Why Mortgage Rates are Rising as the Fed Keeps Cutting

0:00Mortgage rates recently hit their lowest point in a year. Things were trending in a good direction. And then the Fed cut rates and mortgage rates actually just went up. It may seem confusing, but if you look at the economic data, what's happening does make sense. And on today's episode, I'm going to explain what is going on at the Fed, why mortgage rates have reacted the way they have, and share what I think we can all expect going forward.

0:32Hey everyone, welcome to On The Market. I'm Dave Meyer. Thank you all so much for being here for yet another Fed Reaction video. You've probably heard a lot of people celebrating this Fed rate cut or predicting that this was the beginning of mortgage rates really coming down and affordability coming back to the housing market. But unfortunately, at least as of now, and I am recording this on Halloween, so two days after the Fed rate cut, mortgage rates have only gone up. And if you listen to this show, you may understand a little bit why that's happening so far, but I wouldn't blame you if you were confused.

1:10The whole world saying the Fed cuts rates and mortgage rates go down, and then they cut rates and mortgage rates go up. It's a little bit weird, but I think I can help you all understand what's going on here. So that's the plan for the episode today. I'm going to talk a little bit about just what actually happened at the Fed meeting. And then I'm going to go into the why of all this and just explain some of the economic background that is driving these things. So that's what we're going to do. Let's jump in. First up, what actually happened at the Fed? Well, they cut the federal funds rate 25 basis points.

1:44That just means 0.25%. This is no surprise. This is what everyone was expecting. They basically said that they were going to do this. And that's why mortgage rates were trending down a little bit heading into this meeting because people were expecting and baking in the cut before it actually happened. That is one of the funny things that happens with these Fed meetings is that people watch this so carefully that the banks and people who create mortgage rates or other kinds of loans are planning ahead for what they think the Fed is going to do. They don't wait for that actual decision to come. And so you would think, oh, the Fed did what they said they were going to do.

2:26Mortgage rates shouldn't really move in any particular direction, but they went up. They were getting close to 6.1%. As of today, they're about six and a quarter. So they went up 0.15%. So it's not crazy, but it's a reversal of a trend. We had been seeing mortgage rates trend down for a while. And any reversal of a trend like that is notable. And the reason things went back up and didn't just stay the same was mostly because of what Jerome Powell said during his press conference after the meeting. Seems like most people in Wall Street, institutions, bond investors, whoever, they're all counting on that December rate cut.

3:06Then Powell comes out in his press conference and says, not so fast. The December rate cut is, I think he said, anything but certain was his exact quote. So he cast some doubt on something that the industry felt was a foregone conclusion. And that sort of changed sentiment and pushed bond yields back up. And that's why mortgage rates went back up. So that is sort of the long story of what's going on here. It's not that the Fed is not going to cut rates. I actually think they're probably still going to cut rates several times over the next year. but it's that they've sort of introduced a little bit of uncertainty into what people were feeling pretty clear about prior.

3:50Now, the question, of course, is why did he do that? Why is he introducing uncertainty into the market right now? You would think that he wants to be as certain and clear as possible. Well, the Fed's job, as we talk about a lot on the show, is two-sided. They are responsible for maintaining price stability, which is just the fancy way of saying controlling inflation. And they are also responsible for maximizing employment. So really preserving and trying to maintain the labor market as best as possible. But right now, we're sort of in this unique time where both of those things are uncertain. We don't know if inflation is under control.

4:33You know, it's gone up four months in a row. Or is it getting better? We don't know if the labor market is getting out of control. And I think what Jerome Powell is doing here is just trying to hedge and say that they don't really know which is the bigger problem right now. Currently, as of the last couple of months, they think that the labor market breaking is the bigger problem. That's why they're cutting rates. They're less concerned about inflation than they are the labor market. That's why he cut rates. But he's saying and keeping the door open for the idea that the labor market might be OK.

