Why the path to lower rates won’t be a straight line
Once again, another major real-world event has thrown a monkey wrench into the mortgage market, right at a time when rates were as low as they had been in years.
When the markets closed on Friday, the 10-year Treasury had dipped below 4%, and there was optimism that it might remain there for a while. This pushed mortgage rates into the high 5s.
That optimism was short-lived, as the United States and Israel coordinated on strikes against Iran on Saturday. While some in the mortgage space thought the latest Middle East war would drive investors to Treasuries, causing lower rates, one veteran broker knew better.
Amir Nurani (pictured top), broker-owner at Left Coast Leaders, said he was surprised to see so many in the mortgage industry predicting lower rates in the face of another conflict in the Middle East.
“Over the weekend, I saw some like memes on social media from loan officers saying, ‘Rates are going to drop on Monday.’ That's not what happened,” Nurani told Mortgage Professional America. “Rates actually went up today. The reason is that I don't think a lot of loan officers and mortgage press truly understand the bond market. They don't understand how it operates.”
Inflationary factors
The 10-year Treasury, which was below 4% on Friday, surged nine basis points on Monday to 4.05%. This will likely force mortgage rates back above 6% when the latest numbers are released later in the week.
Nurani wasn’t surprised to see the bond market surge, especially long-term bonds.
“As far as its impact on the market, what people don't realize is war is inflationary,” Nurani said. “Because you have spikes in oil prices. The other part of that is when we go into war, the likelihood of the Fed needing to print money goes through the roof. Do I think this is going to lead to a Fed rate cut? I don't think so. I think that the money printer will turn on before the Fed starts easing on rates.”
One of the reasons for the rate increase involves the return on investment in the Treasury market, and the need for the price to rise to make sure investors are getting the kind of return they want, Nurani said.
“That’s one of the reasons you saw the bond market increase,” he said. “When you look at bonds like the 10-year Treasury, if you have the 10-year Treasury priced at, let's say 5% hypothetically, but inflation is running at 3%, and then essentially the investor's net return is 2% when you factor in the inflation cost.
“So when you see something like war break out that has inflationary trends, the likelihood for the Fed to turn on the money printer, which is also inflationary, the impact on oil, as well as on trade, you have all these inflationary variables. The bond market is going to start pricing that in and basically say 4% isn't enough, because investors want a higher return.”
Homebuyers pausing again
Because rates have gone back up again, Nurani expects homebuyers to delay purchases leading into the spring buying season. Last year, it was tariffs that gave them pause, and this year, it is the spike in rates due to the new war.
“Anytime you see rates go up, you're going to see mortgage applications fall,” he said. “I do think that you're going to see homebuyers kind of hit the brakes. A little bit of fear tends to motivate more than people's motivations to buy a home. When you have concerns about AI job loss, and you have concerns about rising mortgage rates, I think that you'll see a little bit of slowdown.”
Nurani is hopeful that the spike in rates will be a short-lived one, although if the Fed is forced to help fund the war in the Middle East, that could delay rates coming back down.
“In the short term, my interpretation is that this is not going to be long-lived,” Nurani said. “I think that within the next month or so, a lot of this will be behind us. You're ultimately going to see mortgage rates settle a little bit. But if the Fed turns on the money printer, you are going to see the bond market increase, and you are going to see rates increase. And I think the overall impact of this could lead to a slower spring and a slower summer.”
For buyers and homeowners who have been waiting for rates to fall before making a move, Nurani said they’re likely waiting for something that isn’t coming.
“I think that you have a lot of buyers, a lot of homeowners in general, both on the refinance side and the buyer side, that had been waiting for this cascade of falling rates,” he said. “And I think some of that is perpetuated by the narrative you see in the industry. We saw loan officers and realtors saying that rates are going to drop in 2024, and last year, and again this year.
“I don't think the path for interest rates is going to be straight down. I think it's going to be a slow and steady chop down. I think that we're going to end the year about where we're at right now for rates. You have people who are waiting for rates to drop, and they will be adversely affected. That group of people, which I think makes up the vast majority, is going to slow down as a result.”
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