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Dave Meyer (10:50)

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Dave Meyer (12:45)

Welcome back to the BiggerPockets podcast. I'm Dave Meyer. Thank you for joining us for this reaction to the news that the Fed cut the federal funds rate yesterday. We talked about what has gone on so far. But as I am sure all of you are wondering what happens next. We're going to look now at how mortgage rates might move into Q4, 2025 and into 2026. I will start with sort of what we call the consensus view, which is basically if you aggregate and look at all the forecasters out there, all the experts, what they think is going to happen. I'll start there and then I will share with you my personal opinion about what's going to happen with mortgage rates in just a minute. Consensus vibe today is that mortgage rates are probably going to continue easing a little bit into the end of the year because the yield on the 10 year US treasury drifts lower. Remember I said that it's at about 4.1%. The general opinion is that's going to get lower as the labor market continues to soften. So when I talking about this consensus view, basically people are saying the read on the situation is that bond investors are generally more fearful of a recession right now than they are of inflation. Now it's important to note that both of these things are a concern right now. Inflation is going up. We've seen inflation go up the last couple of months. But based on the way things are moving and the data, it does appear that the fear of recession is sort of winning out and therefore bond yields are going down, but only slowly. I think if inflation hadn't gone up the last couple of months, we would probably see bond yields in the high threes right now instead of at 4.1 or 4.2%. But it is a more measured response right now because we are seeing both of those things happen at the same time. Mildly higher inflation and the labor market starting to weaken. So when we start to look forward and ask ourselves, are mortgage rates going to keep going down for the rest of this year? Unfortunately, it's just a big maybe, you know, I know people are going to point to the fact that there are likely to be two more federal funds rate cuts and say yes, that means that there is going to be further declines in mortgage rates. And that definitely could happen because the federal funds rate and yields are related. Like I said, they are not perfectly correlated, but they are related. These things do impact one another. And so really what it comes down to is inflation. If inflation remains where it is or potentially even goes down a little bit, we will probably see mortgage rates come down, I think, you know, another quarter of a point by the end of the year. Closer to 6, and we'll probably fall further in 2026, assuming the Fed does what it says it's going to do and inflation stay relatively mild. But that is a big if right now because we've seen inflation go up two or three months in a row. And if inflation stays high, or even if bond investors are fearful that inflation is going to stay high, I don't think we're going to see that much movement in mortgage rates if inflation goes up, we could see mortgage rates go back up. And right now it's really hard to forecast because inflation has gone up. And I know it hasn't been as much as a lot of people were fearing back in February or March or April, but I have dug into this a lot, I have read a lot of analysis about this, and basically what the consensus view is among economists and businesses that have looked into this is that the impact of tariffs are going to hit the economy slowly and steadily. It's not like there was going to be a cliff and that we would see all of the inflation from tariffs all at once. It appears this is just what's happened so far, is that it's sort of dripping into the economy slowly, which means that there is still risk that inflation is going to keep going up over the next couple of months. Again, it seems unlikely that it's going to shoot up to 5%. Like, I'm not saying that, but. But does it go up to 3? Does it go up to 3.5? Those seem, from the data I've seen, within the realm of possibility. And if that happens and if that inflation winds up being sticky, that's not good news for mortgage rates because the Fed can keep cutting rates and mortgage rates can stay just as high as they are. This is a matter of supply and demand. If investors fear inflation, bond yields are very unlikely to go down. And that means mortgage rates are very unlikely to go down, down. And so I've been advising people who have been asking me over the last couple of weeks, should I lock in Now, I've been saying yes, I actually think you would. If they might go down more, I absolutely think that they might go down more. But I also think that there's an almost equal chance that they go back up a little bit. And if you have a property that you're considering buying, I think you take what you can get. Because right now at, at 6.15, 6.2, that's one of the lowest we've seen in years. And personally, I would choose to lock in a fixed rate mortgage at that rate rather than waiting to see if they go down even further. Because it's like it could go down to 6% maybe, but I don't know if it's really worth waiting and not buying a property for it to go down, you know, 0.1 points. To me, that just seems like splitting hairs. But the path to much lower mortgage rates, the path to get us from where we are today to 5% mortgage rates, is probably not as simple as you think it is. And I want to get into that for a minute just to help you understand why I am saying that rates may not be going down as much as a lot of people think they are. We'll get into that right after this quick break.