5:04A, inflation actually might get worse. And in that case, they're not going to cut rates. And so that is just this little bit of uncertainty that he's introduced into the market and is something that we're going to all have to keep an eye on. So that's what I want to talk about more in this episode, because we want to know not just where the federal funds rate is going. We want to know where mortgage rates are going. And for that, we can't just look at what Jerome Powell says. we need to understand where the bond market might be going. Mortgage rates do not follow what the federal funds rate does.

5:40Federal funds controls what is called the short end of the curve. This is short-term lending costs. Long-term lending costs, like mortgages, are broadly influenced by the same things that the Federal Reserve is thinking about. Inflation, recession risk, there's a lot more other variables, but those are two of the main ones that they're looking at. And what the Fed does and what bond investors do are not necessarily always the same thing. But I think if we do sort of a deep dive into what's happening with inflation in the labor market, we'll get a clearer picture of what the Fed is likely to do and what the bond market is likely to do.

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8:52Welcome back to On The Market. I'm Dave Meyer here talking about what happened with the Fed. But we're moving on from what happened last week and what Jerome Powell said. And we're going to do our own analysis here of what's happening with the labor market, what is happening with inflation right now, because that's going to tell us not just what the Fed might do, but hopefully we could all see that, honestly, what the Fed does isn't really impacting residential real estate right now. Mortgage rates are going up when they cut. I should mention it should help commercial real estate. The federal funds rate influences short-term lending much more than long-term lending.

9:28And since commercial lending is shorter, rate cuts will have a bigger impact on commercial. So I should just mention that. But why we're sort of digging into inflation in the labor market is not because we're trying to figure out what the Fed is going to do. We want to understand what the bond market's going to do, because that will tell us where mortgage rates are going, which is going to tell us a lot about housing affordability, which is going to tell us probably what's going to happen with the housing market in the next couple of months. So that's the plan here. We're in a weird time with the economy right now.

9:59We have been for a couple of years now. This has just been the one thing that is consistent over the last three years is the economy continues to send mixed and weird signals. Right now, we are seeing what I think is a declining labor market. I've talked about that on the show a lot. And we've seen stubborn inflation at best and increasing inflation at worst. And this is unusual. This is not what normally happens. You do not, in normal times, have a risk of inflation at the same time as the risk of a recession or worsening labor market. Normally, in a regular standard old economic cycle, what happens is you have an expansion, things are growing and growing, and this is the good times, right?

10:43And eventually they overheat a little bit. And that's when you get inflation because there's just too much demand for the supply in the market just across the entire economy. That creates inflation. Eventually, the Fed will respond by increasing interest rates. That will eventually lead us into a recession where unemployment goes up. So you can see the part of the economic cycle where there's inflation and the part of the economic cycle where there's job loss are typically on opposite sides. But given all sorts of complex things that are going on in the economy, whether it's AI or tariffs or the monetary supply increases we've had over the last couple of years, we're seeing both at the same time.

11:25And this is what we would call the risk of stagflation. Stagflation is pretty much the worst economic situation you can get. Some people would say deflation is even worse, but stagflation is pretty bad because what you have is increasing costs in the form of inflation and decreasing spending power because people are losing their jobs, which is just a nightmare for the economy. Now, I want to be clear, we are not in a stagflationary environment right now. Yes, the labor market has been getting worse. Unemployment rate has been going up, but we are still, historically speaking, the labor market is doing well.

12:04We are at a 4.2 % unemployment rate. That is very good. Secondly, inflation has gone up four months in a row, but it's still at 3.1%. 3 % inflation is not great. It's not what we want, and it's heading in the wrong direction right now. But we have to keep things in perspective. 3.1 % inflation is not an emergency in itself. It feels really rough right now because we've had really high inflation now four or five years in a row. So the compounding effect of all those things is bad. Don't get me wrong. But being in a situation where we have a 4.1, 4.2 % unemployment rate and inflation at 3.1 % is not stagflation yet.

