the mortgage rates also rose higher.
But the market changed from worrying about inflation to focusing on employment so it was ok.
Before long, the same bold was lamb to cut too much, too soon, when inflation seemed to be frowned again.
It is as if the market would continue to get bad news, aka, which is slowing down inflation and weaker job reports so stocks could climb and interest rates could fall.
If you remember at the end of 2024, there were warnings that a hot job report could send shares lower.
The idea was hot data that would force bold to tighten monetary policy and stop cutting. And that’s how what happened.
Now we have tariffs and a trade war, which is apparently inflationary, but enough to sink the economy at the same time, with Goldman Sachs raising recession odds to 35% from 20%.
So while the market initially interpreted tariffs as poor for mortgage rates, greater implications can lead to lower rates.
Now it is about falling mortgage rates at the expense of the economy
So we basically went from a place where good news was bad news because a warm economy didn’t mean any betting or ease money.
For a bad news was then a good news situation because the economy was cooling and unemployment rose, which meant a more welcoming fat.
So for good news was the good news dynamic because we found some feeling of stability, so inflation cooling and job growth still positive, but not too positive.
But now we go into the dreaded bad news is a bad news part of the journey.
How bad news is actually bad news for the economy, the stock market, the housing market, etc.
Of course, the mortgage rates may fall if the economy continues to show signs of slowing down when consumers withdraw on expenses and unemployment rises.
However, you now have a scenario where there is a weaker consumer, more redundancies when companies are struggling to remain open and rising warehouse in the housing market.
It is more important to have a job than it is, after all, a half point lower.
And when you zoom out, we still have a 30-year-old fixed priority rate well over 6% when it was less than 3% as late as 2022.
This makes it difficult to root too much for lower priority rates, knowing that they are bleached in comparison to what is happening more broadly in the economy.
Homeowners and tenants will feel worse as the wealth effect of high prices and foamy house prices loses its brilliance.
And maybe the only real winners will be those who are able to apply for a rate and term for lowering their rate from saying 7.25% down to 6.25%.
This is why I have mentioned for a long time that there is no reverse relationship between mortgage rates and housing prices.
People think they act like a seen where one goes up and the other down.
But guess what? As the economy begins to show signs of cracks, we could be in a scenario where housing prices and mortgage rates fall into tandem.
Instead of the imagination in which sidelined buyers rush when the rates fall, you can see that furniture rises when prices cool.
It is one of those who are careful about what you want for situations.
Read on: Mortgage rates vs. Recessions