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Dave Meyer (19:22)

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Dave Meyer (21:12)

Welcome Back to the BiggerPockets podcast. I'm Dave Meyer giving you my reaction and some forecasts about mortgage rates following the Federal Reserve's cut of interest rates yesterday. Before the break, I said that the likely path, with the consensus view, is that mortgage rates will probably drift around where they are today between 6 and 6.4% for the remainder of the year and they may fall a little bit next year. But it really all comes down to inflation, which is unknown. Now I see a lot of people on Instagram or even professionals saying that, you know, we are on a path to 5% mortgage rates in the next year and I am not convinced, to be honest. I don't think that is the most likely scenario. And you know, I'm an analyst, I, I will never say that that's not going to happen. I think there is some reasonable chance that it does happen and I just don't think that's the most likely thing to happen in the next year. Because what needs to happen for mortgage rates to get down to 5% is we need to see a significant drop on the yield on 10 year U.S. treasuries. We're at about 4, 4.1% today. They would need to go down to roughly 3%. And that might not seem like a very big, big change, but it actually is like that is a considerable difference. You know, if people are going to accept 3% interest rate on debt from the US government while inflation is at 3%, I don't really see that happening. That seems very unlikely given all the historical data we have about these things. There's basically two ways that we can get yields that low. The first is a significant recession without inflation. And so this means we would see big spikes in the unemployment rate, we would see GDP start to Contract, we would probably see wages start to decline. Not good things. Right? And so I know people are out there rooting for 5% mortgages. The most likely path to a 5% mortgage is the economy really tanking. And I'm not talking like a little bit. I think it would take a pretty significant deterioration of economic health to see those lower rates. Because as I said, what needs to happen is investors around the world need to look at the economic climate and say, my money, rather than putting in the stock market or crypto or reinvesting it into my business or investing into real estate, I'm going to put it in bonds. Because I'm just trying to be safe right now. Because the economy is so uncertain and so bad, that isn't really materializing right now. You know, we are seeing the labor market start to crack, but with the Fed starting to cut rates, that might moderate a little bit. I do think that will take some time. I'm not super optimistic that we're going to see hiring pick up because the Fed cut rates at quarter point. I think it's going to have to be bigger than that, and I think it's going to have to be longer than that if we want hiring to really pick up. But right now there are definitely signs of strengths, There are some signs of weaknesses. It's kind of this mixed bag. But for rates to really go down on this avenue, we need to see it go pretty much all bad. And I should note that it's important that it has to be all bad without inflation, because there is a scenario where we have stagflation, where we have the economy decline. It's declining right now a little bit slowly, not an emergency. And we have inflation right now a little bit going up slowly, not an emergency. But if both of those things got bad at the same time, mortgage rates aren't going down, down. You know, a stagflationary environment or any environment where we are going to see inflation in any meaningful way. Even if the economy's bad, we are very unlikely to see mortgage rates go down. So just keep that in mind. The scenario for the much lower mortgage rates is bad economy, no inflation. There is, however, a second potential avenue for rates to get much lower. And this is a little bit technical, but bear with me, because it's important. That is something called quantitative easing. This sounds really fancy. It is something that has been around since the Great Recession that has been used by the Fed as one of their tools to stimulate the economy. And I won't get into all of the details but basically what it is, is the Federal Reserve buys U.S. treasuries rather than waiting for demand from other investors from around the world to drive down yields. Yields, the Federal Reserve actually goes out, they print money, they create money out of thin air and then use that money that they have just created to go buy U.S. treasuries to push down yields. And this would push down mortgage rates. So this is a controversial topic, and I don't think we're going to see it anytime soon. I think there's a basically a zero percent chance that as long as Jerome Powell is the chairman of the Federal Reserve, that we are going to see quantitative state of easing. But next year, if economic conditions deteriorate or President Trump continues to push a agenda of making mortgage rates lower and housing more affordable, there is a chance that a newly formed Federal Reserve around a new Fed chair could potentially pursue quantitative easing. I actually saw this survey of, you know, Wall street types, and there's like a 50, 50 chance that's like 50% of hedge fund private equity traders think that there will be quant easing. 