Fed Cuts Rates: Who Needs to Rate Lock and Refinance ASAP

The federal reserve finally cut rates this week for the first time in nine months does that mean we're about to see lower mortgage rates that's the key question that every real estate investor needs to understand but it's more complicated than simply saying the fed cut rates that means mortgage rates are going to go down so today i'll break down all the factors that could impact mortgage rates and your investing in the near future and i'll give you my projection for what mortgage rates to expect for the rest of twenty twenty foreign welcome to the biggerpockets podcast thank you all so much for being here it has been a very big week for economic news most notably the federal reserve met and made a decision about mortgage rates so i am going to in this episode recap what happened also give you my analysis of what it means for mortgage rates including my take on this bank of america analysis that we could be on a a path to five percent mortgage rates and i'll give you my thoughts about whether or not it's a good time to lock in rates and buy a new property or refinance an existing mortgage right now let's get into it so first up what just happened i am sure you probably saw this on the news or on social media but the federal reserve met and they decide to cut the federal funds rate by twenty five basis points it was sitting at a range between four point two five and four point five now it's at four percent to four point two five percent now this is an important change but it wasn't altogether very surprising pretty much everyone knew that this was going to happen if you pay attention to this stuff now it's important to know i know a lot in the news is about jerome powell who is the chairman of the federal reserve but he doesn't set interest rate policy or monetary policy all by himself there is actually a group of federal reserve governors who do this and it is notable that all of them except the newly appointed steven moran agreed that twenty five basis points was the right amount the newest fed governor stephen moran actually was the one to say he voted for a fifty basis points cut but was you know outvoted by the other governors and that's why it was twenty five basis points now why did they do this why did the fed you know after years of relatively higher rates and after nine months since the last rate cut cut why did they decide now was the time to do it the short answer is that the labor market is getting weaker we've talked about it on the sister show on the market you can listen to that if you want to but there's all sorts of data about the labor market none of it is perfect there's just a ton of different ways to measure it but if you look at the sort of whole universe of labor market data that we have it shows a weakening labor market and that means that the fed usually needs to take action the federal reserve's job is to balance maximizing employment and controlling inflation and they've been erring on the side of controlling inflation over the last couple of months saying that they want to see what happens from the new tariffs and if that's going to push up inflation before they cut rates to stimulate the job market that calculus really over the last two or three months has changed and because the labor market has gotten worse and although inflation is going up it is not as hot as a lot of economists were fearing six months ago and that paved the way for the fed to cut interest rates zero point two five which is basically the smallest cut that they make but not any more than that so this should have some stimulative impact on the economy i'll share my more of my thoughts later but personally i don't think a zero point two five cut is really going to make that big of a difference in so many things but something else did happen yesterday that is really notable the fed releases what they call the summary of economic projections it's basically a little data set about what the fed governors all the people who vote on these things think about the future of interest rates because like i said we all knew that this cut was happening yesterday but we don't know what they're thinking about how many more cuts are going to happen in the future they have something they call the dot plot that's what everyone is always foaming at the mouth to see it basically shows what fed governors think is going to happen to interest rates for the rest of twenty twenty five into twenty twenty six twenty seven and twenty eight so what the dot plot shows right now is we're at four and a quarter right now for the federal funds rate and the expectation is that there will be two more cuts this year getting down to by the end of twenty twenty five to about three point five then when you look out to twenty twenty six twenty seven and twenty eight there is less consensus but generally it shows it moving down closer to three so another one and a quarter percent declines are projected roughly between now and twenty twenty seven now that should be good news for the economy that level of cuts should be stimulative across a broad spectru economy but it is really important to note that these fed dot plots are not always right and over the last couple of years they've just been really really wrong the fed has thought you know if you ask them where interest rates were going to go in twenty twenty two they were completely wrong if you asked in twenty twenty three they were completely wrong and that's just because the fed is data driven their goal is not to be accurate in forecasting they do this sort of to help the business community understand where they think things are going but they are going to react to data and make adjustments in real time but that's what has happened so far so of course for everyone listening on this show you are probably wondering what this decline in the federal funds rate means for mortgage rates now we talk about this on the show quite a lot but i do want to give a quick review of the relationship between the federal funds rate and mortgage rates because i see a lot of people on social media saying oh the federal funds rate the fed's going to cut rates that means mortgage rates are going to go down often that does happen but it is not automatic this is not a one to one relationship where oh the fed.

Cut rates a quarter of a point.

