Mortgage Rate Trends

The recent decline in mortgage rates—staying below 6.5% for most of September—is a meaningful shift for housing. Though it may not feel like much for those accustomed to 2% or 3% rates, even small drops can have a major impact on affordability.   For example, moving from 7% to 6.5% puts 2.125 million more households in a position to buy. If rates were to fall to 6%, that number more than doubles, pricing in another 4.246 million households.   That said, it's important to consider the underlying reason behind the decline: the cooling labor market. Our historical research shows a consistent two-phase dynamic between the economy and housing:   Phase 1. A slower job market initially reduces housing demand despite lower rates. This is driven by job insecurity and weaker consumer confidence. Phase 2. Falling interest rates eventually outweigh those headwinds, helping revive sales activity.   Right now, the housing market is still in Phase 1. This is consistent with the historical pattern where housing acts as a leading indicator—it slows before the broader economy but also turns the corner sooner. Zonda Alexander Edelman Trevor Tetzlaff Sean Fergus Sarah Bonnarens Tim Sullivan Keith Hughes Cameron McIntosh Kyle Cheslock

Per a recent analysis by Redfin, 92% of all mortgages are below 6%. 82% of mortgages are below 5%; 62% are below 4% and a lucky 23.5% are below 3% (nice job guys). See the graph. The current 30-fxed mortgage rate is now 7.58%. And the 10-year UST just hit a 15-year high of 4.21% yesterday - front page WSJ news today. The last time 10y UST was that high was back in June 2008. Those were interesting days... Dana Anderson, writing for Redfin said: "Many would-be sellers are staying put rather than listing their home to avoid taking on a much higher mortgage rate when they purchase their next house. This “lock in” effect has pushed inventory down to record lows this spring." As I've said previously, this dynamic is showing us that Fed policy appears to be affecting Supply more than Demand, despite the Chairman's comments to the contrary. Powell has been quoted saying the Fed could only impact Demand with their policy. Based on what is happening in the mortgage market, I think we can conclusively say that is not the case. High rates are affecting supply in a major way. Given that home values haven't dropped much since 2022, we can conclude that the supply curve has shifted nearly as much as the demand curve. What are you seeing out there? What I see, anecdotally, is that when a house goes up for sale, buyers pounce because there are so few houses for sale, while there are still buyers who relocate for jobs, etc. It's pushing up the bids where I live. #fedpolicy #interestrates #riskmanagement

The 10-year Treasury borrowing rate is 3.9%. Under normal circumstances and based on a normal historical spread between the two interest rates, the average mortgage rate should be 5.6% to 5.9% today. The mortgage rate spread is instead still abnormally high (at 250 basis points) and therefore yielding 6.4% average mortgage rate. One reason for the large spread is due to the cloudy balance sheet among small and regional banks who have exposures to deteriorating office loans. To raise cash, some banks are selling off mortgage loans and mortgage-backed securities. The Federal Reserve’s own reduction in holdings of Fannie and Freddie backed mortgage backed securities is also at play.

BR is Bullish on Resi Credit: The U.S. residential mortgage market is $14T. When a mortgage is out-of-the-money, the loan trades below par and the prepayment rate is ~3% CPR which means only 3% pre-pay per annum (i.e., owner moves, extra cash flow, death), a low prepayment rate. When mortgage rate fall, homeowner who are in-the-money by 75bs are likely to refinance, CPR jumps to 20%+ given homeowners seek to lower their monthly payment. It’s wonderful news for homeowners, but for those who own premium coupon MBS they are subject to negative convexity. Convexity measures the sensitivity of a bond's price to changes in interest rates. Bonds with positive convexity benefit commensurately to a decline in rates as future cash flows are discounted at a lower rate, making them more valuable. MBS on the other hand have negative convex when the price approaches par as the investment doesn't increase as much from this inflection point due to prepayment risk rising as the bondholder loses the opportunity to earn the higher interest payments and then must reinvest at lower rates. The bar chart below shows the rate distribution for the mortgage universe. As the mortgage rate is now 6.1%, mortgages >6.5% are highly susceptible to early pre-payment. MBS between 5% - 6%, might see prepayments inch up marginally from 3% CPR to 4% as these slightly out-of-the-money homeowners who have felt trapped, now have more flexibility to move since the cost to do so is marginalized. Note that in the U.S., 30-year fixed rate mortgages are priced at spread to 10-year UST (not SOFR or Fed Funds); I expect the 10-year UST rates will decline less than the front end of the curve as the yield curve steepens as the Fed cuts rates. New home sales will benefit in this lower rate environment as will existing homes sales. Be Bullish: lower mortgage rates are net-positive for homeowners/residential credit, home builders, building materials, and mortgage originators.

