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Hey there, Blake here. |
My son keeps asking me if he should wait for rates to drop before buying his first house. |
Smart kid – but he's making the same mistake everyone else is making right now. |
Here's what nobody's telling you about rate cuts and mortgage rates: they don't move together like most people think. |
Want proof? |
Let me walk you through exactly what happened last year. |
The Fed Cut Rates 1% – Mortgage Rates Went UP 1.1% |
September 18th, 2024: Fed cuts rates 50 basis points. Ten-year yields? They were sitting at 3.6%. |
Fast forward one month – yields jumped to 4.0%. That's UP, not down. |
November 7th: Another Fed cut. Yields dropped a measly 0.1% from 4.4% to 4.3%. |
December 18th: Third cut of the year. Here's where it gets really interesting – yields shot from 3.7% all the way to 4.8%. |
Do the math with me. |
The Fed cut short-term rates 1% over three months. Meanwhile, the actual cost of borrowing – what determines your mortgage rate – went UP 1.1%. |
Why Your Mortgage Rate Isn't What You Think It Is |
I spent five years as a commercial lender working directly with Bank of the West, Zion's, and Morgan Stanley as a conduit lender. Here's the inside baseball most people never see. |
Your mortgage rate isn't the Fed rate plus some margin. It's the 10-year Treasury yield plus the bank's profit spread. |
During peak competition, I've seen that spread drop to 1.5%. When banks are getting squeezed and loan volume is down? They'll pad that number all the way to 3%. |
The Market Drives This, Not the Fed |
Here's what's really happening: The Fed controls short-term rates – your 30-day money. |
But mortgages are priced off 7-year and 10-year bond yields, and those are driven by market demand for bonds. |
When the market thinks inflation is coming back, bond demand weakens. |
When bond demand weakens, yields go up. When yields go up, your mortgage rate goes up – regardless of what the Fed does with short-term rates. |
We've been running an inverted yield curve where 30-day rates were higher than 10-year rates. |
That's not normal, and it doesn't incentivize borrowing or growth. Until we get a normalized curve where long-term borrowing costs more than short-term, this disconnect will continue. |
What This Means for Your House-Buying Decision |
My son's question isn't really about timing rate cuts. |
It's about understanding that mortgage rates are driven by bond market sentiment, not Fed policy. |
If you think we're headed into stagflation – slow growth with persistent inflation – bond demand stays weak. |
Weak bond demand means higher yields. Higher yields mean higher mortgage rates, even with Fed cuts. |
The housing market isn't showing increased demand despite rate cut expectations. |
Look at homebuilder stocks – they're selling off because they're sitting on too much inventory. That tells you everything about real demand. |
The Real Numbers You Need to Track |
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Forget watching Fed announcements. Track TNX – the 10-year Treasury yield. |
Take that number, add 2% to 2.5%, and that's your realistic mortgage rate expectation. |
Today's 10-year yield of 4.03% plus a 2.25% average spread puts you at 6.28%. That's where the market is pricing mortgages, not some fantasy rate based on Fed cuts. |
Bottom Line for My Son (and You) |
Don't time your house purchase around Fed rate cuts. They're not moving mortgage rates the way you think they are. |
If you can afford the payment at current rates and you've found the right house, buy it. |
If you're stretching to afford it hoping rates will drop significantly, you're betting against market forces that have been moving in the opposite direction. |
Take care, |
Blake Young |
P.S. I'll be LIVE this Wednesday to talk about what rate cuts mean to the market, and how to position for them ahead of Q4. |
RSVP HERE |
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