Mortgage Rates Improved Half a Percent in a Week — Should You Buy Before the Fed Cuts?

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Mortgage rates are getting better

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom, and today we are talking about mortgage rates — mortgage rates are getting better, and I love to see that. This is an interactive show, so please feel free to put your questions into the feed; I will read them out and answer them for you.

Mortgage interest rates are definitely improving, and we are starting to see all of the reports come in that indicate the economy is cooling. Today a huge report came out about retail sales. As I've mentioned in many episodes, the best thing we can do as consumers is stop our unnecessary spending — that sends the biggest ripple effect through the economy, one that cannot be ignored. We have now seen a worse-than-expected unemployment report, and now a worse-than-expected retail sales report, and we're hoping the next inflation report comes in looking better than the last two. These are all signs we're moving in the right direction.

The Fed is going to have to think very hard about its next decision. If they keep pushing, they could very quickly drop us into a rough recession — and honestly, my opinion as the Mortgage Mom is that we've been in a recession for quite some time. Inflation and the cost of everything has kept spending looking higher than it truly has been.

The headlines: consumers are pulling back

These are the headlines you should be seeing across your Google page today. CNN: “The backbone of America's economy was just dealt a serious blow” — great headline, I love it. Barron's: April retail sales disappoint, consumers are pulling back — thank goodness, bravo to all of you. Yahoo Finance: retail sales flat in April, falling short of Wall Street's expectations.

Let me read a quick piece of that CNN article. US consumers could be reaching their breaking point — I believe we already have. After dealing with elevated inflation and the highest interest rates in decades, they're starting to rein in their spending. Retail sales in April were unchanged from March, when spending had increased by a downwardly revised amount, and April's number missed the increase economists had projected. The figures are adjusted for seasonal swings but not inflation.

This is all really great news, because we need the economy to cool off. The Fed keeps saying, over and over, that when they see the economy cooling is when they'll highly consider rate cuts. Because of last week's unemployment report and today's retail sales report, many economists are already starting to price in a rate cut at the next Fed meeting — about four weeks from now. I would love to see it. I would love to be wrong — I kept saying I didn't think we'd see the first cut until about September, the last quarter of this year, and I'd be thrilled if it came sooner.

It's something we all need. Credit card interest is directly connected to the Federal Reserve prime rate. We all need to refinance those auto loans taken since 2021 when rates started to climb. Many of you are sitting on more credit card debt than ever before, there are more personal loans outstanding than ever, and small businesses are having a very difficult time getting financing to stay open. We are seeing the signs of inflation cooling the economy, which is what the Fed wants — but if they hold rates too high for too long, we could absolutely see a disaster. I have a feeling they'll cut a little sooner than the fourth quarter I was expecting. Maybe not the meeting four weeks from now, but I believe probably the meeting after that.

Half a percent better in a week

We have been on a downward trend in mortgage rates — which is what everybody wants to hear — since the unemployment report came out last week, and rates have continued to get better every single day. Today's retail sales report coming in worse than expected threw a really nice wrench into the rate sheets, in our favor.

To give you an example: we've improved by about half a percent over the last six to seven days. Half a percent in interest rate is a lot — if mortgage rates were 7%, now we're talking six and a half. Now, every loan program is different and every person gets a different rate: your credit score, the type of property, the loan program you're using all determine your rate. But we've seen about a half-percent improvement in a week, and from today's report, it doesn't look like that's going to stop anytime soon.

Get ahead of the market

If you're watching me right now, you're getting information in real time. Most people aren't in this industry — you're busy, you're getting kids ready, you're going to work, and you may not hear this news as rapidly as I get it. So I've been saying for a long time: you need to get out ahead of the market.

Maybe your plans have been on hold. You want to sell your home, but your current rate and payment are lower than what you'd get on the next house. First-time buyers keep feeling priced out. You've heard loan officers say “buy now and refinance later” and thought, yeah right, I can't afford that payment. But I can tell you very confidently that right now is the time to start that application. Getting pre-approved does not mean you have to buy a home tomorrow. Pre-approvals stay good as long as we keep updating your documents: pay stubs are good for 60 days, bank statements for 60 days, a credit report for 120 days. As long as we refresh documentation as it expires, your application stays open and ready for you to execute immediately when you find the right property.

And when rates do come down and the Fed announces that first cut, a ton of people will come to market and get excited. You want to be ahead of that. You do not want to be out trying to get an offer accepted against multiple offers.

Does a recession mean home prices drop?

You keep hearing me say we need the economy to cool, that we're probably already in a recession. So you might be thinking: should I buy right now? Will home prices come down? Should I wait?

