Navigating Surging Mortgage and Treasury Rates: What Homebuyers Need to Know

With the elevated interest rates and higher mortgage payments, we find ourselves at a fork in the road. As consumers, we must carefully consider the path we want to take. Are we content staying in our current home with interest rates in the high 2’s and low 3’s, ensuring our payments remain manageable? Or do we want to pursue our dreams, which could mean relocating for a new job, retiring in a different area, or investing in that dream kitchen or an extra bedroom?

In today's volatile financial landscape, we're witnessing a remarkable surge in both 30-year mortgage rates and 10-year treasuries. The connection between these two rates is pivotal in understanding the challenges facing homeowners and prospective buyers. With rates hitting a 20-year high, it's essential to take a historical view to grasp the gravity of the situation. But this isn't merely a numbers game; it's about how these soaring interest rates impact our housing options and the overall market stability. While a surge in rates may appear alarming, it's the underlying factors and their potential repercussions that deserve our attention. In this article, we'll delve into the intricacies of these surging mortgage and treasury rates and the ripple effect they create throughout the economy.

Surging Mortgage and Treasury Rates

We're currently seeing a notable increase in both 30-year mortgage rates and 10-year treasuries. This is because 30-year mortgage rates are closely connected to the movement of 10-year treasury rates. Analyzing the trends over the past 20 years reveals a significant rise in these rates, reaching a 20-year high. If we expand our view to encompass the last 50 years, including the 1980s, we notice that today's rates are much lower than what was seen in the 1980s, approaching what could be considered an average interest rate over this extended period.

The challenge we're confronting is that we've become accustomed to lower interest rates. Many homeowners locked in rates in the high 2's and low 3's, which has made them reluctant or financially unable to upgrade to more expensive homes. The increased borrowing costs associated with higher interest rates often mean doubling their monthly payments. This "mortgage rate lock" effect has resulted in reduced housing inventory, limiting our housing options. Consequently, even in a high-interest rate environment, home prices have remained relatively steady due to the limited availability of homes on the market.

10-Year Treasury Yield: Impact on Interest Rates and Markets

One crucial aspect to watch closely is the behavior of the 10-year Treasury yield. The Federal Reserve's actions have caused interest rates to rise, leading to higher payments on credit cards, car loans, and home mortgages. The challenge we face now is that the Fed has temporarily paused its interest rate hikes. Nevertheless, interest rates continue to increase, and the Fed cannot control this trend at the moment.

Traditionally, we've used the 10-year Treasury yield as a baseline, historically adding about 1.7% to determine the 30-year mortgage rate. Currently, the 10-year Treasury yield is approximately 3% higher than that historical baseline. This deviation primarily stems from significant fear and uncertainty in the market. People were uncertain about the Federal Reserve's intentions, which led to added risk in the market. Banks, when lending money for 30, 45, or 60 days, lock in a rate but also require a buffer to protect against potential losses in the future.

There has been a substantial amount of fear and uncertainty factored into the current situation. Many now believe the Federal Reserve is pausing its rate hikes, and there's even the potential for rate reductions in the future. Despite this, we've observed a significant increase in 30-year interest rates over the past couple of weeks. This increase is primarily attributed to fluctuations in the 10-year Treasury yield. The Treasury has introduced a substantial number of new bonds into the market, effectively oversaturating it with these fresh bonds. However, the demand for these investments hasn't matched past levels. As a result, interest rates have had to rise to a point where investors feel comfortable purchasing these bonds.

To provide some historical context, the United States has traditionally been viewed as the safest investment globally, particularly concerning our national debt. This status is somewhat like the gold standard, as all other investments are assessed in relation to it. Essentially, the interest rates on various investments are determined by the level of risk compared to the 10-year Treasury bond. Nevertheless, challenges arise when considering the trend of rising US debt. Many people are now questioning whether the United States remains the world's safest investment.

For instance, consider Fitch, which recently downgraded the US credit rating from AAA to AA+. The real issue here is that our current rating may not be as strong as it appears. Consequently, we might experience increased price pressure and higher premium demands from investors in the 10-year Treasury market, potentially impacting the 30-year mortgage rate market. This is a critical factor to monitor since the Federal Reserve lacks direct control over it, and it has the potential to keep interest rates elevated for an extended period, possibly even driving rates higher than what we are experiencing today.

Diversifying Investments in a Changing Market

Given Fitch's recent downgrade of the US economy and the Treasury market, it's prudent to consider alternative investments. Treasuries and government debt might not currently be the safest investment. Typically, during times like these, people turn to hard assets like gold, silver, and real estate. This can include your personal home or investment properties, which are more likely to retain long-term value compared to increasing debt loads that may lose value over time.

