KGCI: Real Estate on Air - What's Causing Recent Interest Rate Movement

Episode Date: February 21, 2025

And welcome to a new edition of the Nerdy Agent podcast. I am going to be hosting today. My name is Josh Pedersen here with my brother, AJ. Luke is on paternity leave right now. We are very excited. We got to meet his newborn Millie last week. She's what, almost two weeks, getting close to two weeks old now. Two weeks tomorrow, I think.

Yeah. Doing well. Mom's doing well. Baby's doing well. We're psyched for him. It's been really fun so far. But he's going to be on a temporary hiatus in the meantime. taking care of what's really important. We've spent the last few podcasts talking about all of the

lawsuit stuff, but in that time frame, we've also seen some movement on interest rates. So today we want to get into the interest rate component of things, go over a little bit more what's been going on in that realm, and really kind of how we foresee that playing out and how we're already kind of seeing that play out in our local market. So rates did the week of, what, April 12th, I want to say jump from closer to seven to up now around the seven and a half range, kind of hovering seven four, seven five right now. So AJ, can you give us a little more insight on what drove that big increase? I know you have a lot of the numbers, but it's been business as usual, really, I guess, on all the reports, which is too many jobs, too high of inflation. Too many jobs,

such a bad problem. It just keeps going. Yeah. So they're, you know, the Fed's looking for, um, obviously prices of things to come down, which is a, you know, a producer side problem because the PPI is also, was way higher than expected actually, because the PPI has been pretty, pretty low compared to the CPI. And again, I don't know how those numbers track, but the estimate was fairly flat and it came in well above flat. PPI was at 2.1 for March. For month over month, though, I think it was 0.2%. And it was expected to be like, negative 0.1 or something, I could be off on that,

but I pretty sure it was much higher than expected. It was actually right in line with expectations. Right in line, Josh says. Okay, so I'm wrong on that one. The CPI, however, has continued to stay sticky in the threes. That's the one that they talk about as their long-term kind of number, that they want to get to 2%. Personal expenditures is another one they look at,

which I think is like credit card purchases. That's been pretty hot. And then again, the jobs. So it's from a company perspective, how much are they getting stuff for? How much are they charging for those products? The higher that is, you know, the more people are having to spend on a daily basis for just ordinary things. But then the more people who have jobs, the more people who have money, and then they continue to spend. And then that continues to drive those prices up because the demand is so high.

So they're trying to get down to that 2% mark. But when we consistently get these reports that are higher, than what we were thinking or not showing any meaningful improvement, you start to see the markets react. And so the bond markets, 303,000 jobs added in March. That's a big number. What was the estimate? Estimate was, I think, around 200, no less than that. So, I mean, it's been outpacing expectations really pretty much throughout the entire year.

So when the 10-year yield, when they came out and said, we are going to cut rates this year, like for the first time, right? talked about that. Traders were estimating seven rate cuts in 2024. That sent the 10-year bond down to 3.6, I think even a little bit underneath that at one point. Since all this stuff has come out in the last few weeks, it is 4.57 today, I want to say. It was over 4.6. It's off today a little bit. But it's that that kind of drives that 30-year rate up. And we talked a little bit before about the podcast or before the podcast about what's going on globally too, because that always typically more turmoil is going to lead to more investment into safer assets, which are bonds. And as demand for bonds increases, the value of the bonds goes up. And so, you know, I don't

know if you guys follow the news, but Iran, which historically has used, different groups to carry out attacks. That's what kind of the most people have said. They themselves are participating in the war in the Middle East now with Israel. And Israel with a, I think they call it like a soft retaliation of drone strike or whatever. So that war has escalated a little bit, which has people a little bit more scared, which I think is probably contributing to some of this as well. But to Josh's point, you've also seen.

those spreads get back to where they were before. So they're almost 300 basis points again on the 10-year to 30-year fixed. The 10-year right now is at 4.59. And it was around 4. Yeah, right around that yesterday. It was around at the end of March. You were talking 4-2 to 4-4 in one day. But right around the end of March, it was around the 4-2 range. So we've continued to see upward momentum there.