12:47Why am I talking about this? Because this stagflationary risk, these forces that are normally not existing at the same time, the fact that they do exist at the same time is why mortgage rates and the bond market aren't moving. Bond investors are very concerned about inflation. They do not like it because think about it. What is a bond? You are lending money to the US government for a period of time. And the bonds we're talking about are 10, 20, 30 year time periods, right? And the yields on these, the interest that you earn right now are right about 4%. That's a good way to preserve wealth if the inflation rate is at 2 % because then you are earning a 2 % real yield, right?

13:32You're getting 4%. Inflation is eating away 2%. So four minus two is 2 % real yield. When I say real, I mean inflation adjusted yield. But what happens if inflation goes up to 5 %? Then your real yield on bonds that you buy today is negative. You're earning a 4 % yield. Inflation's at 5%. That means you're earning negative 1%. That's not good. The whole point of buying a bond is that you're accepting a low return for stability and assurance that you're going to get paid. And so bond investors, super concerned about inflation, even though it's not out of control, they don't like it and they don't want this.

14:13On the other hand, they are also worried about recession. And the bond market is really reactive to recession risk because the reason, again, people invest in bonds is for safety and stability. And so what happens when you enter economic conditions when there's a lot of risk? People tend to take their money out of other assets, whether it's the stock market or cryptocurrency or real estate or their savings account, and they put them in bonds. And they say, even though I'm only going to earn a 2 % real return, that's less than the stock market. stock market's feeling kind of risky right now. So I'm going to put my money into bonds and just make sure I don't lose money for the next couple of years.

14:54I'll be okay if I don't make the most money. And so these are sort of these competing forces that we have right now. This is why the bond market is not moving. And it's why I've been saying sort of all year that I don't think mortgage rates are going to go down and why I think through the end of 2025, they're not likely to go down either. It's because we don't have a clear sight yet on which one of these things is going to be the bigger issue. So hopefully, given that, you sort of understand why mortgage rates aren't moving that much, why I don't think they're going to move that much for the rest of the year, unless, of course, we get some huge news about the labor market changing or stubborn inflation.

15:33Now, I think that's unlikely to happen because we're already sort of in the beginning of November here and things tend to not change that much towards the end of the year. But it's also extremely unlikely to happen because the government is shut down and we don't even have the data about inflation and the labor market that we normally get. And so through the end of the year, I think it's very unlikely that we see big changes, but we can do our own research. We can look into private data. We can look into state data to at least get a sense. It's not as good as having everything that we normally have.

16:06But I've pulled together information about the labor market and about inflation to share with you so that we can try and forecast what's going to happen because we need to know what's going on. Let's talk about the labor market first. You've probably seen in the last week in particular, there's been a lot of high profile layoffs. This week, UPS said that it's going to cut or did cut 48 ,000 employees. That's an insane number, 48 ,000 employees. On top of that, Amazon said that they were going to cut up to 30 ,000 jobs and already did 14 ,000 layoffs. We've also seen other big companies, Meta, Intel, all across the economy, we are seeing high profile layoffs.

16:52But does this mean that the labor market is actually starting to break? Again, a little hard to tell because we're not getting normal data we get from the federal government. But we do get some private data. So a lot of private companies, payroll companies will put together this data. And we still have state data, which you can sort of extrapolate out. It is not perfect, but I do want to share with you what's going on because I know people are worried about their jobs. They're worried about the labor market. And so I'm just trying to share with you what we do know, even despite the government shutdown.

17:26So here's what we got. ADP, which is a payroll company, they always put out a monthly jobs report. And so they actually put out some data recently that shows actually an improvement in the hiring environment over the last couple of weeks throughout October. They track basically a four-week moving average of changes on unemployment. And over the last couple of weeks, they've had positive 10 ,000, 20 ,000 are the last two readings, whereas in In September, it was negative about the same time. So that is relatively positive news. It's not like bumper great growth, but, you know, when it was negative in September, that was a little more concerning.

