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The David Greene Show
Mortgage Monday | Why the Fed are Keeping Rates High & What It Means for You | Episode 82
00:20:24
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- [00:00]
A
What's going on, everyone? Welcome to Real Talk Real Estate. This is Mortgage Monday. I'm David Green, he's Christian Bashelder, and we're your mortgage nerds. Got an update for everybody on what's going on with the Fed and these stubborn rates. But before we get into that, Christian, how's your day going?
- [00:13]
B
It's going pretty good. You know, we're fortunate to have a lot of business, a lot of clients that reach out to us to finance your, your endeavors in real estate. And, you know, always grateful. Just want to take a second and say if you've made the jump and decided to trust one brokerage with your business, we very much appreciate it. That's how we make our livelihood here.
- [00:28]
C
Right.
- [00:28]
B
We spend our time giving away a lot of free information and ultimately, at the end of the day, we do have a business to run. So big thank you out there to to all of our clients who have trusted us with their mortgage needs.
- [00:37]
A
That is right. And if you don't mind, please follow the show because we want you to keep listening and we want to keep making content for you. Also, a little ask before we get into this thing, if you know a loan officer or you know a real estate agent that knows loan officers, can you just tell them that we're looking to bring in new loan officers? Cause we have more business than what we can keep up with. We would actually like to do more advertising, but we don't think that our staff can keep up with like a whole bunch more lead flow other than what we generate organically right now. So if you know somebody who's in the business and they'd like a better place to work, we would love to talk to them. So you can send them Christian's way or my way. We'll give our emails and our contact information at the end of the show. But before we do that, let's talk about the Fed choosing to hold interest rates steady. This article talks about what that means for car loans, credit cards, mortgages, and more because many people don't realize it, but the Fed is not controlling mortgage rates. They are controlling interest rates for everything. Mortgage rates are one component of that. Christian, can you take a minute to just kind of break down the difference between interest rates and mortgage rates, but how they are connected and affect each other?
- [01:37]
B
Yeah, ultimately the Fed, it is definitely a misconception that the Fed just independently goes and, you know, decides what a credit card is, what an auto loan is, what a mortgage is, and they don't. They really control the federal funds Rate, which is the cost of short term borrowing that banks use typically. And the margins for, you know, personal level loans, mortgages, car loans, credit cards, lines of credit, even business lines of credit, all kind of tail off of the federal funds rate and even more so off the 10 year treasury yield. And without getting too complicated, the Fed basically determines the value of money, Right? It determines the value of leverage. That's the best way it was ever explained to me. They determine how accessible it is, how cheap it is, and ultimately control how much money moves through the banking system in America based on setting their interest rates. Obviously, if banks are borrowing money at 7, 8, 9%, there's not a whole lot of margin they can make unless they're charging clients 12, 15, 14%.
- [02:33]
C
Right.
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B
So that's why a low federal funds rate in general is usually better for the personal level borrowing, you know, network in America.
- [02:42]
A
All right, thank you for that. Let's talk about how this is going to be affecting the overall cost of borrowing in the country. We start off with President Donald Trump, who has repeatedly said that the central bank should have lowered rates by now. I call him Too Slow Jerome. We'll have to wait until at least the next Federal Open Market Committee meeting in September to get a borrowing cost to ease. Americans hoping for lower rates on many types of consumer loans, like me, are also sidelined. For now. The Fed chair, Too Slow Jerome, indicated that the central bank has yet to cut rates due to the uncertainty and inflation risks opposed by Trump's tariff agenda. Richard, could you break down for us what the concern is with inflation, tariffs and mortgage rates?
- [03:24]
B
Yeah, I mean, specifically regarding tariffs. The concern is tariffs in just general understanding make products more expensive. It makes it more expensive to get products into America, at least temporarily. The long term goal with tariffs is that companies work to avoid tariffs by investing in America.
- [03:41]
C
Right.
