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Friday, July 19, 2019

I was sitting in my office last week when I received a call from someone inquiring about refinancing options. Indeed, it is a common conversation that I have been having a lot of late. After going through the specifics of his situation and offering him our best rates and terms, he went on to give me his expert advice about the interest rate market. He told me how he is confident that the 10yr U.S. Treasury market will be closer to 2.50% within a week or two than it will be to 2.00.

By his own admission, what made him “an expert” was “stuff” he reads online from financial bloggers. There is no shortage of opinions and prophecies out there! I’m certainly not poking fun, and wouldn’t relate this exchange if we didn’t have a laugh over it recently, and if I didn’t tell him that I will be “quoting him” for an upcoming blog post of my own.

I will leave the predicting of market movements and interest rates to “the experts,” all I can do is discuss where we are today, and how we got here. I find that understanding how we got to a certain point is often as informative as trying to anticipate where we might be going in the future.

Friday, July 5th was a big day for the markets. Stocks and Bonds were both lower after a surprisingly strong Jobs report from the Bureau of Labor Statistics. Instead of the 160,000 new jobs anticipated, 224,000 were reported exceeding most predictions. The markets were stunned and concerned about how this strong employment would impact the predicted Federal Reserve “Rate Cut” anticipated for the end of this month.

In the aftermath of the jobs report, the markets seemed to be changing momentum. Yields on mortgage bonds began to inch higher, bringing slight increases to mortgage pricing. After a few days of the negative movement, Bonds finally got a reprieve on Wednesday when insights from the Federal Reserve were released.

The Fed minutes showed that many members thought additional accommodation was needed and a that there should have been a cut at the June meeting. The Fed said that there was uncertainty about the economy, but they wanted to let it play out further. Powell says the strong jobs report last Friday did not change the Fed’s outlook on rate cuts. Powell clarified that further in his comments by being transparent and reassuring a rate decrease this month on July 31st at their next meeting.

After those comments became public, I got a follow-up call from my “market expert” friend. With the Fed guaranteed to cut rates in July, he said, “it’s obvious that we should be waiting to do anything until they cut rates.” My response was, yes, Powell did note the rate cut, but that was already anticipated to happen at the July 31st Fed Meeting, and factored into the current rates. Now the only question for markets is not if, but how much.

Most analysts are expecting a 25bps cut; some are going as bold as predicting 50bps (1/2 percent cut). If the cut is only ¼ (25bps) with no other comments about further reductions, then mortgage rates will likely increase (go up). Believe it or not, that is the predictable response to Fed rate cuts. Mortgage rates typically improve on the news of a cut but increase on the execution. That has been the historical response over the past decade, if not more. My new “mortgage rate expert” friend was thankful for the insight and decided to “take his chips off the table” and guarantee himself the low rates we offered him today.

As I have written about in the past, I have been predicting an economic recession in late 2019, which seems very likely to happen by 2020. That will undoubtedly have an impact on capital markets in 6-12 months from now. If you want to know my longer-term thought process on the economy and mortgage rates, I am happy to discuss that further with anyone. For now, all you can do is arm yourself with real & current data, and try to make the best decisions for your situation with the facts-on-the-ground today. A special shout and
happy birthday to Moshe Kinderlehrer!

By Shmuel Shayowitz


Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience including licenses and certifications as certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected]