Never a Straight Line

A few weeks ago, I shared a strategy for those thinking of refinancing on how to get the best rate possible in a downward trending market.  The primary point I conveyed was that rates never move in a straight line, up or down.  To capture a dip, you need to prepare.

 

Let’s study the chart of the 10-Year US Treasury Note below.  In July of this year the 10-Year was just under 4.30%.  On September 18^th, the 10-Year hit a low at 3.63%.  Today, it’s back up to just above 4.10%.

 

I’ve circled in black 2 points that were the best time to take advantage of a dip in rates.  I had clients that were fortunate and were able to seize upon those dips and lock in a low rate.  How were they lucky enough to take advantage of the situation?  Luck had nothing to do with it.  They prepared in advance and acted when the timing was right.

 

 

 

 

The good news is that you have not missed your opportunity to catch the next meaningful dip in rates.  Despite the headlines this week of higher than forecast inflation, it is still the housing component that is keeping the inflation rate high.  Unfortunately, the way the Fed measures inflation in the housing sector creates a lag in the timely report of that data.  The Fed says inflation in housing is running 4.9% annually.  If you look at private sector data from Zillow and Apartments.com, they calculate inflation at under 2% annually.

 

Rates are going to drop again.  The question you should be asking yourself is if you want to take advantage of the next round of lower rates.  If the answer is yes, you need to act.  To grab the next dip:

 

• You need to get your application and supporting documents to your lender of choice.
• They should review everything to make sure your loan is fully processed.
• You need to set with your lender a target rate/points offer that works for your situation.
• Set up a protocol of what your lender should do if that rate becomes available.
  • Do they have to contact you first, or do you authorize them to lock on your behalf?
• Your lender then must monitor rates daily and take the appropriate action you agreed to.

 

And for those of you still on the fence thinking you’ll wait till rates drop further, here is something for you to consider:

 

The smart money guys think that inflation will moderate, and the economy will have a soft-landing next year.  That means there won’t be a huge drop in rates that many of you, me included, are hoping for.  You need to calculate how much more you’ll pay in interest in the next 12 months on the loan you currently have, versus refinancing.

 

And if you are expecting rates to get back to the 2% range, read on to my next article, because if history teaches us anything, we are not going to see those rates in a very long time – if ever.

 

 

 

 

Fed Cut – Now Higher Rates - WTF?

The Fed cut rates, yet rates have gone up.  Yes, that’s a very normal reaction based on the history of Fed rate cuts.  But rates will drop.  I’ve been asked by many consumers why the spike and where I think rates will go next year.  Anyone can take a guess, but financial guru David Rosenberg did the research and went back 40 years to see what impact Fed rate cuts had on the yield of the 10-Year Treasury Note, but right after the cut, and the long-term effects.

 

There’s a lot to unpack in this graphic, so let me explain each column so you can understand what David discovered.  I need to first clarify what a rate cycle is.  For the past 4 years, the Fed has either raised or kept rates at an elevated level in an effort to slow the economy and fight against inflation.  On September 18^th they cut rates and ended their cycle of monetary restriction.  We are now in a cycle of economic loosening.

 

Let’s start with 9/20/1984.  On that day the Fed cut rates for the first time in that rate cycle.  On that date, the 10-Year Treasury was at 12.25%.  I know!  That’s 8.5% higher than where things were when the Fed started to cut rates this time.  On that date they cut rates by 0.25%.  Shortly after the rate cut, the 10-Year Note spiked by 0.31% and hit a post-cut high of 12.56%.  Rates started to drop at hit a low of 6.95% in that rate cycle.  Rates did drop 5.30%, but more important for us today is that represents a drop of 43% from the peak.

 

There’s some very important data to extract from this chart to forecast what we should see in the coming months and years.

 

If you were to average the declines in the yield for the 10-Year Note from its peak over the past 40 years, it averages 37% per rate cycle.

 

If we plug that into our chart on the last line at the bottom, we will expect to see the 10-Year Note reach a low of 2.35%.

 

Remember, we’re talking about the 10-Year Note and not the 30-Year Mortgage rate.  On average, the spread in rates between the 10-Year Note and 30-Year Mortgage rate is about 2.50%.  If history holds true, that will put mortgage rates at a cycle low of (2.35% + 2.50%) = 4.85%.

 

 

 

And now the week’s economic news…….

 

Inflation Creeps Up

The focus this week was on the inflation data, and it was a bit stronger than expected.  As a result, mortgage rates ended the week higher.

 

Each month, the release of the Consumer Price Index (CPI) is one of the most highly anticipated inflation indicators.  To reduce short-term volatility and get a better sense of the underlying inflation trend, investors often prefer to look at core CPI, which excludes food and energy.  In September, Core CPI was 3.3% higher than a year ago, above the consensus forecast and up from an annual rate of increase of 3.2% last month.

 

Although this annual rate is down significantly from a peak of 6.6% in September 2022, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed.  Shelter (housing) costs were 4.9% higher than a year ago and continued to be a primary reason why inflation remains stubbornly elevated.  Other categories which posted large monthly increases included apparel, used car prices, and medical care services.

 

Another significant inflation indicator released this week which measures costs for producers was essentially in line with the consensus forecast.  The core Producer Price Index (PPI) was 2.8% higher than a year ago, up from an annual rate of 2.4% last month.  Of the two major inflation reports, investors tend to place less weight on PPI, since it reflects a smaller slice of the economy than CPI.

 

The detailed minutes released on Wednesday from the last Fed meeting on September 18 revealed an intense debate about the decision to cut the federal funds rate by 50 basis points rather than 25 basis points.  The statement released after the meeting indicated that 11 of the 12 voting officials supported the decision, while just one dissented.  The minutes, however, suggested that there was a little more disagreement during the debate.  According to the minutes, "some" participants supported a smaller 25 basis point reduction to provide more time to evaluate the shifting economic outlook.

 

 

 

Next Week

Investors will continue to look for Fed officials to elaborate on their plans for future monetary policy and will closely monitor the situation in the Middle East.  For economic reports, Import Prices will be released on Wednesday.  Retail Sales will come out on Thursday.  Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy.  Housing Starts will be released on Friday.  Mortgage markets will be closed on Monday in observance of Columbus Day.

 

 

 

 

Until next week…….