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B
If you make a Toyota in America, there's no tariff for getting it here.
- [03:45]
C
Right.
- [03:46]
B
Tariff is only delivering the final product here. Now, obviously you may still pay some tariff on the supplies and materials you need to get here, but you don't need to pay tariffs on the, the large exit value.
- [03:57]
C
Right.
- [03:57]
B
Like a Toyota car. So this is where you see a dichotomy of short term goals and long term goals. The short term goals are penalized people for investing out of America. That's depending on your, you know, your political standing. That's not really a bad thing.
- [04:11]
C
Right.
- [04:11]
B
We should prioritize investing in America. That's a core concept for building up our economy domestically. The problem is the short term While these companies and these investors develop maybe their manufacturing plants in America or whatever they're planning on doing, they are hit with a fee which overall increases the cost of their good to get it here.
- [04:35]
C
Right.
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B
And because of that, the common sense is that most companies will levy, levy that onto the end user, which is American purchasers.
- [04:43]
C
Right.
- [04:43]
B
And if a Toyota car goes from being, you know, 40k up to 45, you can basically attribute that to a $5,000 tariff that Toyota is just passing on to the American consumer. Well, regardless of how it got there, if the price of goods go up, they're going up.
- [04:58]
C
Right.
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B
And that's the Fed's goal, is to be cautiously optimistic that while we haven't seen that spike from tariffs yet, their argument is that it hasn't solidified long enough.
- [05:09]
C
Right.
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B
As we see companies start to maybe squeeze their bottom line, their profit margins, they may start to say, hey, we got to sell these Toyotas for $5,000 more. And that will lead to, not direct, like monetary inflation. It will just lead to the cost of goods increasing, which is general inflation.
- [05:26]
C
Right.
- [05:27]
B
And that's what the Fed is trying to be proactive against. Where we're going to keep rates where they are in the event inflation, as they expect takes place. The counterargument is, what if it does, right? What if the investment into America offsets that? What if, you know, these companies don't offload that onto the American consumer and they, they, they take it, right? And they pay it out of their, you know, their lifetime high earnings that they've made the last few years. That's, that's the counter. And depending on which side of the aisle that you're on, ultimately rates coming down would benefit the American consumer at the potential risk of letting inflation tick up more than it would otherwise. My argument is if inflation take up, ticks up, we use the levers that we have in place to bring it back down, which is increased rates at that time. I don't really see the huge value in keeping rates low while inflation is not peaked.
- [06:19]
C
Right.
- [06:20]
B
We can use the tools in our disposal, but it should be based on market data, not we think maybe kinda sorta it might do this. And let's set our monetary policy accordingly. It should be based on real facts.
- [06:32]
C
Right.
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B
Which is why I'm a proponent of let's bring them down and see how the market reacts. And if we have to get them back up, then we do it all right?