Mortgage rates are going to fall a quarter of a point that is not how it works mortgage rates are actually most closely almost exactly correlated to the yield on a ten year us treasury this is a form of us bond when ten year treasuries go up mortgage rates go up when ten year treasuries yields go down mortgage rates go down so that's the main thing we need to look at with mortgage rates so when we look at mortgage rates where they are right now i think there has been meaningful change in mortgage rates over the last couple of months like i said as of right now they are trading close to six point two six point two five percent i am recording this on september eighteenth actually yesterday on the seventeenth they dropped to the lowest level in basically a year they're at about six point one percent but they have since gone back up and that is an important thing to note that they cut rates and mortgage rates went up the next day not a ton but they did go up and that is because like i said everyone knew this fed rate cut was coming and mortgage rates along with the stock market and the bond market and the crypto market and everyone they make their trades they make their moves before the fed actually makes this decision because everyone knew it was coming so for example why would a bank wait to offer better rates on a mortgage if they knew in a week or two there was going to be a lower federal funds rate they all do that to try and stimulate demand for refinances or purchase applications because they know that this is coming and so they can move mortgage rates lower in anticipation of that so for that reason when the fed actually goes and cuts rates like it's kind of a non event it's the lead up to the rate cut and the fed sort of telegraphing that they were going to make this rate cut that actually mattered so far in terms of rates that said that's pretty good i think if we're sitting at roughly six and a quarter points for mortgage rates that's great it wasn't very long ago that we were seeing mortgage rates near seven for a thirty year fixed and this is for an owner occupied loan and that might not seem a lot because that is still a relatively high mortgage rate compared to where we were over the last couple of years but that is approaching a relatively normal mortgage rate on a very long term basis if you look back thirty or forty years the average on a thirty year fixed rate mortgage is in the high five so we're getting closer to that and just if you bought the average price home in the united states right now four hundred four hundred twenty thousand dollars the drop from a seven percent mortgage to a six point two five percent mortgage is going to save you you know one hundred fifty ish doll is probably seven eight percent of your monthly payment that is meaningful that can actually bring more people into the housing market or for people who are already searching and looking in the housing market it just means that your payments are going to go down so that's positive news all right so that is what has happened so far with the federal funds rate and mortgage rates we got to take a quick break but when we come back we're going to talk about the outlook for mortgage rates for the rest of this year and into twenty twenty six and what all.

Means for real estate investors we'll be.

Right back this week's bigger news is brought to you by the fundrise flagship fund invest in private market real estate with the fundrise flagship fund check out fundrise dot com pockets to learn more.

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Welcome back to the bigger pockets 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 q four twenty twenty five and into twenty twenty six 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 ten year us treasury drifts lower remember i said that it's at about four point one percent 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 four point one or four point two percent 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's 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're 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 six and we'll probably fall further in twenty twenty six assuming the fed does what it says it's going to do and inflation stays 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 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 that the impact of tariffs are going to hit the economy slowly and steadily it's not like there is 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 five percent like i'm not saying that but but does it go up to three does it go up to three point five 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 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 six point one five six point two 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 six percent maybe but i don't know if it's really worth waiting and not buying a property for it to go down you know zero point one 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 five percent 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 if you own.

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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 six and six point four percent 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 in a path to five percent 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 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 five percent is we need to see a significant drop on the yield on ten year us treasuries we're at about four four point one percent today they would need to go down to roughly three percent and that might not seem like a very big change but it actually is like that is a considerable difference if people are going to accept three percent interest rate on debt from the us government while inflation is at three percent 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 five percent mortgages the most likely path to a five percent 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 a 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 up but right now there are definitely signs of strength 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 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 us treasuries rather than waiting for demand from other investors from around the world to drive down 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 us 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 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 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 wall street types and there's like a fifty fifty chance that's like fifty percent of hedge fund private equity traders think that there will be quantitative easing fifty percent 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.

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 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 five percent 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 that used to be around which is kind of boring right there's more transaction volume we'd get off these lows of four million transactions a year probably back closer to five million transaction which would be great for our entire industry we'd probably see more predictable appreciation at the normal three to four percent instead of these massive spikes some years and then corrections next years 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 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 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 sixty or ninety days because then you can potentially see 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 zero point one percent 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 twenty twenty five you might want to take that the second thing is refinancing i think about it much the same way if you have an eight percent mortgage i would consider refinancing if you're thinking about refinancing from six point seven five to six point two five 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 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 refining and.

Paying those prices if you're trying to.

Hold onto this property for five more years ten more years i think refining 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 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 four million total home sales this year in the united states a normal level is about five and a quarter million so we're like twenty five percent 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 twenty twenty two 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 one hundred bucks a month this could get mentally some people off the sidelines and i just think 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 twenty five basis points the indication is that they're gonna cut another fifty basis points by the end of the year we have seen mortgage rates move down from where they were in january.

At about seven point one five percent.

To almost a point lower at about six point two percent 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 twenty twenty six 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 rates 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 e and k copywriting is by calico content and editing is by exodus media if you'd like to learn more about real.

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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 direct consequential or other damages arising from a reliance on information presented in this.

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