Mortgage Interest Rates

They’re not dropping

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Does anyone have any idea if we should go ahead and lock today or hold off to see if they drop a little in the next few weeks?

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What rate are you being quoted?

Why didn't you do a one time close and lock it in up front?

Obviously this is not my area (or anybody here probably) area's of expertise, and predicting things like this are going to be difficult, but I don't see much potential for an increase and much more potential for a decrease for a couple reasons.

Inflation appears to have peaked and trending downward, and they way CPI measures housing costs (which make up like 30% of CPI) results in a pretty large lag because things like rental contracts are usually around 12 months (at least few are month to month) so it's hard to capture changes over the short term and changes take 6-12 months to really get reflected into the data. So various measures that attempt to capture real-time changes indicate that these have dropped pretty significantly over last 6 months or so and trending downward.

These changes should start to show up soon, and since we put a lot of weight on year-over-year inflation, this should correspond to about the time inflation really picked up last year due to the base effects (which worked in the opposite direction when inflation quickly picked up). Since inflation and treasury yields are positively correlated, they should remain, at worst, flat, but there is a lot of downside potential, even if fed funds rate remains constant.

In particular, the 10-year treasury yield is the important one to monitor since that largely determines 30-year mortgage rates. More specifically though, the spread between the 30-year fixed mortgage to 10-year yield has a historical average of about 1.7% with a standard deviation of about 0.5%. But for the last 6 months or so we've seen the spread between 2.5% and 3%.

Now I haven't seen any explanation why this is happening, but looking at a chart of this spread, but the spread does appear to correspond to rising rates and recession risk. So I think a bit of a cushion is built in here. So if rates remain flat, or begin to rise at a slower rate, I think this spread will decrease if it follows more historical patterns.

So altogether, I think the inflation data indicate that treasury yields are likely at or near their peak, and will likely level off if not decrease. So even if the spread remains the same, mortgage rates should also either flatten if not decrease. But because I think the spread has a cushion, and is more likely to decrease, I think even if yields remain flat, rates should decrease.

So depending on your construction timeline, but I suspect we're looking at spring completion at the earliest, if not more towards summer, if I was in your position, I would wait if I had at least a few months to lock in my rate. And it's my understanding the longer the locked in rate is in effect, the larger the fees tend to be. So added fees if you locked in, gives a bit of a cushion if rates increase if you don't lock it in.

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They’re not dropping


They already dropped signifcantly

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What rates are you seeing? They dropped a little but seem back up again. For example today:

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With 700-719

30-yr fixed - 7.555%
15-yr fixed - 6.235%
10 / 6 ARM - 7.572

800+

30-yr fixed - 6.928%
15-yr fixed - 6.226%
10 / 6 ARM - 7.265

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In particular, the 10-year treasury yield is the important one to monitor since that largely determines 30-year mortgage rates. More specifically though, the spread between the 30-year fixed mortgage to 10-year yield has a historical average of about 1.7% with a standard deviation of about 0.5%. But for the last 6 months or so we've seen the spread between 2.5% and 3%.

Now I haven't seen any explanation why this is happening, but looking at a chart of this spread, but the spread does appear to correspond to rising rates and recession risk. So I think a bit of a cushion is built in here. So if rates remain flat, or begin to rise at a slower rate, I think this spread will decrease if it follows more historical patterns.

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I did a bit more analysis of these data, and ran a little scatter plot and regression with the monthly mortgage rates and 10-year treasury yield since 1971.

The R-Squared of this relationship is 0.978 (so a correlation of 0.989), so they're nearly perfectly correlated. In addition, the resulting simple regression equation is 30-year Mortgage Rates = 1.017*(10-year treasury yield) + 1.6054. With the current yield of 3.879%, that would indicate an expected 30-year mortgage rate of about 5.55%.

So with mortgage rates at about 0.8% to 1% above their expected rates, it looks like there is a lot of room to come down, even if the 10-year stays flat, and a pretty large cushion if it rises.

Respect to BuckeyeVol for his work in this thread. A little off topic-On the construction side-What I’ve seen with new construction in Louisiana is builders with inventory calling potential buyers back with dramatic price decreases . They are working hard to get buyers in a home with a specific monthly payment like they are car dealers. I spoke to new home buyers who said DSLD called them with a 15% price drop on a home. As for interest rates , I think 5.5 gets things moving again in the first time buyers and production home market. I think pressure and supply issues in the rental market will help motivate first time homebuyers also in conjunction with these other factors.

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I did a bit more analysis of these data, and ran a little scatter plot and regression with the monthly mortgage rates and 10-year treasury yield since 1971.

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The last time inflation was as running at these levels was approximately 40 years ago. Rates 40 years ago were between 16-18. We won’t see them that high, but they have more room up in the next 6 months. I was downvoted heavily for predicting rates in excess of 7% this year back in April and told I’d lost my mind for suggesting 8% rates were possible in 18 months. I still think we will see rates at 8% before the end of 2023. I’d definitely do an ARM if I Were purchasing a home right now.

For those saying rates are off their peak, the same could be said when they dropped in February, May, and July. Rates do not straight line.