The saving grace for interest rates is right there in plain sight, but no one is talking about it..?!

Wall Street Journal is calling it “The Hidden Force” and it might change the trajectory of a year that started out…pretty shitty if we are being real.? Activity has been slower, days on market has been increasing alongside interest rates that were on a war path.? Will it turn around?? Well it already started this week with the CPI numbers.?

Inflation is still the market’s sexy mistress.?

Just when we thought we were trapped, here comes inflation numbers to make everyone squirm.? When I saw the first headlines at 5:30 Wednesday morning, it seemed like bad news because inflation ticked up all the way to 2.9% - almost half a point higher.? I thought, good lord…have you no mercy?? Rates are already back above 7%.? I just told everyone in my 2025 forecast they would stay in the 6’s all year and I thought that was being a conservative curmudgeon.??

When we looked into the report deeper, we saw that core inflation actually improved with a lot of help from us!? Us meaning shelter costs!? Bonds rallied big time and have continued to rally since.? (Disclaimer, I am writing this on Thursday so if some black swan event has happened Friday morning – don’t hold it against me.? Anything is possible these days.)?

The Hidden Force?

There is, and has been for quite some time, a larger than normal spread between the benchmark treasury yields and 30 year fixed mortgage rates.? The more recent historic norm has been for there to be a 1.7 to 2% spread between these two.? If we go back to 2019, the spready was less than 1 percent.? Times have not been normal for a while now due to economic instability (real or perceived, see last weeks blog for my saltiness there), an inverted yield curve and a tricky housing market.? So, we’ve seen this spread move as high as 3%.?

Let me break this down a bit better.?

What I’m saying is that you will typically see 30 years fixed interest rates be 1.7% or 2% higher than the 10YR treasury yield.? However, given how much fear has been baked into the market, we’ve seen this spread increase to 3%.? Three hundred basis points.? That pushes mortgage interest rates significantly higher than what they should be based on the technicals.? Some mortgage strategists believe that this is the year the markets get the clarity they need to tighten up this gap on bond spreads.? This is worth paying attention to.? If we look at the 10yr today, January 16, it is at 4.644.? Mortgage rates are high 6’s, low 7’s.? So that’s well over a 200 basis point spread.? That’s impacting buyers attempting to finance a home in a very big way today.? However, if the strategists are right in their hunch that this gap begins closing this year…even if the 10YR yield was at this shitty level of 4.6…if the spread was only 100 basis points, that would put mortgage interest rates in the mid-5’s.? THAT WOULD BE HUGE FOR AFFORDABILITY MY FRIENDS.?

If the 10 year yield drops because of rate cutes or improving inflation (hey, it happened this week – it’s not like I’m talking about unicorns appearing) or a recession and the bond spread has simultaneously tightened up….can you imagine what happens to mortgage rates?!???

Let’s slow down here, I think I’m getting everyone too worked up.? I will just say, you can be cautiously optimistic.? And if you explain this to someone at Happy Hour this weekend, you’re gonna sound super smart.?

Don’t forget –?

Mortgage and Mimosas is coming up on Valentines Day.? You guys are going to love the topic this time!? RSVPs will open on February 1st and there are only 50 spots.? Not because your girl only wants to pay for bottomless champagne for 50 of you but because I like to be exclusive.? It’s my trauma but it’s also my event, so I get to make the rules.?

You can also buy your ticket to Future is Female now!?

Have a great 3-day weekend ???