Higher mortgage rates in the UK are eventually going to hurt.   Markets have now moved to price in a 6.5% peak in UK interest rates by February 2024 and for rates to stay above 6% until the end of 2024.   Given the recent shift higher in swap pricing, which affects the fixed mortgage rates banks can offer, new 2 year fixed mortgage rates could soon be close to 6.5%, even for borrowers with significant equity in their property.    Two years ago borrowers with a 25% or more deposit could fix their mortgage for 2 years at about 1.5%.   Anyone with a fixed rate deal that is soon coming to an end and has to refinance soon, will see their mortgage payments rise significantly. This should put downward pressure on discretionary spending as more and more cheap fixed mortgage rates expire.   Another 2.4 million fixed rate mortgage deals are set to expire between now and the end of 2024.   As the chart below shows, if a household has to refinance from a mortgage rate of 1.5% to 6.5%, their mortgage payments would rise by over 80% (assuming they maintain the term of the loan at 30 years on a repayment mortgage).   They might choose to extend the term of the mortgage to reduce the monthly payments (but substantially increase the total interest paid over the term of the loan).   But increasing from a 30 year term to 35 years would mean the increase in payments would be still be 75%. Increasing to a 40 year term (if allowed) would mean the payments would still rise by 70%.   So eventually, the level of interest rates currently being priced into UK bond markets is likely to be painful for the economy and could lead to rate cuts.   But until enough fixed rate mortgage deals have expired to slow the economy and cool inflation, interest rates could continue to move higher.   Where do you think UK interest rates will peak? And how long until they have to be cut? #interestrates #mortgages #economy #inflation

Having the Home Mortgage Paid Off Before Retirement: A Very Risky Myth   Over 30 years ago, Pat signed notified his company of his retirement. An officer of a Fortune 500 company, a CPA, and my former boss, he hired me to perform a check-up of his financial plan as he and Joyce prepared for this milestone. My analysis was not what they expected.   During his 40 year-career, they had acquired beautiful homes in toney Rumson, NJ, and Florida. When he announced his retirement, he cashed in some company stock to pay off the mortgages—before meeting with me.   “I have bad news and good news,” I said at their planning meeting. “You don’t have enough wealth to retire.” Stunned, Pat said, “I just signed my retirement papers!”   “I have good news, though,” I told them. “Just take out those two mortgages again, and you’ll be fine.”   They did. They have been fine for over 30 years.   It pays to “run the numbers” or perform calculations when making financial decisions. Most don’t. Most must work longer or have less in retirement. This is why people run out of money in retirement.   Morey, a retired CEO and his wife Ann were turning 80. What should have been joyful years were now years dreading the future. They had used up a lot of their retirement accounts. They were in what I call “survival mode:” Cutting back on travel, gifts to grandkids, entertainment, and keeping up their beautiful NYC apartment.   They came to me.   They had no mortgage on their apartment. We got an interest-only mortgage and invested the proceeds.    They returned to their former lifestyle, for the rest of their lives.   Accelerating or paying off your home mortgage may not be a smart decision if you want to build retirement assets quickly and decrease cash-flow risk in your retirement years.   Instead of paying debt early, save that money in 401(k)s, pensions, IRAs, and investment accounts. Take advantage of compounding, save income taxes and wind up with more wealth.   And if this strategy builds wealth that well while you’re working, keep the mortgage—and keep building wealth in retirement!   But you can mortgage your house later or sell it—right? Or maybe get a reverse mortgage.   Banks will not lend to those with little cash flow. Reverse mortgages can be expensive. Having to sell is not a great option.   Having a mortgage during your working years and into retirement may help you: ·  Keep your “equity” working to build more wealth and cash flow. ·  Avoid being real estate rich but cash poor. ·  Pay less in income taxes.   I helped to start CakeClub™ to educate you to always make the best financial choices like these.   Be one of those that proudly state they still have a sizable mortgage in retirement. Your savvy friends will recognize a smart financial decision.   Follow me at Al@AlZdenek.com and CakeClub™ at www.CakeClubapp.com for my experiences and stories over my career. Help me help others achieve their dreams and live the life they want, now! Please repost. Thank you!

Over the past few days, we’ve seen a rise in the 10-year US Treasury yield. Arguably that can be seen as positive because it may mean the Federal Reserve (Fed) doesn’t have to hike rates anymore to temper inflation. However, it’s also exerting downward pressure on stocks and driving up US mortgage rates. In my #WeeklyMarketCompass, I discuss the forces behind the rise in yields and implications for investors. ➡️The catalyst that began the most recent rally in the 10-year US Treasury yield was the release of the Fed’s September “dot plot.” And we’re also seeing an imbalance in supply and demand for Treasury bonds. ➡️More than 90% of existing mortgages in the US are long-term fixed rate mortgages at relatively low rates, so I don’t expect rising rates to impact consumers the way they did in the Global Financial Crisis. ➡️The conflict in the Middle East is a countervailing force that has driven down yields at least somewhat on certain days, as investors seek “safe haven” asset classes, although investors have shown a strong preference for gold instead.

