This Is When Mortgage Interest Rates Will Head Lower

One of the most popular questions Josh and I both get is when are mortgage rates going to head lower? So in today's episode, we're gonna dive into that question exactly. We're gonna tell you exactly what has to happen for mortgage rates to move down. I know a lot of you are sitting on the sidelines looking to purchase, potentially looking to refinance, and this is at the top of your list. So Josh, when you get this question, what's your typical answer? What's funny, Jeb, is it almost always is precipitated by Trump is gonna do X, Y, or Z, and then that tips your hand as to whether they're Trump supporters or Trump haters, but they believe that that's gonna change the economy, force the hand of the Fed, which there's some truth to all of that. So we're gonna go back and walk you through all of the things that have to happen. Yesterday, as we're recording this, yesterday we got the Fed meeting. So you get all the talking heads, lots of experts. You have two talking heads here yammering on to you about what's gonna happen with interest rates or what has to happen. And probably the most interesting one that I saw yesterday, Steve Leishman, very, very smart bond follower, and he was just making a statement that the futures markets over the next 12 months are pricing in 100 basis points of Fed cuts. So Trump wants that. There's things that they're doing behind the scenes. There's things that a new Fed president will come into play at some point in the next year, and we are likely to get 100 basis points of cuts. He said at the same time, the futures markets are projecting 10 basis points of treasury reduction. Yesterday we were at 435 and saying down to 425. So that's interesting. We've been way below that just in this calendar year when we don't really have inflation under control and we don't have unemployment breaking in our favor. So I think there's this expectation that there's sort of a, not a new normal, but a return to normal. And when I hear that return to normal, it's people looking back from say 2005 prior, say 2005 to 1985, Jeb, as crazy as that sounds, we're 20 years past 2005, look at the 20 years prior to that and even possibly the 20 years prior to that. Normal meant interest rates, mortgage rates somewhere between five and 7%. We're under 7% right now. So people think, well, this is just normal. We've just returned to normal. That timeframe also was noted for having a much higher rate of growth in our economy. So when you have GDP growing at four to 5%, those rates may be normal. We are unlikely to ever return to those levels. That's one of the elements that we're going to talk about today. But when you hear this question and you hear this thought, what is the thing that kicks it off in your brain of what has to happen for mortgage rates to potentially move lower and increase affordability for home buyers? Well, I think for me, when I think of lower interest rates, I typically think of a slower economy. I think of something happening in the economy where interest rates would need to be lower in order to stimulate growth, right? One reason that we saw the Fed funds rate at zero during the pandemic, and we saw these emergency rate cuts and all of that was because of all the uncertainty, all the volatility out there in the market. And that's one way, that's one tool that the Fed has in order to kind of stimulate growth, right? They lower the Fed funds rate, makes money really cheap to borrow. Businesses can go out there and get money for basically next to nothing, and then they can go out and push that into the economy. And then that money gets circulated, people spend it and buy goods, all of these different things. But the opposite side of that is, or I guess the con side of that is that growth leads to inflation in many cases. So when interest rates are really, really low, typically means a slower economy. So right now we have interest rates higher than a lot of people want to see, a Fed funds rate higher than Trump wants to see, than I think we want to see, but why? Why is it like that? Well, because at the moment we have pretty stable employment when looking at the numbers. We'll talk about the contracting numbers and that sort of thing, but when you're looking just face value at the number by in and of itself, it looks strong. On top of that, inflation is still pushing high twos, depending on what measure you're looking at. And we've got uncertainty with tariffs. And so all of those things are playing into why we're not seeing that pullback in rates. Now, I'll be the first to tell you, I thought we would have seen a break in the economy more than a year ago, right? All of that stimulus that happened, all of that money pumped in was getting spent. And at some point I thought the consumer was going to run out of that money. Businesses were going to start to have to pull back and we would see this slow down and potentially a recession. We're not there. We haven't been there. And therefore I think that's the reason that rates are staying