- [06:39]
A
Now, a lot of people think that the Fed controls mortgage rates, but they don't. They Control what's called the Fed fund rate, which is basically the, the rate that banks charge each other when they loan each other money. So the Fed controls how much a bank can charge another bank. But many things like mortgage rates, like credit cards, like car notes, like HELOCs, their rates are based off of the Fed funds rate. So they take that and then they add to it depending on market conditions. So there are five different ways that the Fed affects your finances, not just mortgages. The first is credit cards. So most credit cards have a variable rate and there's a direct connection to that rate to the Fed's benchmark. So if the Fed lowers interest rates, you should see your credit card rates come down. If they keep it higher, your rate that you're paying on your credit card will go up. Now I don't know if the article is going to talk about this, but I know that the, the Fed or, sorry, I don't know if you call it the Fed, but the American government, we have our own version of a credit card. It's all the money that we owe. And when we keep rates high, we have to pay more money back to the people that we issued the debt to. And we can't borrow money as cheap as easy. Number two is good old mortgages. So they don't track directly with the Fed, but they are largely tied to treasury yields and the economy. And as a result, CERN over tariffs and ongoing uncertainty about future costs have kept those rates within the same range for months. The average rate for a 30 year fixed rate mortgage was 6.81 as of July 28th where the 15 year fixed rate was 6.06. Adjust rate mortgages or ARMs and home equal lines of credit or HELOCs are pegged to the prime rate and they're also elevated. Those higher rates, along with much higher home prices have been a relentless obstacle for would be buyers. And so mortgage rates begin to decline meaningfully. Growth, the mortgage market is expected remain modest. I don't know why we can't get some common sense brought into this industry where the government understands if you want rates to be high on homes, people have to be making more money at their job. If you make sure people are getting raises, if the economy is healthy, if we're producing things in America, you can have people pay a higher mortgage rate on their house and they can afford it, but you can't raise mortgage rates and also have people making less money at their work than they used to and getting less hours. And that's what we found is we Raised the interest rate to slow inflation, but all that did was kill people's ability to make money. So what happened is your insurance became more expensive, your maintenance became more expensive, your materials became more expensive, all the components of owning a home became worse. But you didn't make any more money to pay for that, and you didn't actually fix anything by raising the interest rates. Now, car loans are another one. Auto loan rates are tied to several factors, but the Fed is probably the most significant. And with the Fed's benchmark holding steady, the average rate on a, on a five year new car loan is 7.3%, which is near a record high. While the average auto loan rate for used cars is even higher at almost 11%. So who's going to be buying cars when it might cost you 11% to buy a used car? And if you want that 7.3% on a new car, you're paying 30% more, 40% more for the car. Well, guess what? When people can't afford cars, they don't buy them. When people don't buy cars, people don't make money from selling cars. Dealerships don't make money, mechanics don't make as much money. The whole thing gets hurt because they wanted rates to be higher, which is one of the reasons that our economy, ever since they raised rates, has kind of just been crawling along at a snail's pace and we can't get anything going. And they're saying that car prices are also rising and they're blaming this on pressure from Trump's tariffs on, on imported vehicles and car parts, leaving car buyers with bigger monthly payments and growing affordability issue. That sounds like a typical CNBC comment that yes, the tariffs could be affecting the price of vehicles, but they've already been way more expensive because interest rates are too dang high. And now the, the share of new car buyers with a car payment of more than $1,000 a month is at all time high. Have you ever had a car payment at a thousand dollars a month?
- [10:39]
B
Me personally, unfortunately, I have actually.
- [10:41]
A
I just realized.
- [10:43]
B
Yeah, yeah, but I shouldn't. But unfortunately with the, with the car that I chose, I do, I have.
- [10:51]
A
Several homes that have a payment of less than a thousand dollars a month. Now I did mine recently.
- [10:56]
C
Right.
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A
But yeah, there's people with car payments higher than my mortgages and my tax and my insurance on investment vehicles. Student loans is another one. This. Do you still own any money on student loans, Christian, or you paid off?
- [11:06]
B
I do not. Now, I paid proudly. I paid off my student loans. After my first year work and that's something I'm very proud of.
- [11:11]
A
Had a baby, you didn't wait for the government to come bail you out. And they weren't cheap.
- [11:15]
B
I wish I got them forgiven. I would have had some more savings. But no, I, I very aggressively paid down my student loans my first year, my first year working after college.
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A
Chris Christian is a graduate of Cal and was a. What type of engineer were you?
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B
Chemistry, Chemical engineering, UC Berkeley.
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A
Big huge nerd if you ask me.
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B
Basically.
