Why Are Mortgage Rates Going Down? The Consumer Debt Signal Behind the Turn

Auto-generated captions cleaned for readability. Commercial breaks and repeated housekeeping have been trimmed; licensing information appears at the bottom of this page.

Today's show

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom, and every week I bring you what's going on in the market — especially the things driving change in our mortgage and real estate world. The hot topic right now is mortgage rates: they have come down a bit. We covered the Federal Reserve meeting last week, and I said on that show that I felt we were getting to a turning point, even though the Fed didn't come right out and say it. Now we're starting to see more evidence of that turning point, just as I predicted.

We're also going to talk about credit card debt and consumer debt — what you should be doing right now to get yourself freed up, especially if you're a homeowner — and about getting ahead of the market: being out looking at homes before a slew of additional buyers gets there first. This is an interactive show, so put your questions into the feed and I'll read them out loud and answer them.

Why are mortgage rates improving?

Last week the Fed met on Wednesday, and at the end of the week our unemployment report came out. It was the first time that report came in worse than expected — fewer jobs created than anticipated on the most recent numbers. That gets the market excited.

As I've talked about on recent shows, mortgage rates are tied to the market very much like stocks. Reports and news can spark stocks to rise or fall, and mortgages work exactly the same way. Investors read between the lines of these reports and try to determine what's coming. One thing Fed Chair Powell said in the last Federal Reserve statement is that he's looking for the economy to start cooling — not just spending, but jobs and inflation too. So now that we've finally had a jobs report come in below expectations, many investors are reading it as: if jobs aren't being created as quickly, we're cooling, and there's a good chance the next inflation report improves. As I said last week, I expect the next inflation report to come in level — not worse like the last two — or possibly even a bit better.

The consumer debt signal

Why do I think spending is slowing? Let me show you what I'm reading. We've got a lot more credit card debt than we used to, and as card debt climbs, people start running out of spending limit. With inflation and higher interest rates, the interest on those cards, student loans, and car loans is higher — we're all feeling the pinch. In my opinion, simply being limited in the amount of credit Americans can access is going to slow what people buy.

Here's an article I pulled from the Federal Reserve Bank of New York. Their Q1 2024 household debt and credit report comes out next week, on Tuesday, May 14 — and I expect it to be worse than the last one. The last report, covering Q4 2023, said household debt reached $17.5 trillion, rising $212 billion in the fourth quarter. Credit card balances increased by $50 billion to $1.13 trillion. Mortgage balances rose $112 billion to $12.25 trillion. Auto loan balances rose $12 billion to $1.61 trillion, continuing an upward trajectory seen since 2011. Delinquency transition rates increased for every debt type except student loans — and student loans haven't fallen into delinquency only because many are still on deferment.

When I read reports like this, what it tells me is: our debt as consumers keeps going up, and eventually there just isn't credit available to keep adding to it. Delinquencies rise, and people simply cannot spend the way they were. That brings me to the tipping point I've been talking about. At the next meeting, the Federal Reserve is going to have to look very closely at the economy to decide whether to hold one more time or cut. Some analysts are already betting on a cut at the next meeting. I still don't think we're at cut-time at that meeting, five weeks from now — but I believe we are very, very close, and personally I think it might be the meeting after that.

Get pre-approved before the rush

As soon as the Fed starts cutting, more and more people are going to jump on the opportunity to purchase a home. If buying has been your goal and you've had it on hold, take it off hold right now. A pre-approval can take three, four, six months depending on you — your credit, your income. Many times we're building a plan for success: you do the consultation, complete the application, and we give you the roadmap to get to the point where you can be pre-approved and out looking at property. And sometimes you're pre-approved the same day, within hours, and you never knew you were ready.

I've been reading this market for a long time, and I haven't been very far off on the predictions I've given you. I'm telling you we are around the corner from rates starting to be cut — that's my opinion as the Mortgage Mom. Go to mortgagemomradio.com and book yourself a phone consultation right on the website with me, Heidi, Heather, or one of the girls on my team.