Here's the thing: not every recession drops home prices. I pulled a Bankrate article published two days before this show, and it said they still anticipate home values will increase by 6.4% in 2024, and they do not see a decline coming in 2025. You can look that article up yourself. The key takeaway: low levels of inventory mean sellers continue to have the upper hand. With very few homes for sale, it is very difficult for home prices to come down. The article also noted that mortgage rates have come down from their peak but are still high, and steep home prices are dissuading would-be buyers — which tells you right now is a good time to start looking, before everybody else comes out of the woodwork. And if rates drop further, that spurs the market for both buyers and sellers.

The contingent-buyer trap

Sellers, you might ask: why are you telling me to sell right now? Because if you're selling a home and you need the equity from that sale to buy the next one, you're going to be a contingent buyer. If you go into escrow and the buyer on your home falls out — they can't get their loan, or an inspection turns up repairs you can't agree on — the house you're buying falls apart too. So in a multiple-offer situation, a seller will accept the non-contingent offer first, from somebody who doesn't need to sell a home to buy theirs.

And if you're a low-down-payment buyer — FHA, VA, down payment assistance — you'll also have a harder time winning multiple-offer situations, because sellers gravitate to the strongest offers: non-contingent, larger down payments, or cash.

Two years of pent-up demand

The key issue is inventory. We do not have enough homes to satisfy the number of people who need to buy — and it's not just first-time buyers. I have a client right now in a one-bedroom condo who has had two children since buying it. A one-bedroom condo, with two kids — and they chose not to move because they didn't like where rates were. They're now pre-approved and out looking. This has been happening since 2021: families growing, families shrinking, kids off to college, people wanting to move to Palm Springs or Havasu or Vegas or back to Tennessee or Georgia. All of those plans have been on hold, and all of those people need to act on that cycle of life — along with all the first-time buyers who've been waiting. If you wait for the announcement that the Fed has cut, you'll be competing with all of them at once. Once they cut once, we all know they're going to continue to cut.

Buy now, refinance later — with help

That advice you've heard for two years — buy the house, refinance later — now is a great time to be thinking about that strategy, because we know we're on the downward trend. You could buy something right now and have an opportunity within the next 12 months to refinance into a better payment.

And there are always programs: a 2-1 buydown, a 1-1, a 3-1. If you're buying a home — not just first-time buyers, any buyer — you can negotiate with the seller to get one of these programs paid for, lowering your rate and payment in today's market while you wait for rates to improve, and then take advantage of a refinance.

Many of you are carrying heavy credit card debt. If you're a would-be seller whose credit score has taken a hit because your cards are maxed out, consider a home equity line of credit or home equity loan to pay that debt off — you'll see your score come up very quickly — and then put your home on the market. We have lots of ways to help you buy without necessarily selling first, even if you need the equity from your property. Every single person's situation is different, so the best thing you can do is call the office or schedule a consultation on the website, and we'll build the plan around you.

Why 2008 was different

I want to touch on the 2008 recession — trust me, I lived through it, and it was not fun. But the 2008 housing recession was very different: it was a recession brought on by housing. The loan programs being offered back then meant basically anybody with a good credit score and a heartbeat could get a loan. Buyers took advantage, loan officers offered it — and you can't hand a salesperson a program and expect them not to sell it. Ultimately it comes down to the banks; those programs should never have been allowed.

Since then, the CFPB and the Dodd-Frank Act brought in the regulations that needed to happen. Just about every buyer who owns a home today had to qualify for it — show documentation, put money down or use a down payment assistance program, and prove they could afford the loan. A big housing bust doesn't happen until people who own homes can't afford their payments. They can afford their payments, and we don't have enough inventory. I truly don't believe that even a full-blown recession will bring home prices down this time.

The 1971 lesson

Here's a great takeaway to end on. In 1971, interest rates were about 7.3%, and many home buyers said: we're not going to buy, we'll wait for rates and prices to come down. It wasn't until about 1991 that rates first came down below what they were in 1971 — and by then, home prices had quadrupled. Fact-check me, go look it up — but I hope that drives the point home.

Wrap-up

I hope you guys are ready to get your applications started, get your consultation, and get prepared. Rates are changing, the economy is cooling, we've had two reports pointing the right way, and I think a Fed rate cut this year is absolutely going to happen. I want all of you to have the opportunity to get what you need — so call my office or visit mortgagemomradio.com. I'll be back right here next week, Wednesday at 1 PM Pacific on YouTube. See you all real soon.