Despite President Trump trying to get the FED to drastically lower interest rates, they have been stubbornly holding rates high, citing concern of increasing inflation. Well, the FED has been cutting rates – 4 times this year, by small increments. So, why are mortgage rates staying in the 6% range?
It’s tempting to hope that whenever the FED drops the rate by 0.25% that the mortgage will also drop. Home buyers will go to their bank and apply for loans thinking that the rate will be lower. Right now, they are getting surprised.
The FED funds rate is a short term loan rate and mortgages are long-term, often 30 years. They usually get paid off or refinanced in 10 years, so they follow the 10 year treasury rate much better. And look how poorly the FED rate correlates with the 10 year yields:
Ok, so there is a trend there, but the recent FED rate drops are not also associated with decreased yields (which typically means lower interest rates). But look at this graph:
Now that’s eerily similar. Buyers really should be watching the 10 year yields to follow what their mortgage rate will be. But, mortgages are more risky, so add about 2% to the treasury yield and you have a good estimate. So, what has the 10 year yield been doing recently?
It’s been decreasing, just not as quickly as the FED funds rate.
What are Buyers Doing?
Buyers are cautiously entering the market. They are finding that the mortgage rates are not as fantastic is they were 5 years ago and this is still shocking. Sellers are starting to enter the market, probably due to fatigue of waiting to list. High interest rates means buyers can’t pay as much, and it suppresses house value growth. But this is countered by so few houses going on the market in the past 2 or 3 years. So, we have a bit of a stalemate and it won’t change until a drastic thing happens, such as a big FED rate decrease or a recession.
Is it a Good Time to Buy?
If you are looking to buy an investment house right now is still going to be a challenge. Without many sellers on the market, you’ll have to be looking for value-adds. Many of these are so bad that you won’t be able to get a traditional mortgage. You’ll need a solid track record with the bank and plenty of cash.
When Will it be a Good Time to Buy?
That’s a problem. If interest rates continue decreasing slowly, it’ll be a casual growth in listings and values will not change much beyond the typical growth we are seeing. To get good deals, sellers will need to be seeing some stress, and the FED is doing everything it can to prevent this.
That’s not to say you should sit on the sidelines. You’ll just need to be more creative with your deal-finding and financing. That’s not really good news but I do wish you good luck.