50% think that's not going to happen. So that's a relatively likely scenario. Right. And that to me, like, will definitely push down mortgage rates. Like, if we start to see quantitative easing, we will see lower mortgage rates. How much quantitative easing they do, the economic conditions at the time will determine how low they go. But I feel pretty confident quantitative easing will push down mortgage rates at least for a little bit bit. But as I said, the risk with quantitative easing is inflation, because although it has some fancy name, basically what it is doing, it is injecting a lot of new monetary supply into the system. And that can create inflation. It doesn't always, but it can create inflation. And so that's the risk here. You know, you do quantitative easing could push down mortgage rates, but it could also create inflation that could counteract it and push up mortgage rates in the long run and would obviously not be good for anyone because inflation sucks. So all that to be said, is there a path to 5% mortgage rates? Yes, but I don't think they're very desirable situations. Right. I think these are areas where there is a lot of risk and there is a lot of bad things going on in the economy. And personally, if I got to pick, I would rather see mortgage rates slowly drift down because inflation gets better over the next year and we see mortgage rates settle somewhere in the mid, maybe even into the low fives, but probably not below that. And to me, that could really help restore long Term a pretty healthy housing market. If we had mortgage rates sitting in the mid fives, that would probably get us back to the kind of housing market that used to be around, which is kind of boring, right? There's more transaction volume. We'd get off these lows of 4 million transactions a year, probably back closer to 5 million transaction, which would be be great for our entire industry. We'd probably see more predictable appreciation at the normal 3 to 4% instead of these massive spikes some years and then corrections next year. And so if I had to pick, I would like to see that and I would obviously like to see mortgage rates come without big increases in unemployment rate or the need for quantitative easing and the risk of inflation that comes with that. All right, so enough about mortgage rates. That's sort of where I see things going and the potential avenues that we can go down. Down. Let's talk now about what this means for real estate investors and sort of what strategies you should be thinking about. If you are a buy and hold investor or a house hacker waiting on rates, I think right now is a pretty good time to try and lock in a rate another way you could do it. I was talking to a friend yesterday, I was telling him, try and see if you can get a rate lock for 60 or 90 days because then you can potentially see a, if they do come down a little bit more. But as of right now, like I said, rates could go down. They might not, they might go back up. And so if you have a rate that you like today, just lock that in and stop, you know, fiddling over a 0.1% over mortgage. Just actually do the thing that you want to do. Buy the deal that you want to buy, move into the house you want to move into. We've seen mortgage rates come down almost a full point since the beginning of 2025. You might want to take that, that. The second thing is refinancing. I think about it much the same way. If you have an 8% mortgage, I would consider refinancing. If you're thinking about refinancing from 6.75 to 6.25, I probably wouldn't do that. But you should really just go out there and do the math. Because remember, refinancing isn't free. It costs you in two different ways. And so you need to make sure that the spread between the rate that you are paying now and the future rate that you could get by refinancing is big enough to cover that cost when you go out and refinance there's going to be closing costs again, there's an appraisal, there's going to be loan fees, there's going to be escrow fees that can amount to thousands of dollars. So you need your monthly payment to go down by enough to make those thousands of dollars worth it. If you're going to sell this property a year or two, probably not worth, you know, refiing and paying those prices. If you're trying to hold onto this property for five more years, 10 more years, I think refiing can be worth it. Again, depending on what your current rate is, what your new rate might be. And just understand if the decline in your monthly payments is going to be enough to offset those closing costs and the resetting of your amortization schedule. So those are two things. One other just thought is this will probably be good for the commercial real