Please note these are my independent thoughts and ideas and are not considered investment advice. Here is a link to the YouTube video walking through the blog post. #1 BIG PICTURE: Fed has lowered rates 75 bps since September, but why are rates up almost 100 bps?

In September 2024, the Federal Reserve lowered rates by 0.50% and again by 0.25% in November 2024. This is a total Federal Funds rate reduction of 0.75% from September. Since then, mortgage and vehicle finance rates have increased between 0.70% to 0.90%. That’s a more than a 1.40% divergence between the Fed cuts and the upward trend in mortgage rates. Why has this happened?

Source: https://www.mortgagenewsdaily.com

When the Federal Reserve changes their target rate, this typically is only for rates on short-term loans (1, 2, 3-Month US Treasuries). This typically impacts business loans which have floating rates based-off short-term US Treasury benchmarks which drives SOFR. This is called the short end of the yield curve.

The mortgage and vehicle finance market is priced off the longer-term US Treasury bonds like the 10-year bond, which is considered the long end of the yield curve. The Federal Reserve has little control of the long end of the yield cure (or longer term bonds) unless they are doing quantitative easing, but we can talk about that later if there is interest in this topic.

Source: https://www.investing.com

The organic drivers for long-term US Treasuries are, among others, inflation. Well, since the cut by the Fed, there was a period where rates really jumped up pretty aggressively. And no one in the main street media is really talking about why, so let's try to unpack the potential reasons for this.

International large institutional investors measure their performance on bonds relative to inflation. For example if inflation is 2.5% and bond yields (similar to interest rates) are 5.0%, then the real return is 2.5%. So if inflation is increasing or investors are expecting higher inflation, investors require a higher rate of return to remain invested or invest in a certain bond. That also applies to US Treasuries.

With that said, based on CPI and PPI data from the US Government (and other sources) inflation seems to be picking up, which is likely the reason behind long-term bond rates going up. This translates to mortgage rates because mortgages are priced off the longer term US Treasuries (particularly the 10-year). 

What does this mean for buyers, sellers, renters, multi family and commercial?

Buyers - Higher rates may reduce transaction activity opening people up for better negotiation opportunities. But monthly cost to own increases. 

Sellers - We are no longer in a 3-4% rate environment where multiple buyers are bidding on the same home. Sellers now have to pay attention more to comparable sales and may need to reduce price if there is no activity or be willing to negotiate. Prices still remain above 2019 levels in the US and this can be a topic for another post.

Renters - May see rents increasing if inflation continues to accelerate.

Multi Family - Cap rates will likely trend with long term bonds resulting in downward price pressure. Rents may increase if inflation accelerates. Overall trends in price may continue upward depending on rent trajectory. This can be a topic for a post in itself as there is a lot going on here.

Commercial - Cap rates will likely trend with long term bonds resulting in downward price pressure. Rents may increase if inflation accelerates. Overall trends in price may continue upward depending on rent trajectory. This can be a topic for a post in itself as there is a lot going on here; however, I’m not going to spend much time here as I don’t focus on this market.

I write these to send to my clients and prospects to give them a better understanding of how the bigger picture may impact their individual situation. Remember, all the topics discussed above changed on a weekly basis, but the framework is likely to remain the same. Not financial advice, just sharing ideas. If you disagree or have a better understanding of this situation, please comment with your reasoning and back it up with data.