high. Well, I know a lot of you guys out there are waiting for lower rates. Some of you can't wait because you're already under contract. You have to move, you have to do something. So if you're one of those people and you're an educated home buyer, want to know more, want to talk to the team, make sure you use that link in the description of the video, get in touch with Josh, guide you through the process, quote your mortgage rates. And ultimately, just give you information so that you feel confident that you're making the right decision. Again, the link is theeducatedhomebuyer.com forward slash start, check that link in the description. Let's pick up with that question or that thing that you just said. I thought we would have a recession. Recessions are by definition deflationary. Deflation or at least disinflationary if not outright deflationary. And that leads to lower interest rates as we try to avoid that. Those are bad things. Deflation is outright really negative. Disinflation for an extended period of time would be negative. So the Fed would want to stimulate us out of that. Markets would also, it would just react with lower interest rates. So a recession is by definition, two consecutive quarters of negative GDP growth. And it doesn't look like we're going to get that anytime soon, Jeb. We just got GDP yesterday. So I was sitting here talking about growth and growth being lower, much lower than the historical long run averages and unlikely to ever return to those long run averages. And when we look at that, yesterday we got the first look at Q2 GDP and it came out at 3% and the market shrugged it off. 3% would be high relative to what we've had over the last five, six, seven years. That would tell us we got a hot economy and rates would probably be going up. Why did the market shrug it off? It was an artificially high number. Just like the first quarter, we had an artificially low number because of the tariffs. Importers front loaded all of their bringing goods in ahead of the tariffs in the first quarter. And that has a negative impact on GDP. So we had negative, I think a quarter percent. And now we just followed that up with a positive 3% because we didn't have nearly as many imports as normal in the second quarter. The best approach to that is we average the two of them. And it tells us we've got one and a quarter percent growth. That is well, well, well below historical averages. It tells you we do not have an overheated economy. We don't need restrictive monetary policy. So remembering here, Jeb, the Fed does not control mortgage rates. They control short term interest rates. They control the rate that banks lend to each other overnight. And they have the greatest impact at the shortest end of the curve, meaning two year treasuries or less. So when we see that, this is telling us, depending on anyone's measure, right now they are a half percent to one and a half percent restrictive. They're not neutral. They're not accommodative. They're restrictive to the tune of a half percent to one and a half percent. Trump thinks two to four percent. But most reasonable experts, somewhere between a half to one and a half percent. With one and a quarter growth, is there a reason to be restrictive? No, there's not. Let's move on to sort of the second point, the thing that's important that you talked about. And in the press conference yesterday, Powell leaned really heavily on this. Hey, we've got some time. We can be patient. He leaned heavily into tariffs and inflation. So we'll talk with that. But what he was saying is, we haven't had an employment break. We haven't had unemployment shoot up. And he was kind of jabbing at Trump, saying, hey, you want me to lower rates, but you've given me cover to not lower interest rates. We've reduced immigration. We've reduced the labor pool. So even though we are not growing nearly as many jobs as what we were a year ago, unemployment hasn't gone up. So for right now, we look, there's other data, the JOLTS data. We see there's less job openings. So less employers advertising jobs. We see the challenger layoffs every month continue to go up. We get the weekly claims. Continuing claims are at the highest level since COVID. They're not off the charts. This isn't telling us we have a terrible jobs market, but it's telling us all of the underlying data, the higher frequency data, is telling us that the labor market is weakening. The only thing that isn't is the unemployment rate. If the unemployment rate was at 4.8 right now, instead of 4.1, we would have much lower interest rates. And Jeff, we'll get a look at that tomorrow. We're recording Thursday. You guys are going to get a chance to listen to or watch this video on Monday. But tomorrow, we get the July jobs report on the first Friday of August. And we're going to see. And the expectations are, maybe it bumps to 4.2, but any way you cut it, that's still historically really low unemployment. Yeah, and on top of that, I mean, like, I think it's important to know that, you know, we have slower job growth. Things