estate industry. I do think that even small declines in mortgage rates, rates and downward trends in the federal funds rate are definitely going to help multifamily. So if you're in that industry, this is probably very welcome relief news that is great for that entire industry. The last thing I'll say is I just think that this decline could help us get a little bit, please, a little bit more transaction volume in the market. I alluded to this just a minute ago, but right now we're on pace for a little bit above 4 million total home sales this year in the United States. A normal level is about five and a quarter million. So we're like 25% below normal levels. And this is rough on the whole industry. If you're a loan officer, if you're a real estate agent, you've been hurting for two or three years with transaction volume being a fraction of what it was in 2022, but even below pre pandemic levels for several years now. And I do think any improvements in affordability like we're seeing right now are just positive for the industry. Even if it's, you know, 100 bucks a month, this could get mentally some people off the sidelines. And I just think we sort of need that momentum. We need a little bit of health injected into the housing market. And so I, I am happy that this is happening. I'll also say that for people who are doing short term deals like Flippers, this could bring some demand back to your market. Again, it's not a crazy amount on this mortgage rate. I don't think it's going to flood the market with new buyers, but it could get some people who have been kicking the Tires off the sideline. It could bring some new buyers into the market. And to me, any improvement in affordability in the housing market is a positive sign. And we have seen that over the last couple of months, and I hope it stays that way. So that's what personally I'm thinking about as an investor. And just to recap what we've talked about today before we get out of here, the Fed has cut rates 25 basis points. The indication is that they're gonna cut another 50 basis points points by the end of the year. We have seen mortgage rates move down from where they were in January at about 7.15% to almost a point lower at about 6.2% as of today. That is good news. But what happens with mortgage rates is very unclear and is going to depend almost entirely on inflation. Not really what the Fed does. It's really going to come down to inflation. Inflation has been picking up over the last couple of months, and if that trend continues, you should expect muted changes to mortgage rates. They could even go back up. If inflation winds up flattening out in the next couple of months while the Fed cuts rates, or if inflation starts to go down over the next couple of months while the Fed cuts rates, then you will start to see mortgage rates move down closer to six, potentially into the high or even into the mid fives in 2026. But that remains to be seen. I know it is frustrating. Everyone wants to know what's going to happen, but we just have too many question marks on inflation to really know what's going to happen, which is why I recommend most people. If you find deals that work with today's rates that are the lowest they've been in nine months or so, you should heavily consider locking in those rates. And if you know rates go down into the mid fives or fives in a year or two, then you should refinance. But don't count on that. You have to make sure that the deals work with today's rates and. But as I usually advise people, you find a deal that works with today's rates, don't overthink it. Go out and execute on that. All right, that's what we got for you today. Thank you all so much for listening to this episode of the Biggerpockets podcast. I'm Dave Meyer. We'll see you next time. Thank you all for listening to the Biggerpockets real estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calico, Content and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com. the content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk, so use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose and remember, past performance is not indicative of future results. BiggerPockets LLC disclaims all liability for direct, indirect, consequential or other damages arising from a reliance on information presented in this podcast. Hey everyone, my favorite event of the year is almost here, the Bigger Pockets Conference. And I'm here with some exciting news that we just added two new sessions that you do not want to miss. First, we have Doug Bryan, super bowl champion turned real estate strategist who's going to share his playbook that he used after 2008 to scale to 17,000 single family units. And we have Andy Gill, full time investor and tech pro who's going to share the exact AI prompts he uses to save hours on contracts, deal analysis and operations. I've said it before, but it's worth repeating. The next wave of opportunity in real estate is already forming and I believe that the investors who get ahead won't be the luckiest. 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