Rates Plummet on Fed Speak | Guest Post

Long-term mortgage rates don’t move with the Fed rate, they move on Fed speak, and there was enough said at the July Fed meeting to see the biggest bond rally since December 2023. And while this does not imply rates will keep dropping in a straight line, it does reinforce the current trend. I have conversations on the daily about what will happen in September. How much will the Fed will cut rates? And will they keep cutting?  My answer is ”yes, and…” Meaning, yes the Fed will cut rates AND the market has already come to the same conclusion. So, if you are waiting for September for the rates to drop, it’s already happened.

Let’s break down Fed Chair Powell’s specific word choices that dropped the 10-year treasury below four percent for the first time since February and sent rates on an aggressive downward spiral. Then how our current economic and real estate market is moving to give buyers a short window before the election and before rates drop further. Because while some headlines will claim the bubble is still expanding, I’m seeing opportunity knocking. 

But before I get ahead of myself, do me a favor and share this. Understanding these dips, locking in opportunities and not getting lulled into thinking it’s all downhill from here, is what helps you gain confidence in making decisions in uncertain markets such as these. And while you’re on my channel, make sure to subscribe to keep getting market and homebuying strategies that empower wealth.

Fed Chair Powell kicked off his conference on July 31st with written remarks which are always redlined from the prior meeting. Small tweaks in the specific word choice are dissected and tend to move markets with even the slightest wordsmithing. This month, Powell shifted ever so slightly dovish. During his eight-minute statement summarizing the economic landscape and the Fed’s decision to hold steady, he noted that: 

• Job gains have currently “moderated” vs at June’s Fed meeting he had stated they were “remaining strong;”
• Unemployment has “moved up but remains low” vs. last month they simply were “remaining low;”
• Inflation is now “somewhat elevated”, vs. last month’s “elevated;” and 
• There has been “some further progress’ towards the Fed’s two percent inflation target vs. in June we had only seen “modest progress.”

Each of these delicate word changes, albeit minor, signified the Fed is getting closer to triggering a Fed rate cut. After reading the prepared speech, Powell moved into his press conference where a reporter asked him directly if the Fed would be cutting the rate in September. Powell did not confirm that they would. So, it wasn’t a “yes,” but it also wasn’t a “no.” He replied there is a scenario in which it does happen, and it requires two more months of data that tracks. 

The next morning more data that tracks did in fact come out and the rally continued. Continued economic softening was evident as each report was released, hinting the United States is tipping into a recession if not already in one, giving the equity markets fear that Powell with the decision to wait until September has waited too long. ADP Employment reported 122,000 jobs created versus the 150,000 jobs the market expected; the cost of labor month-over-month change fell to 0.9 percent from 1.2 percent; Initial Jobless Claims (i.e. people going on unemployment) jumped to 249,000, the highest in a year; and ISM Manufacturing slowed to an eight-month low amid a slump of new orders. 

Then July’s non-farm payroll and unemployment did the deed and secured the trend. Non-farm payroll for July, released August 2^nd, tanked, showing only 114,000 new jobs were created versus the 175,000 which were forecasted and the 179,000 previous. Average hourly wages rose just 3.6 percent from July 2023, the smallest year-over-year gain since May 2021. And the unemployment rate jumped to 4.3 percent versus the 4.1 percent forecasted and previously. 

The so-called Sahm Rule, named for the former Fed economist who came up with it, Claudia Sahm, holds that a recession is almost always already underway if the unemployment rate, based on a three-month moving average, rises by half a percentage point from its low of the past year. The jump to 4.3 percent crossed the threshold.

This incredible three-day trend will require a diet of rate-friendly economic data to be sustained. And note that it can also be reversed on a single report’s release. Ultimately, the Fed rate does not move long-term mortgage interest rates, but word choice and economic data does.

Meanwhile, the Denver real estate market has been taking a little snooze. As often happens in July with vacations and holidays, new sellers fell off 12 percent from last month. Active listings, however, are hanging on with 10,584 active listings as of July 31^st, up 3.6 percent from last month and up 68 percent from last year. Given the increase in inventory, days in the MLS are up seven percent on average and 15 percent for the median with the close-price-to-list-price ratio hitting its lowest percentage since July 2020 at 99 percent. Mortgage purchase applications also struggle at their lowest since 1995 dropping every week week-over-week during the month of July.

Well, that was depressing. But is it about to change? I will not claim the end of July and first two days of August are the beginning of lower rates forever; but do I claim strongly that this move in the market comes at a time when buyers have an uncanny advantage? I say it all the time, you cannot catch a ball when it hits the ground, only on its way down or on its way back up. When this ball starts heading back up and the real estate market feels safe again, the majority of people who follow the crowd will jump back into the market. We are seeing a hint of this as August begins and it would be no surprise to me if mortgage purchase applications jump next week.

In the meantime, buyers need to know the score. There are 10,584 homes for sale, a number we have not seen since 2013. Home prices are flat, plus or minus one percent, not dropping with a bubble bursting. And with listings sitting longer, a softer close-price-to-list-price ratio gives buyers an advantage. 

Just for fun, here are ten rewards for buying right now

1. Seller paid closing costs
2. Seller paid rate buy down
3. Seller paid repairs
4. Seller paid improvements
5. Price negotiation opportunities
6. No need to waive inspection
7. Inspection negotiation opportunities
8. Time to think
9. Offers contingent on sale of your current home
10. And longer contract-to-close options if needed

The con? Higher interest rates, but not for much longer.

Well, that’s a wrap. This is Nicole Rueth with the Rueth Team of Movement Mortgage and proud sponsor of the DMAR Market Trends Report and your August Update. I’ll see you next time.

The views, opinions and positions expressed within this guest post are those of the author alone and do not necessarily represent those of the Denver Metro Association of Realtors®. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.

If you are interested in submitting a guest post, please contact Sarah Webber at swebber@dmarealtors.com.