are slowing down. But what happens is it takes weeks, months, potentially years, I guess, in some cases, for this data to continue, you know, I guess, in a trend that actually impacts rates. So what we've seen over the last year to year and a half is all of a sudden, it looks like weaker data, you know, maybe for a month, maybe two. And then all of a sudden, looks stronger. And then it stays stronger, right? So there's this up and down, sideways movement. We haven't had any consistency. So when you start looking at averages, you know, four-week averages, whatever, it averages out where numbers look to be, hey, look, the economy still, you know, putzing along. Everything looks to be okay. There haven't been any major breaks with anything. And I think that's important to note. You know, one thing the Fed has been through this entire process is very, very transparent about expectations, about the direction that they're headed. And at the moment, you know, when you start looking at the Fed Funds futures, you know, we started the year, Josh, with I think somewhere between three to four rate cuts. I think it was like three is what they were expecting. And up until last month, I think we were close to two. Latest, after yesterday, we're thinking one, right? So Fed traders are thinking one. So now, like, we're kind of pulling back. The economy tends to, or on paper, looks to be going the other direction. So when we talk about what needs to happen for rates to move lower, you need, you know, ADP's probably the most useless of the jobs reports that come out. But tomorrow, with non-farm payrolls, we need a break there. You need those numbers to come in less than expectations, than forecast. You also need revisions to the previous months, probably moving downward on top of jobless claims, trending higher, you know? All of these things, Josh, it just, we haven't seen it, and that's what truly has to happen for this to get any real movement. It's funny. In terms of interest rates, in terms of market watchers, you're 100% correct that ADP is relatively useless. In, on a monthly basis, it has a very low correlation. It comes out on the Wednesday before the Friday, where they deliver the monthly jobs report, the non-farm payrolls. And there's a very low correlation in the short run. But you talked about revisions. We get revisions all the way throughout the year in the monthly NFP non-farm payrolls data. And there have been, for the last three years, consistently revised down. And long run, ADP is very accurate and very predictive of what happens with that data. So in the short run, the market would do well to follow ADP and pay less attention to the non-farm payrolls on Friday, but that's just not what they do. To put that into context, these are not the exact numbers. We went through it on the live show last night. But the 12-month average per ADP, I believe, is 107,000 job creations a month. The six-month average is about 67,000. And the three-month average is down to 37,000. So we're not losing jobs. Economy's still creating jobs, but a rapidly slowing pace. And when you look back a couple months, those revisions in the NFP data, we're likely gonna get an inaccurately high number tomorrow and we'll likely get more revisions down to the previous months. And then a couple of times a year, we get this QCEW data where they take a bigger look and they go, well, okay, that was what we were compiling quickly on a monthly basis. Today is the last day of July. And tomorrow, the first day of Friday, or first day of August, first Friday of August, they're gonna give us that data. That's compiled really quickly. So it makes sense that they would continue to look and refine and revise that data. But we're gonna find out that ADP is more closer to accurate. It's expanding. We are creating jobs. Because of the reduction in immigration, less jobs need to be created to keep the unemployment rate where it's at. But bigger picture, what it's telling us, this is not an overheated economy where we have employers having to compete with higher wages to get people to switch jobs. That ADP data showed we've had nice wage growth. We're not having people losing money, losing income power, but we also don't have these big bidding wars that we had for employees during COVID that led to higher wages, massively higher wages and higher inflation. So really, this comes back to inflation, Jeb. And that, if we look at what Powell said yesterday in the press conference, like 10 quotes I showed on the live show last night were related to inflation and tariffs. So why don't we talk about tariffs and inflation? Because in simple terms, tariffs don't cause inflation. Tariffs cause a one-time readjustment to prices. So it gets picked up in that data that it reflects as inflation in the short run. But after one year, if we stay at the same rates, inflation isn't going up. We just had a reset to prices at a new, higher level. Yeah, and that's something that, I mean, you did a survey, you showed a survey last night as well, and it was like, what is the