Interest rates in Q4 2023
After watching this interview with Chairman Powell this week to investigate what the current monetary policy thoughts might be, we kept digging and found some other interesting data that buyers may want to be aware of.
Where are interest rates headed?
No one knows the answer to this question. It is having an impact on the housing market all over the country with mortgage applications hitting a 28-year low. Having insight into where rates may be in the future could present buyers with a small window of opportunity to secure the lower pricing currently available and speculate on lower rates in the future to lower payments through a refinance.
Market forces set mortgage rates, and generally, there is a correlation to the ten-year treasury. The relationship between the 10-year (TNX) and mortgage rates varies. There is a good article about that here, along with a historical chart here. Generally, the spread is 170bps but widens during economic uncertainty, it is currently hovering at about 3% (300bps).
The willingness of banks to lend based on risk factors and capital requirements is one component that drives the spread between the TNX and 30-year mortgage rates.
The Federal Reserve also dictates monetary policy, easing or tightening money supply using their Fed Funds rate and purchasing US treasuries and mortgage-backed securities.
So, the Fed doesn’t set mortgage rates, but they do influence them by telegraphing to the markets where they may move in the future. The Fed’s goal is full employment and stable pricing. The recent rate increases are a direct result of the price inflation we have seen as an after-effect of COVID stimulus money hitting our economy.
What is the “Dot Plot”, and what can this tell us about the direction of rates in the future?
The Fed releases a summary of their economic projections after FOMC meeting with the latest report from September here. As part of this report, there is a chart called the “dot plot” on page 4 of this report. Great article explaining the dot plot here. It is a visual representation of the FOMC participants' assessments of appropriate monetary policy. But it also gives a glimpse into what the committee may think about the future. Obviously, market events, news events, and geopolitical events can cause them to shift their thinking before we get to the future, but I find this interesting when thinking about what direction we may be heading in the future. (A project for a different day will be to look back at historical Dot Plots and see if the 2022 and 2023 interest Fed Funds rates matched previous Dot Plots or not.)
What is the CME Fed watch tool?
The link to this tool is here
If we look forward to June 2024, you can see that the bond trader sentiment is that the traders think that there is a greater than 50% probability that the Fed Funds rate will be below 5% in June 2024. This doesn’t exactly align with the Dot Plot, but it is close.
So maybe, just maybe, the Fed will ease monetary policy before June of 2024. This is great news to mortgage lenders and realtors everywhere. In addition, and this is just speculation, I wonder if the 3% spread may tighten lower mortgage rates even more than the fed decrease in rates. The Dot Plot shows fed funds rate much lower in 2025, at ~ 3.5% and if we add in the typical 170bps spread, that could mean mortgage rates ~5.5%.
How should we use this information and does this provide an opportunity for a window of time for real estate buyers?
No one knows what will happen to mortgage rates in the future, it is impossible to know that. However, we can guess at what we think appears to be the most probable outcome. Given the above, it appears that both the CME traders and the FOMC committee see a possibility of mortgage rates decreasing in the next two years, perhaps as soon as Q2 2024. In our current market, we have seen a decrease in Austin pricing from the peak of 10-15%, depending on the part of town. St Louis Fed data chart is here, showing an approximate 10% decrease overall.
If you are waiting in the wings for rates to decline, you may have a window of time now where you can capture the price decreases caused by higher rates, lock in the 10%-15% discount from the peak pandemic pricing, and then wait for rates to decline in 2024-2025 to refinance and lower payments.
A few examples are here, and you can always check the math on an online mortgage calculator.
$500,000 house with 20% down payment in central Austin today with 7.8% interest rates would have a mortgage payment of $2,883 (excluding property taxes). If rates do in fact, go down to 5.5% in 2025 this same payment could be refinanced to $1,950. This represents a savings of $1,000 a month on the mortgage payment (excluding property taxes).
The additional benefit to a buyer is that prices are likely to increase when rates ease slightly as inventory remains rather low and may be likely to remain low due to the lock in effect Covid era 2% rates has on inventory moving forward. So a buyer that purchases now may be able to save ~25% on interest rate costs in the future as well as lock in 2023 discounted pricing.
We never know where rates will end up and we never recommend people outright speculate on interest rates, but if your long-term goals are to acquire property and you plan on owning that property for many years, this may be an exciting time to be set up for future success.
Always happy to do the research and be your data nerd so you don't have to!