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A
Although. Although borrowers with existing federal student debt balances won't see their rates change, many are now facing other headwinds with fewer federal loan forgiveness options and a popular repay plan that's currently on hold. And then last is savings, which is the one thing where higher interest rates can help you because when you're getting a return on the money that you have in the bank, you can make money. Here's why I think that that's less impactful. The average American has less in savings than the debt they owe. Between your mortgages, your car notes, your credit card debt and any other debt you've taken on that's going to be way more than your savings. If your savings is more than your debt, you'd probably pay your debt off. So the one area that you win, which is savings, is less impactful in the overall algorithm of wealth building than all the areas that you're losing. And so they threw this one in in the end as a little bit of icing on the cake. But it's not helping the economy. I don't know that I've asked you this Christian, and you're, you're free to disagree with me. I'm not going to kick you out the studio here, but I'm curious. Do you think lower rates would be good for the economy or do you think they'd be bad?
- [12:35]
B
I think everything has, has an argument to be made with both sides because you know I was reading, I was reading actually last night and the, the largest holder of. I was kind of reading just how, how like debt is how the world moves nowadays and I think it's about 73% I believe of the stat of American debt is owned by American citizens. So that's kind of. And you think anybody who buys a bond or a 10 year treasury note or whatever, like you're giving America a loan. That's basically what a bond is. America raising money in the form of debt. So it's, it's really funny we think about it because of word whatever x trillion dollars in debt, multiply it by 70%, like that's America's debt to itself. Now, a lot of people bring up, like Japan and China are our largest individual debt holders, which is still true, but 70% is to American citizens. So there is some argument to be made that with interest rates high, America is giving a larger return to the majority being its citizens. Which is kind of a counter argument there that, you know, there's, there's more money being made on Americans investments, however.
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A
I think for bondholders.
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B
Yeah, correct. I think the other argument of that is the average American citizen has no money in bonds because they don't have savings.
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A
Yeah.
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B
And the average American citizen is paying higher rent, higher auto loans, higher credit cards, higher mortgages. And that's a much bigger negative in my mind than making a percent more on your mortgage bond or on your, your U.S. bonds.
- [14:02]
C
Right.
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B
So while there is some argument to be made that some of that money is circling back into the Amer standard American, I think we reach a threshold of like, what is the standard American?
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C
Right.
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B
And bonds are not impacting the, the return on bonds are not impacting standard American. That's, you know, vanguard who holds like, you know, billions of, you know, money of bonds.
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C
Right.
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A
It's wealthy people that own bonds. Correct. You basically have to have so much money that you're willing to take a four, four and a half percent return, which only people with a ton of money are going to be willing to do. So it's true, it's Americans that own it, but it's more like American corporations that have a ton of money in reserve and they don't want it sitting there getting nothing. So then they go buy bonds with it so that they can get a very safe, predictable return.
- [14:50]
B
And it's funny somebody explains me because I used to ask myself, especially during COVID a lot of people forget this point, but when you get a mortgage, there's an investor on the other side of that. So all of you guys who like proudly hold your 2 and 3% mortgages, there was somebody on the other side who purchased that mortgage. That means there was an investor with hundreds of thousands, if not millions of dollars, whatever your mortgage balance is, that was willing to accept a 2 or 3% return on that money. So I ask you guys listening, if you had $1 million right now and I offered you a 2 1/2% return, would you take it? Your answer is, probably, hell no, of course not. Why would I make a 2% return? I can go put in the S and p and make 8 to 10, you know, on the 30 year average. The reason being is when you, like David said, the more money you have, the harder it is to invest. These institutions, these vanguards and these blackrocks that have hundreds of billions if not trillions of dollars under management, you can't go find a place to put that that pays you 10 returns. That's why a lot of investors will pivot to these super large amounts of money into a lower interest rate returning but zero risk product, which is bonds, it's, it's usually government debt, right? So next time you're thinking, you know, every, I'm going to get a mortgage and I'm trying to get that rate as low as possible, there's got to be on somebody on the other end of that who's willing to lend you money and make that return, right? It kind of flips the mindset on its head a little bit and you know, makes you give a little bit more, more sustenance to why the market is the way it is.