one thing that's bothering the consumer out there the most? And it was inflation and- For four years running, that's been the number one thing for consumers. And I think we talk about it off air a lot, but people don't truly understand what inflation is. Inflation is this continual growth year over year in prices, for example. Like eggs go from $4 to $5, $5 to $6, $6 to $7. Every single year, they just go up and up and up, not four to eight, and now you're pissed because they're $8 and they've been $8 for three years. That's no longer inflation. That's just the price of eggs, right? So high prices are the consumer's gripe, not high inflation. Inflation is slightly elevated right now, but their complaint is high prices, not inflation. And trust me, I jump on board, dude, when I go to a restaurant with a family of five and it costs us $200 to eat. I'm like, what are we doing? Like, this is nuts. Like, everything is more expensive. So I'm griping along with everyone else, don't get me wrong. So I, and I understand the impact that has on the wallet and everything else. And so going back to tariffs right now, at the moment, Josh, it looks to be that, you know, most of the countries are going to be somewhere around 15%, give or take a little bit. There are some countries out there that we're still griping with and saying, hey, if you don't do something, you're going to be at 30 and whatever else. But I think when all things are said and done, we're going to probably be around 15%. So when you hear those numbers versus where we were starting this whole process, some were at 50, some were at 100, right? We're a long ways from that, but it is going to have some sort of impact. So is the Fed doing the right thing at the moment waiting, or are we kind of in this normal thing for the Fed where they hang on too long for, too late for too long and swing the pendulum too far in one direction. And then they do all this catch up and then it's almost too late. I believe they're absolutely waiting too long, just like they waited too long to raise rates coming out of COVID, but the risks are much less than then. So it was pretty high stakes game and they lost. Their wager was bad and they lost badly. I don't think there's a huge amount of risks to waiting too long now, like pushes off the cliff into a horrific recession or a recession when there otherwise wouldn't have been one. But Jeb, yesterday, or this morning, we got PCE data. And the PCE data is showing that inflation is moderating. The inflation that we saw in the GDP data yesterday was essentially limited to healthcare and pharmaceuticals. So is that important? Yeah, we all want to be healthy. We all have to ensure ourselves. And if you have a condition, you need your drugs, right? So from that perspective, I'm not saying it's not a problem, but the last few years, the problem has been services inflation. It's almost all in services and goods. For the better part of a year, we saw outright deflation in goods prices. So now we're seeing all of the inflation that we're seeing is in goods, primarily. The only services inflation is in healthcare services. We've seen, ApartmentList came out with their data. Rents are up 0.8% year over year. Decelerating, slowing down. So all of the things that go into the measures tell us that we are well on our track to 2% inflation because that goods inflation that we're picking up right now is transitory and related to those tariffs. If it weren't for the tariffs, goods would be cheaper. We're not seeing input costs increasing massively. What we're seeing is the threat of these tariffs. And realistically, it's buy the rumor, sell the fact. The fear of these tariffs is probably bigger than what the actual impact is. If you're right, if we're right, that 15% is where almost everyone shakes out. Some of that's going to get absorbed by the exporter. Some of it's going to get absorbed by the importer. And some of it's going to get absorbed by the consumer. Consumers are fed up with high prices. We just talked about that. They're not open to absorbing these costs. So are there instances where certain goods and services, they will? Yes. But across the board, consumers, double deuces. We're done with this. We don't want any more of your high prices. So it's going to be really hard to pass those prices on. So from that, where is the Fed at? Like we don't have massive job growth that would risk inflation. We have full employment. So lowering rates wouldn't risk that. And we don't really see a risk of wage-based inflation kicking back off. Inflation is absolutely moderating in their direction. Every number, they look at these. They don't look at the headlines like you see in the Wall Street Journal or on CNBC. They dig granularly down into this data. And the granular data is telling us we are slowly drifting towards where we need to be. The tariffs give them cover. The immigration and unemployment staying lower gives them cover. And I think at this point, Powell just wants to be right and say, no risk, no downside to me not cutting. So