Four straight days of better rates

We've seen a nice decrease in rates since that unemployment report, and the gains have continued all week. It's Wednesday: rates got better Friday, better again Monday, again Tuesday, and again today. And today was actually a bond auction sale day. Another thing in the Fed's statement last week: come June 1, they're going to slow the amount of Treasuries they're selling off the balance sheet. Typically, on days when those Treasury sales happen — selling at today's discounted prices — mortgage rates get worse that day and for a couple of days after. Today they did a sale, and our rates didn't budge; they're still quite a bit better than they were last Wednesday before the Fed met.

Basically, every indicator that signals a turning point is showing positive. The economy is cooling, spending is slowing, consumer debt is up — the things the Fed wants to see are coming to fruition. What matters now: we need inflation to come down further at the next report, we need unemployment to stay soft, and we need spending to keep slowing. All the signs are there, and being in this industry, that is very exciting: we're almost there, and we're all going to see some relief.

Record equity, record card debt

Americans are sitting on more equity in their homes today than at any time in history. But consumers are choosing not to tap it, because rates are high and nobody wants to refinance away the really low rate they got during the pandemic. So people aren't relieving themselves of their debt — they're just struggling.

If you're a homeowner sitting on a lot of equity, this is the time to consider a home equity loan or home equity line of credit to get that debt paid off — without touching your first mortgage. Many of you have maxed-out credit cards and high-rate personal loans. And remember what maxed-out cards do to your credit: if your card limit is $10,000 and your balance is $9,700, your score is much lower than it would be at a low utilization. Get the cards paid off through an equity line or equity loan and that score comes up very quickly.

Then, when rates come down — and I think we're talking somewhere in the next 6 to 18 months, probably more like 12 — we can consolidate everything: your low-rate first mortgage plus the equity line or loan, into one new loan with a payment lower than the two payments combined. And of course, it only makes sense if it saves you money over and beyond what the credit card debt is costing you today. That's exactly what we work through in a consultation.

Personal loans vs. equity loans

There are always personal loans as well. A personal loan can consolidate credit card debt, but it will typically carry a much higher interest rate than a home equity line or loan, and a shorter term — usually five or six years, sometimes seven. With a home equity loan, you choose the term: 10, 15, 20, or 30 years, and a longer term can make the monthly payment to clear that debt much lower than a personal loan's.

What to bring to a consultation

When you call the office or schedule an appointment, have the most recent statement pulled for every debt you have: every credit card, personal loans, student loans, car loans — a trailer, an RV, a boat, any debt, period. We'll ask what you owe, the interest rate, and the years remaining, and plug it all into our blended-rate calculator to show you the total interest you're paying monthly and your blended interest rate. From there we start sorting: this one's a great rate with two years left, don't touch it — ooh, this one's 33% with Capital One, that goes. It's a very individualized consultation, and having those statements in hand makes it that much better.

Buyers and sellers: don't wait for the cut

For anybody who hasn't bought yet — low-down-payment borrowers, down payment assistance, vets with zero down who need help with closing costs — right now is your opportunity to negotiate with a seller for those things. As soon as rates start to come down and every home you want has multiple offers, you won't have the leverage to ask for closing costs; sellers will select the strongest offer. Where I believe we should be giving veterans the best opportunity — they deserve it — sellers in a multiple-offer situation look for bigger down payments, all cash, and non-contingent buyers.

And if you're going to sell your home to buy the next one, think about listing now rather than waiting: as we talked about in last week's episode, becoming a contingent buyer makes it harder to win against an offer with a big down payment and no contingency.

After all these years of giving you advice online, I haven't been wrong about this kind of turn. Get ready, get prepared, get your application started, get your consultation. If you have a bunch of debt, get it consolidated. If you own a home sitting on a ton of equity, do something about it — and do not miss a payment or let your credit score drop.

My website is open: book an appointment, and if you don't see a time that works — you need an early morning or later evening — hit “contact us” and it comes directly to me, and I will schedule a time that works for you, as long as it's not 11 PM and I'm in bed. mortgagemomradio.com. I hope I gave you valuable information, and I'll be back right here next week, Wednesday at 1 PM on YouTube. Talk to you guys soon.