Housing Market Softening Amid Rising Rates

As mentioned in a previous video, we are currently facing a supply and demand imbalance, not only in Huntsville but also in markets nationwide. In a previous video, I predicted that even with interest rates in the 6% or 7% range, our market would still experience price stability, despite these rates being higher than what we've seen in recent years. However, I did mention that if rates reached 8%, that's when the market could start to soften.

Now, we find ourselves with rates exceeding 8%, and we're already witnessing a softening in the market, particularly in terms of resales and new construction. Homebuilders are reaching out to us with various promotions and specials, attempting to sell off inventory by year-end. If you're interested in new homes and want to learn more about these deals, you can give us a call and we’ll let you know where those best deals are located right now. 

An intriguing development to monitor is how these builders handle their homes, especially given the current trend of liquidating them at incredibly low prices. The question is, what will they do in the first and second quarters of 2024? Will they remain wary of rising interest rates, possibly slowing down production and inventory? Might they shift from speculative building to offering custom build options, or will they maintain or increase their production volume?

My speculation is that, with their current home liquidation practices, builders may exhibit caution in 2024. This caution is likely to impact the housing supply in the area, significantly affecting long-term housing affordability, as there won't be an adequate selection of homes.

It's important to note that there has been a 6 million home deficit since the Great Recession across the U.S., and it was predicted that it would take at least a decade of consistent building to bridge this gap. However, it seems that this progress might be delayed, as builders are likely to slow down their production in 2024.

Inflation’s Impact on Interest Rates

Another important factor to consider in the near future is a recent article from Forbes, which suggests that the government may need to resort to increasing its currency supply once more. When this occurs, it's likely to have an impact on inflation. If we experience a return to 5%, 6%, or even 8% inflation, investors will demand a return on their investments. They won't be satisfied with a 10-year Treasury yield of, say, 4% when inflation is running at 6%, as they would be losing value in the market. Similarly, they won't be interested in a 30-year mortgage at 5% when there's 8% inflation, as it means the value of their dollars is decreasing by 3% annually.

This is something we need to closely monitor because if heightened inflation returns, it could solidify the current higher interest rates and keep them stagnant in the market for several years. This situation may persist until the issue with the value of the dollar resolves itself.

Economic Challenges and Interest Rate Uncertainty

With higher prices and increased interest rates, homeownership has reached a 50-year low. This has led many millennials to step back from the home-buying process, opting to rent or even move back in with their parents. In 2022, one in eight millennials returned home.

However, one group that's faring well amid this situation is the baby boomer generation, aged 65 years and older. Many of them have paid for their homes in cash or secured low-interest rates in the high 2's or low 3's. They're a vital part of the market, accounting for about 14% of consumer spending in 2005, though that figure has increased to 22% in 2022. This generation plays a significant role in keeping the economy stable.

An encouraging aspect of this situation is that if you have money intended for your kids or future generations, now could be an excellent time to gift it to them and earmark it for home purchases. Without this support, many millennials may remain locked into renting for the long term, which some are calling 'Renter Nation.' As many know, homeowners typically have 40 times the net worth of renters, with over $245,000 compared to about $5,000 for renters. Investing in this upcoming millennial generation can help them build family wealth and, in turn, benefit the overall economy.

Challenges in Predicting Economic Landscape

The current economic landscape is exceptionally challenging to predict due to various factors, particularly the rising Treasury yields. Organizations like the Mortgage Bankers Association and the National Association of Realtors are applying pressure on the Federal Reserve to refrain from further rate hikes, aiming to bring the market back down and stabilize rates. However, the key concern is whether investors will maintain their appetite for ten-year treasuries and 30-year mortgage bonds, considering the growing national debt.

Some believe that in an election year, there will be efforts to lower interest rates. Nevertheless, we need to closely monitor investor demand. If it falls short, regardless of the Federal Reserve's actions, it can continue to exert pressure on mortgage rates and all forms of debt in the country.

Realistically, I don't think we'll see rates again below 6%, honestly, probably in my lifetime. However, there is a significant risk that interest rates may not only remain in the 8% range but potentially even surpass 8%.

Matt’s Advice

At this point, we find ourselves at a fork in the road. You need to decide whether you're in your forever home and content with the current interest rates, which may range from high 2’s to low 3’s if you already own a home. On the other hand, if you don't yet own a home, you face the decision of pursuing your dream home, potentially one with an extra bedroom or in a new area. Ultimately, this is a choice only you can make.

The advantage of making a move now is that you can leverage the deals and offers currently available from both builders and in the resale market. Builders are particularly motivated, and they may be open to lowering their prices. In this market with rates at 8% or higher, you might have to accept this reality for a while. However, if rates drop to around 6%, that could be a suitable time to consider refinancing in the future.

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