Why Do Mortgage Rates Change So Fast? Inside the Rate Roller Coaster

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Why a half point matters more than you think

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom. Interest rates have been up, down, up, down — and today we're talking about what's sparking all of it, what I'm reading and watching, and what I think we see in the coming months and into 2024.

If you are out there looking at homes, writing offers, hoping to get one accepted, it is very important that you and your lender are close friends — that you check in every couple of days to see whether rates have moved.

Here's why. Earlier today I ran a payment for a new client wanting to get pre-approved. At 6.5%, for their sales price and down payment, the payment was $3,900 a month. At 7%, the same purchase was $4,110. The rate changes the payment, it changes how much you qualify for, and it changes whether the property is affordable for you. The last thing you want is to get pre-approved, look for two months, fall in love, get an offer accepted, call your lender back and find out the payment isn't doable any more.

The debt ceiling, the Treasury bill, and the spike

So what happened. This came from the service I follow for rate movement, sent out last Friday — today is Wednesday, and if you're hearing this on the radio Saturday you're a couple of days behind. This was right before Memorial weekend.

“Debt ceiling fallout: as of this writing there has been no resolution to the debt ceiling debate where Congress and the White House agree on a plan to lift our spending limit. In the absence of lifting our debt ceiling there is a risk of debt default and/or a credit downgrade. Any of those scenarios would be very disruptive to the financial markets and our overall economy. We are already seeing upward pressure on rates due to the lack of resolution. The one-month Treasury bill spiked to 5.6%, up from 4% just a few weeks ago. This dramatic spike has also placed upward pressure on the 10-year yield and mortgage rates — the former hit two-month highs on Thursday.”

So a couple of weeks ago I was on here telling you we were at the lowest levels we'd seen since about October 2022. A week and a half later, we're back at high rates.

Two things did it. First, the Fed. At the last meeting, most analysts felt that was the end of the hikes. I told you at the time I didn't think we were done — I thought we'd see another quarter point in the middle of June. Then last week the jobs and inflation numbers came out, and analysts flipped: now they think the Fed hikes at the next meeting, June 13th and 14th, exactly two weeks from today. And as I've explained before, it's all about anticipation. If the market expects a quarter point, lenders build that quarter point into the rate sheets before the announcement. That's what happened last week.

Second, the debt ceiling. If they don't raise it, the United States — one of the strongest currencies in the world, held to a top standard — gets downgraded. Stock markets fall significantly. I read one estimate that a failure to resolve it could wipe out ten trillion dollars of homeowner net worth through a stock market plunge of 45%. That's not a prediction that it happens; that's analysts working through what-ifs. Everything in the market — stocks, crypto, mortgage rates — runs on what-ifs and assumptions.

Then over the weekend, on Saturday, they announced an agreement, and it went to the House to vote on. And all of a sudden this week rates are improving again. It has been an absolute roller coaster.

What Fed officials were saying

Some of the Federal Reserve members started making public statements, and that's part of what set off last week's increases. Here's a Reuters piece from May 31 — I finally figured out that today is May 31st.

“Federal Reserve Bank of Cleveland president Loretta Mester says no compelling reason to wait to implement another interest rate hike, the Financial Times reported on Wednesday. 'I don't really see a compelling reason to pause,' Mester told the Financial Times in an interview. 'I would see more of a compelling case for bringing the rates up and then holding for a while until you get less uncertain about where the economy is going.'”

Her comments came after some Fed policymakers hinted they may support a pause in June to assess the impact of tightening so far. Ten straight hikes have brought the U.S. policy rate to a 5 to 5.25% range. Mester also said the debt ceiling deal brokered by President Biden and House Speaker Kevin McCarthy could relieve a big piece of uncertainty about the economy — and the legislation passed an important hurdle late Tuesday, advancing to the full House for a vote expected Wednesday.

So there's one policymaker saying she'd vote for another quarter point rather than pausing. Nobody is talking cuts yet. Most of what I've read says no rate cuts at all in 2023. If they raise another quarter in June and then hold in August, they most likely hold through the rest of 2023 — no more hikes, but no cuts either. The cuts show up in the 2024 forecasts, and that may not mean early 2024; it could be the middle or the third quarter. Some analysts are calling for seven cuts in 2024. That would be fabulous. I think seven is a little overzealous. But the bottom line is we're almost there.