18:06The fact that it's turned positive, that's positive. We also have some other estimates. Citibank put out a study and they're showing that their estimate, again, it's an estimate because we don't have this federal government data, is that the number of Americans filing for unemployment did increase for the most recent week in October, but just from 220 ,000 to 232 ,000. You don't want to see that go up ever, but having it go from 220 to 232, that's like a normal fluctuation. These are not alarming levels so much. And I think this is sort of confusing, but I'll just explain to you like what I think is going on here.

18:47And actually Jerome Powell said this not, I think it was the previous Fed meeting, he was saying we're in the no hire, no fire economy. And when you dig into the data, that is what you see a lot of. We do have these high profile layoffs, but companies are still hiring, but it's not growing. It's like a one in one out kind of system right now where no one's investing into new employees or new programs. But because a lot of companies are in really good positions, corporate profits are at all time highs. These companies don't need to make a lot of layoffs. You see in a lot of these instances, Amazon, for example, or UPS, they are just doing this because they're moving towards automation.

19:35I think UPS is trying to move towards more gig workers instead of full time employees. So it's not like these companies are losing their profits. they, for whatever reason, feel like they can optimize their workforce or optimize their profits or whatever these public companies want to do. That's what they're doing. And it's less about like dramatic emergency cost cutting measures. That's at least what I've been seeing. Also, the Federal Reserve Bank of Chicago put out another estimate too. They tried to put out an estimate of unemployment. They showed that it did increase a whopping 0.01 % from September to October.

20:14So basically unchanged. They said their estimates went from 4.34 % to 4.35%. They're scientific about these things. For normal people, that means unchanged. So I think the big thing is even though these high profile layoffs right now, the good news is that it's not all bad, right? Like we're not seeing some massive increase in unemployment from AI or from corporate profits declining. The opposite is happening. Corporate profits are doing really well right now. So that is relatively good news, right? No one wants the labor market to break. But it is one of the reasons the Fed is being cautious about rate cuts.

20:55Because again, their job to control unemployment, to control inflation, if they feel the labor market is doing well, they're going to be less aggressive about rate cuts. I still think they'll cut rates, but they'll probably do it slower. If the job market really starts to tank, then they need to cut rates even faster. Now, I think all of this is relatively good news for right now. Of course, things can change in the future, but we have limited data and what we can see of that limited data, it doesn't seem as bad as the headlines are making it out to be. And I am encouraged by that because I admit it, guys.

21:32I admit I have fear about AI and what it might do in the labor market. I sort of have mixed feelings about this, actually. So on one hand, I have fear about that. On the other hand, I also think companies are overcommitting to AI right now. Like I use AI, I know a lot of people who do, it can't replace most jobs yet. It can assist people who are doing jobs, but the idea that right now with the technology as it is, that it's gonna wholesale replace a lot of different jobs, I think is a little overblown. I think over the next couple of years, it's definitely going to do that. But my concern more is that companies are just like, if things start to go bad, they're going to be like, oh, we're just going to fire, lay off a bunch of people and hire.

22:15It's all going to be AI without an actual plan about that. And that's something that worries me, honestly, because I don't want people to lose their jobs, but it's also a hard thing to fix. if AI really does start to come and take jobs from Americans, it's not something that the Fed can fix. It's not even really something policy can fix, right? Because it's not like, oh, we're going to go lower rates, 1%. All these companies are like, yeah, you know what? Forget AI. I'm going to go hire a bunch of people. That's not going to happen, right? We're just in the middle of a technological shift. It's a disruptive time in the labor market.

22:53And these things, they do stabilize in all previous instances where people were scared about the telephone or electricity or automation or the internet or all of these different things. There is a time of disruption. Then new jobs come out. And that's what I expect mostly will happen with AI. But there's a period of time where there is this disruption. And I worry about that. I think we might be in the middle of that, even if it hasn't started yet. So that's the labor market. Finding a strong rental property usually takes time, research, and calculated risk. Lennar Investor Marketplace helps simplify all of that.

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