- [16:19]
A
I think about this all the time. Like in order for anybody to take on debt, somebody else had to lose money like you. You had to give your money to someone else which they then used and now you now are owed, you have debt. But that money was used to hopefully do something productive. If that person defaults and they don't pay back the money that they gave to the person that like let somebody borrow it, in essence, like the money is lost, but it's not really lost because it was sort of just dispersed out to different things that would create value and went to different people. Money's not real is what I'm getting at here. It makes we treat it like it is, we feel like it is, right? It's like I have this dollar bill or whatever, but that dollar bill doesn't mean anything unless everyone else agrees it means something. And the only reason it agrees it means something is we've all just bought into this thing sort of without thinking about what we really did. Wealth is not just how much money you have or how many dollars you have in your bank account or even the value of real estate. It goes up or it's down. And what you thought at one point was a steady job can become not a steady job. Wealth is more about productivity, right? Did we get roads built? Did we get buildings built? Are things clean? Do we have a good standard of living? And if we start going and seeing a bunch of foreclosures and housing getting foreclosed on and people getting kicked out of it and Everybody moving in with their family and having several generations under the same roof and the house just falls apart. Nobody wins that wealth just disappears into nothing. The banks don't win. The homeowner doesn't win. The next person to buy it doesn't even win because they probably have to go spend a lot of their wealth and their time and their effort to fix it up to what it was before. We would be much better off if we just prevent this big calamity from coming. We don't let people get laid off. We don't let housing prices collapse. And that's really what my thought process is with why I want to see rates come down. I don't want to see home prices explode again, which is what everyone's afraid of. You and I have talked about this on past episodes. It's not only low rates that cause housing prices to explode. It is increasing demand of which rates play a role. But there's a lot more that goes into it. We are also seeing that some people, like you mentioned the South Florida buyer that was or was he north Florida. Do you remember what part of Florida that person was in that's buying houses now?
- [18:31]
B
Yeah, Tampa West. West coast Florida kind of.
- [18:34]
A
Yeah. Tampa was like untouchable for years. It was. You couldn't get in there. It was so super red hot. He's now seeing opportunity. We got a lot of people that are kind of buying in the Midwest right now. They're doing good as people move out that way or going into some markets that have high days on market like Austin, Texas and South Florida where houses just sit forever and you might have a house reduced by a hundred grand and you go in there and say, I'll give you another 100 grand less. And you're getting that thing at an amazing price. And then when rates drop now you can refinance it. That's something. Some wealth building opportunity right there. If you know someone out there. Sorry, let me say another way. If you are someone like that and you're looking to buy and you want to get a hold of one of us, Christian, where's the best place that people can go to talk to you?
- [19:12]
B
Yeah, anything. If you guys are interested on the market, loan products, mortgage products, even commercial. Remember guys, we do commercial lending now, right? 1brokers.com the 1brokers.com is the best place so you can find out more about the company. If you want to talk to me directly at the One Broker is my Instagram handle. Best way is to shoot me a DM on there and then David can also be contacted@davidgreen24.com use the chat feature.
- [19:34]
A
And you can talk to David Green live and in person. Nice setup there, Christian. You just basically threw that alley oop right there for me. Fun fact, a lot of people.
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B
O' Neill right there, right?
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A
Fun fact, people don't know about Christian. Not only did he go to Cal Berkeley, not only was he a chemical engineer, not only is he the smartest loan officer probably in the country, he also loves basketball, owns property with me in the Smoky Mountains, closes a buttload that is a technical term of homes and has the cutest dog on the Internet. Do you want to bring Cinder over to say bye?
- [20:03]
B
All right, guys, we got the mortgage mud coming at you live. This is the guy getting all your interest rates right here.
- [20:08]
A
He has with the one brokerage. And book your session with the mortgage. Christian, thanks for joining me today. And if you're listening to this, thank you very much for listening. Make sure you subscribe to the show and leave us a comment. Let us know what you think about the economy, rates and Cinder. We'll see you guys next week on Mortgage Monday.