Three Things to Know About The Absurdity of Higher Interest Rates in The Midst of Lower Inflation

By Ryan Casey Stephens,  FPQP®
Special Contributor

The absurdity of higher interest rates despite lower inflation continues this week. The 30 Year Fixed mortgage rate is 6.95 percent, at heights not seen since November when inflation was nearly two points higher, above 7 percent. Mortgage bonds, which largely determine rates, are on shaky footing. Some crucial data this week will cause them to move one way or the other, but it’s not all scary. Moments like this also present enterprising buyers with opportunity.

Let’s take a look at what’s ahead in this week’s Three Things to Know.

Still Searching

It’s a big week for jobs data. Between Wednesday and Friday, we’ll get the latest installments of the ADP Employment Report, the Job Openings and Labor Turnover survey (or JOLTS), Initial Jobless Claims, and the BLS Jobs report. Fed Chairman Powell has made it abundantly clear he’d like to see weakening employment numbers in response to rate hikes. If weaker jobs data materializes this week, which the markets seem to be expecting, it could help fuel the rally we need to see mortgage interest rates head down once again.

First Thing to Know:

In our Fed-Centric environment, appeasement seems to be the winning strategy. If lower jobs numbers begin to come in, mortgage bonds could receive much-needed support and rates could drop.

Speak of The Devil

Chairman Powell will be taking center stage on Tuesday and Wednesday as he speaks first to the U.S. House of Representatives, then the Senate. It’s a regular occurrence where he briefs lawmakers on the Fed’s monetary policy and reasoning, but that doesn’t make it safe. Jerome Powell has a track record of shaking up markets when he’s handed a microphone, so his tone and content will be very important to watch. If he sticks to his script there’s no upside for us, but if he surprises everyone with something he says, it could be bad for mortgage rates. 

Second Thing to Know:

If the Chairman were to say something traders don’t like or expect, sell-offs are a risk. We’ve seen wild swings in mortgage bond values this last few weeks, so we must be on guard against potentially higher rates Tuesday and Wednesday. 

Take Advantage of The Turmoil

When interest rates dropped by one percent last month, I think many buyers thought the worst had come and passed. However, with the sharp increase again in the last week, it’s likely many shoppers will put the brakes on again. Should they, though? Just like with any downturn, there’s opportunity present. Let’s use a fictional home buyer in North Texas to explain:

Jim was considering purchasing a $500,000 home using a $400,000 mortgage loan, but rates have risen 1 percent, and his payment is now $257 per month more than last month’s rates. That translates to $3084 per year in increased cost. However, Jim isn’t the only buyer getting cold feet, which means sellers are seeing days on market increase. 

Due to less traffic, Jim discovers he can get $10,000 off the price of the home he wants, making up for more than three years of increased payments. Assume also that in those next three years rates decline and his home appreciates $15,000. Final assumption — a refinance will eventually cost him $5,000. If you net all that out, Jim will benefit a total of $20,000 because he chose to go ahead with a home purchase when rates were high and buyers were running. That’s no small accomplishment — that’s an opportunity! 

Third Thing to Know:

As a real estate professional, it’s critical to be able to articulate the counter-narrative during frightening times. Many buyers will assume there’s very little reason to buy now, unless you’re able to show them otherwise. 

---

Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].