Why rates improved this week

Here's the other note I read, and it explains the relief: “Signs that global inflation is cooling, disappointing growth out of China and falling stocks are all giving the bond markets a boost as the market awaits a signed debt deal from Congress. After yesterday's headlines that inflation eased in Spain, this morning Germany is reporting that inflation dipped to its lowest level in more than a year, while India also said inflation was cooling. The Fed's Bowman said the housing market rebound could impact the inflation fight, but she also noted that the decline in rents should appear in future inflation prints. Mortgage bonds are higher while the 10-year yield has fallen to 3.65%.”

The JOLTS report showed 10.10 million jobs available on the last day of April, up from 9.745 million. Technically, the Fannie Mae 30-year 5.5% coupon has risen above its first resistance level and has its sights on the next. “This appears to be a classic reversal higher on the heels of the debt ceiling optimism, but a lot still has to go right before we can get overly bullish. Remember the Treasury coffers are depleted and it may have to raise cash to fund the debt deal by offering more government securities, and at the same time the Fed is not buying bonds and banks are possibly buying less if at all. Continue to lock where you can, but for those files closing outside of a 30-day window consider floating. Watch closely with us as we wait to see if bonds can bust through nearby technical hurdles.”

What that's telling you: we hit a high last week, then the debt deal drove stocks down, which pushed money into the bond market, which brought our rates down. We broke through one of the technical resistance points, which usually becomes the new plateau, and they're hoping we break the next one.

So expect volatility over the next couple of months. The Fed wants to hike, the government has been fighting over the debt ceiling, inflation is coming down — we're being pulled in several directions at once. If you're shopping for a home, check in with your loan officer every three or four days to confirm your pre-approval still means the same payment and the same price. If you're refinancing, get the application started and talk daily about when to lock.

The best hedge against inflation you can buy

Before the break I said we'd talk about the easiest way to fight inflation. I did a consultation today with someone worried that if they buy and rates go up, their payment could change. It is so important to understand what a fixed rate actually gives you.

From the article: “Owning a home helps protect against inflation. You're probably feeling the impact of high inflation every day as prices have gone up on groceries, gas and more. If you're a renter, you're likely experiencing it a lot as your rent continues to rise. Not only will buying today help you begin to build equity, a fixed-rate mortgage can stabilize your monthly housing costs. Unlike rents, which tend to rise with time, a fixed-rate mortgage payment is predictable over the life of the mortgage, typically 15 or 30 years. When the cost of most everything else is rising, keeping your housing payment stable is especially important.”

Rents move alongside inflation. When your lease comes up for renewal, your property manager may raise your payment to offset it — and according to one recent survey, 73% of property managers planned to raise rent over the following two years. Having your largest monthly expense stay stable in a time of economic uncertainty is a major perk of ownership. If you keep renting, you don't have that protection.

Why values haven't fallen

Everyone expected property values to plummet when rates went up. They haven't. In some areas they're still increasing; in others we've seen a slight decline of a couple of percent. Nothing spectacular. So anyone who bought kept their equity, got a rate at or below where the market is today, and has a stable payment and a place nobody can make them leave.

Why haven't values dropped? There aren't enough homes for sale. Why aren't people selling? Because they have a 3% rate, or 2.5%, or 4%, and if they sold and bought something else their payment would go up. So they stay put, and that keeps values high.

When rates do drop, a $700,000 or $800,000 property becomes more affordable, and you get a wave of renters becoming buyers and a wave of sellers who've been waiting to make the normal move — people stay in a home three, four, five, maybe seven years and then trade up or downsize. That natural evolution is paused right now. When it restarts, you'll see more inventory, but you'll also see a lot more buyers. I don't think we get flooded with listings to the point that values fall. I think the market gets buzzing, and equity starts building again.

So my best guess, and I don't have a crystal ball: a hike in June, then we hold, and hold for a while. They're going to make sure inflation gets back to where it needs to be before they start cutting, and then they'll cut every meeting or every couple of meetings. But when those rates start coming down, the market is going to buzz — applications, buying, bidding wars, all of it. In my opinion, we'll see what we saw in 2020 and 2021.

Homeowners: the debt math beats the rate math

I haven't given homeowners much attention, honestly because refinances are slow — most of you have very good rates. The majority of people looking at a refinance now aren't doing it for a better rate on the mortgage; they're doing it because they've accumulated debt they need to pay off and they have equity in the home.

And you've probably accumulated more than you realize, because when the prime rate moved, your card rates moved. You're paying more interest every month, which grows the balance even when you make the minimum.

We have a lot of clients inquiring and then choosing not to move forward, because the mortgage payment would go up. But two things. One: you can always refinance again when rates come down. Two: have you actually written down every monthly debt you have and what it costs you?