there's a very good chance. Like as of yesterday, we talked about markets pricing in one cut for the rest of the year. Prior to two, three weeks ago, it was pretty solidly in the camp of two cuts before the end of the year. I still think we get two cuts before the end of the year. We have a ton of data coming out between now and the next Fed meeting. There's no August meeting because we just had the meeting here on the 30th of July. So we've got like seven weeks before the next meeting, we're going to have two PCE readings, two CPI readings, two jobs reports. And I don't think any of that data is going to go, oh my God, you can't cut, things are getting hot. Also by the same token, nothing in that data is going to say, hey, the economy is cratering, we have to cut. So could they? They could, but I don't think they're going to. But leads us back to, Jeb, what was it a month ago we did this episode, the Fed doesn't dictate your mortgage interest rates. Fed only controls the short end of the curve, the very shortest end of the curve. And that is probably going to move in your favor over the rest of the year. If you're enjoying the content, you want to become the educated homebuyer, make sure you like the video, make sure you subscribe, make sure you turn on the notification bell so you'll know we're here every week, multiple times throughout the week, staying on top of this stuff so that you don't have to. We will deliver the info for you to become an educated homebuyer. So my question to you, Josh, and it's one that a lot of viewers, listeners have, is that what we're waiting on? Are we waiting on the Fed to cut? Is that what's going to send interest rates lower? Well, we get this question all the time on the live show. Jeb, we had that paradox last year. The Fed cut four times, 100 basis points, and rates went up. Treasuries went up, mortgage-backed securities sold off, and we ended up with higher interest rates than where we started. It wasn't because the Fed cut. The Fed was very restrictive, and they went to moderately restrictive. And at that time, we had some inflation data giving conflicting readings and showing that it popped up for the next two, three, four readings after the Fed cutting. And so the market not saying, I don't care what the Fed says, I'm going to loan someone money for seven, 10, 30 years, which mortgages recently have followed more closely to seven-year treasury. Historically, we look at the 10-year. You're loaning someone for quite some time. So if you think, hey, this inflation thing is not licked, it's going to kick back off, if that's what your thought is, then you're going to say, hey, I need a higher rate of return. I think we are slowly starting to see that we don't have a new regime of higher rates of inflation that require higher rates of return. I think we are going to see over the long haul that in the short run, over the next three, five, seven years there's not any catastrophe coming from these massive US government deficits. Long run, there is. So there will continue to be buyers of treasuries and we're likely to see interest rates move lower, but we're also likely to be less volatile to the downside, meaning we're not likely to get this big drop in the matter of a week or two because we've had a couple of them over the last few years and the market has been burned. I think the market is saying, we're open to this concept of lower interest rates, but the economy itself has to prove it over time. The Fed has to prove itself over time. And it's just one voice, the Fed is just one voice, but probably the loudest voice saying out loud where the economy is at, what we're watching and where we are and where we need to be. So from that perspective, simple terms, Jeb, I think it's going lower, but I think it's going to be a low, slow grind in that direction. Yeah, I think in like looking at it from a broad overview, you don't need a perfect economy. You don't need a full on recession. You just need clear signs that, hey, the data is trending in the same direction, that the economy's cooling. You need that transparency from the Fed that, hey, listen, we're seeing it, this is our plan. And I think with all of that, it takes some of that volatility out of the market and you probably start to see spreads contract a little bit. You start to see mortgage rates come down. Which we have seen over the last few weeks. Yeah, and I think there's an opportunity for lower rates in the future. So if Josh and I can be of any assistance to you in this process, you're going through the pre-approval process, you're looking for that second quote, make sure you use that link in the description of the video, the educatedhomebuyer.com forward slash start. It'll get you in touch with the team, helping hundreds and hundreds of people here on YouTube, guide you through that process. A lot of positive feedback. We're happy to be a part of it. So if you'd like the same assistance, make sure you click that link. But until next time, make sure you buy right, borrow smart and build wealth. Adios. Amigos.