Interest Rate Risk: Why It Matters Even When Rates Are Stable Interest rate risk often hides in plain sight. When rates are volatile, it is top of mind. But when they stabilise — or appear to — many assume the worst is over. This assumption can be costly. Understanding interest rate risk requires more than tracking central bank decisions. It requires recognising that repricing mismatches on the balance sheet do not disappear just because the market quietens. In fact, those mismatches often deepen during calm periods, masked by stable net interest margins or temporary accounting gains. There are two main types of interest rate risk that every bank must manage: Repricing Risk (or Gap Risk): This arises when assets and liabilities reprice at different times or on different terms. For example, fixed-rate mortgages funded by short-term customer deposits create exposure if rates rise — the funding cost increases, but the asset yield does not. Basis Risk: This emerges when two instruments reprice from different benchmarks. For instance, a bank might hedge SONIA-based assets with 3M LIBOR derivatives (historically) or hedge variable-rate loans using swaps indexed to a different benchmark than the underlying cashflows. These risks are rarely symmetrical. A bank might be positioned to benefit in one scenario but be significantly exposed in another. And while earnings-at-risk models can show the short-term impact, economic value measures often reveal the longer-term story — particularly for banks with large maturity mismatches. So why does this matter today? Because balance sheet positioning over the past five years has shifted dramatically. In the ultra-low rate environment, many institutions leaned into fixed-rate lending, chasing margin through duration. Now, as central banks hold at higher levels or begin to ease, the embedded rate sensitivity in those positions becomes more apparent. Here are three reasons interest rate risk still deserves attention: 1. Lagged Effects: Interest rate risk is often slow to materialise. Hedging costs roll off, floors expire, and behavioural assumptions (like early repayments) shift when rates stay high for longer than expected. 2. Policy Uncertainty: Central banks are not done yet. Rate cuts may not come as quickly or deeply as markets expect. Any surprises — especially on inflation or employment — can quickly change the path and catch institutions off guard. 3. Capital and Liquidity Impact: Earnings volatility affects capital. Rate risk also interacts with liquidity risk, as seen in 2023 when deposit outflows coincided with unrealised losses on securities portfolios. These are not isolated risks. They compound. Managing interest rate risk is not about predicting rates. It is about being prepared for multiple scenarios. This includes regularly stress testing key assumptions, assessing both short-term and long-term exposures, and ensuring risk appetite aligns with strategy, even when rates are steady.

Back from holiday and contemplating sales market outlook for H2 2023 in our latest Zoopla HPI report. Higher #mortgage rates haven't de-railed the #housing market as much as the headlines imply. Buyer #demand is down 18% in last 2 months. New sales have slowed with activity for family #homes down the most as people already owning a home wait and see on mortgage rates. There is also a big regional divide - higher rates hit hardest in higher value markets where people need bigger incomes and more equity to buy. The south of England is registering modest price falls - e.g. Southend -2.2% - while prices in affordable and accessible markets near big cities in the north of England and midlands continue to rise by up to 4% (Halifax, Wolverhampton). Its markets with average house prices over £300,000 that are registering the price falls. This also links to how many #FTBs have been squeezed out of the a market. Looking ahead #mortgage rates look like they are peaking at current levels - 5.5% for a 5 year fix at 75% LTV - and they will drift lower over summer and into the autumn - outlook for inflation key factor. This spring lower mortgage rates of 4% boosted demand and activity and we saw house prices actually firm and increase slightly. The sooner we see mortgage rates back to 4-5% the better. Banks are ready to compete on mortgage rates but its the underlying cost of money and the 5 year SWAP rate that matter the most. We are still on track for house price falls of up to 5% at the UK level and then weak growth for 2024. Sales volumes are bearing the brunt of the impact. Read full report here https://lnkd.in/eGfmaE9a

After the FOMC press conference, a September rate cut seems more likely. Markets are betting on three rate cuts by the end of the year. What does a possible rate cut (or two) mean for the housing market? The expectation of a Fed rate cut is already exerting downward pressure on mortgage rates. The 10-year yield (benchmark for 30-YR FRM) is now the lowest since March 2024. Should incoming data on labor and inflation continue to support a more dovish Fed, we could see further, albeit gradual, declines in mortgage rates. As such, we expect a very modest easing in the affordability constraints holding back potential first-time buyers, as well as a little easing in the magnitude of the rate lock-in effect for existing homeowners. However, a decline in mortgage rates may boost demand more than supply. Traditionally, existing home inventory has made up the bulk of total inventory, and approximately 86 percent of existing homeowners have a rate below 6 percent. So, even if mortgages rates fall gradually through the remainder of this year, they are unlikely to fall enough to ‘unlock’ the majority of homeowners.