The Expert Podcast

Hi, this is Dave Pel Granelli, licensed Commercial Insurance producer and also retired mortgage broker. So what's going to happen with interest rates? Well, a year ago, you would have thought there would have been two or three rate cuts by now, and maybe another two or three this year. Now, it's looking like we'll be lucky to get one more. The Federal Reserve is talking about maybe having a rate cut later this year, but that's not a certainty either. It's likely that they may hold back on that rate cut because they want to keep inflation low. This is what's been talked about for several months now.

Remember, the Federal Reserve rate is only one component of mortgage rates. The other components are the markup from the mortgage companies and the market that the mortgage companies make on the retail product. Even if mortgage rates stay the same, the interest rate that the Fed has could still go up, and the mortgage companies hold the line. On the other hand, if the Federal Reserve rates bump up, mortgage companies could keep their rates the same or even go lower. It's unlikely, but the mortgage companies want to generate a little bit more business than what they have. They're starting to see some economy of scale and some internal efficiencies, so we may see the actual retail mortgage rate bump down a little bit from where it is right now, mostly because of the anticipation of rate cuts.

Remember, mortgage companies hold that loan for 15 or 30 years, so if they think down the road there'll be more rate cuts, they can actually bake some of that into their retail rate now and still be able to make a profit. The mortgage originator gets their fee upfront—they get a flat fee—but the mortgage holder, which is normally Fannie Mae or Freddie Mac, they have to base their rates on what they think the average rate is going to be during the life of that mortgage. And even though you have a 30-year mortgage, people don't normally keep it the whole 30 years—they might sell their house, pay it off, refinance, who knows? So they have to factor that in as well.

So you may see some interesting things happen with mortgage rates. What's that going to do for the real estate market? Well, people now are starting to get used to the idea that the rates are what they are—they're in the 7% range, maybe bump up in the mid-sevens, maybe in the mid-sixes. That's going to be the range; it'll be a narrow range. People are starting to figure out what their budget is, how much house they can afford based on that rate. I think what was happening before is a lot of people didn't know how much house they could afford based on the rates. People want to buy as much house as they can get, right? So if, let's say, the rate is at 8% and you max out whatever house you can get at 8% based on the payment, you might find out later if the rate goes down to 6.5%, you could have gotten more house for the same payment. So people held back a little bit with the uncertainty.

Now, people are starting to look at it like, "Well, we see where the rates are going to be—they're going to be in the between 6 and 7.5 range. So now we know what our budget is, and they can buy as much house as they can afford in that range." And that'll open up the floodgates a little bit on home sales. That will also open up the floodgates on home listings because people can't list their house until they know what they're going to buy. So it's kind of like a catch-22.

Prediction is that, as we've already seen more inventory coming on the market, more people buying, rates hovering around seven, the market will become more normalized between now and the end of the year. Of course, the election is a big variable, but I think most people figure either way it's not going to have a huge effect on the real estate market or the economy for that matter—it can only get better. And they're going to start coming loose a little bit with the home purchases. A lot of people are still short on funds, but the home buyers, people who are in the real estate market, they're the ones who are a little more liquid as far as cash and can jump into the market with a little more peace of mind.

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