We took a refinance application last week that's in process now. The client is giving up a 3% rate on their mortgage and going to about 7.25%, based on their credit score, the loan-to-value and how much cash they're pulling out. Think about that — 3% to 7.25%. Yet when we wrote out all of their monthly debts and everything they're paying off, even with the mortgage payment going up, they save $1,500 a month out of pocket.

Every person's math is different. I just want the sentence “I can't refinance, I'd lose my rate” out of your head long enough to ask what the student loan costs you, what the personal loan costs you, what the card minimum costs you, what the car costs you. Many homeowners have enough equity to pay those off. And the equity lines a lot of you took specifically to avoid touching your mortgage — those payments are up and the interest is up. Six or seven percent on a new mortgage is a whole lot lower than what's sitting on those cards.

A real estate agent watching, Heather, put it well: it's an excellent time to get qualified and see where you are on purchasing power — and if changes are needed to get you there, find that out now, so when you're ready you're not waiting on an approval. As long as we keep the credit and income documents updated as time goes on, a pre-approval stays active.

Q&A: what sources do you use?

Giselle asks if I'll share the articles and websites I referred to.

The homeownership-and-inflation piece is from Keeping Current Matters — keepingcurrentmatters.com. The debt ceiling and bond market commentary is from Tabrasa, also known as Mortgage Market Guide. And the Fed comments came from Reuters. I'm not pulling from Fox News or the New York Times; I go to the places the financial data actually comes from.

Q&A: clients who are skeptical about lenders

Giselle also asks, as a realtor, what tips I have for clients who are skeptical about talking to a lender.

Honestly? There are a lot of loan officers who come across like the used car guy — a little pushy, a little sleazy. And there are a lot who don't take their time and don't educate. Someone calls, says they'd like to get pre-approved, and gets: fill out this application. They run the numbers, send them back, and say congratulations, you qualify for $500,000, your payment will be $4,500 a month, let me know when you find a property. No conversation. No important questions asked first.

I did a consultation on the phone today and my questions started somewhere else. You want to get pre-approved, that's fantastic — but you've been window shopping, I guarantee you're on realtor.com or Redfin. What are you seeing? What price range do you need to be in to find something you'd be happy buying? They said $500,000; they can't find anything below that. Is that a single family or a condo — because I need to know whether HOA dues go into the payment. Single family, in that area, in that price. Great. Now, down payment: do you have it saved, do you need assistance, what's available? They had $20,000. So realistically we're looking at an FHA loan at 3.5% down, you'll be short on closing costs, and you should talk to your agent about whether this market allows negotiating a closing cost credit — but let's assume they can, and your $20,000 gets you into the $500,000.

Now, what monthly payment were you looking for? They said about $3,500. I ran the FHA payment at today's rates and it came out around $3,950. And I told them: I don't want you to do an application with me. I don't want to pull your credit and take you down that path if $3,950 versus the $3,500 you said was your comfort level isn't something you can afford.

It is very important that people know they can afford what they're buying. You have to assume you'll be in that payment a long time. Maybe we all get lucky and rates come down and we refinance. But we can't hang our hats on that and figure we have enough savings to swing it for a year — because what happens at the end of that year if rates didn't come down?

That client and I kept talking, about the property tax and mortgage interest and mortgage insurance deductions and what that does to their return, about equity, about the possibility of refinancing later — and they decided the higher payment was doable, and we started the application. That's the difference. And when someone isn't ready, we don't say “no, sorry, try again later.” We give them the path: save this much, work on this part of your credit, pay these things off. A road map to home ownership.

A real client, live on the phone

Heather, an agent on my team, wrote in that she has a client for whom refinancing everything into one new loan was better — saving them $900 a month. I wanted the numbers on air, so I called her.

Their current rate is 4%. The new rate is about 7% — a bit higher than it might be because they need to work on their credit. They're paying off all their debt, including personal loans, and still saving $900 a month. They'd discussed a HELOC, but a full refinance with cash out was much better for them. Nine hundred dollars a month right now is huge for a family.

Wrap-up

If you've got debt and you're a homeowner, call us and let us run the numbers. If you've been thinking about buying — I say it week after week — get off the fence and get pre-approved. It's the best thing you can do to fight inflation: stability, a payment nobody can raise, a stepping stone. Rent it out later, refinance when rates drop, make some cash flow, and go buy the next one.

Reach us at 844-935-3634 — 844-WE-LEND-4. To know when I go live every Wednesday, text the word MOM to that same number; just M-O-M, and you'll get one text a week with a link to join. I'll be back next Wednesday. Talk to you all real soon.