And if you go back further, I mean, it was much lower than that. When the rates, I mean, we had rates as low as 6.4. point four for at least a day or two. It was right at four kind of in the early part of March. 4.05 is kind of the low point. If you keep going back. February it bottomed out around 3.81 is the lowest point this year. So there you go. So and even at that number, we were seeing rates in the mid sixes for a brief minute, which was those spreads were shrinking. Yep. And now they're kind of back at your, you know, 290 to 300 basis points. 30 year fixed over the 10 year yield. The other interesting thing to look at from an economic perspective is, and you could probably pull up the spread on the St. Louis Fed, but the two-year, 10-year spread has also shrunk lately. So I believe those are trading at about 30 basis points apart right now. That's when people talk about inverted yield curve. That would be short-term rates versus long-term rates. In the long run, in a good economy, you would see the two-year yield trade lower than the 10-year yield. We've had an inverted yield curve for three years. Long time.

And they say that predicts recessions. But as it starts to back off of that and change back the other direction, you start to see people start to think maybe we aren't going to have this massive recession. And right now, everything's kind of trading super choppy. So it's really hard to know what the market's predicting. I talked to a buddy yesterday who thinks he made a bold prediction the Fed's going to raise rates before they cut them. It's not crazy. which would be really wild to see, based on the fact that back in February March, we were thinking seven rate cuts this year.

Now traders are trading with one, I think, in September, and that's it. Yep. So the rates are trading, the 30-year fixed is basically trading like we're going to have one rate cut this year. But if you see the rates go up, you're going to see those bond yields really pop. That's a complete reversal of what they were thinking originally. If we go back to what we were talking about maybe six months ago on this, one thing that was driving me nuts was a big pet peeve of mine was the general consensus and communication that there was a guarantee that rates were going to be coming down right they've hit

their peak they're coming down uh i've said it before my one of my biggest pet peeve slogans is marry the house date the rate because you can always refinance and it's really irresponsible i've always said in terms of communication i think we looked at it and said well the economy's actually pretty healthy. Jobs reports are really good. Inflation's running hotter than we want it to be. So unless they feel like they overshot their activity and are going to drive inflation down with some of the things that they've done, the Fed doesn't have a lot of incentives to move rates down. And the Fed's decision making impacts the 10-year, which impacts our mortgage rates, right? We've always kind of walked through that process of how those things flow together. But what we're seeing right now is the inflation is even coming in a little higher than they thought it was going to.

I think the Fed probably thought it was closer to the three range now. We were at 3.8 for Core and 3.5 for headline CPI. And so, you know, the Fed wants that number at two. They've said they want that number at two. Whether or not they are okay with the number that's closer to two and a half to three, we don't know. But 3.8 is not what they want. How long have we been between 3.5 and 4? It's been around the three.

to four for sure, right? Like it's been under four and we were like, yay, and then they figured we keep going down and it's just sat in that three range, right? And so, like I said before, and like I'll continue to say, people were like, there's going to be seven rate cuts next year. They didn't, they didn't know that. And so communicating that out is irresponsible because the Fed's not making that decision. They're looking at data and they're deciding in real time what they are going to do. traders are pricing in expectations as they're making decisions because the traders are going well based on what we're seeing. We think X, Y, and Z is going to happen. And so they had this, you know, whether it's optimistic or whether it was emotionally clouded belief that rates were going to fall this year.

And so therefore certain activities should be taken. But it hasn't happened yet. And frankly, I don't see it happening until we see some improvement in terms of these inflation numbers, in terms of war stability, et cetera. So when I said, I'm not trying to be a responsible here in giving a negative crystal ball, but I do think it's important to be thinking about it from an agent perspective as you're communicating with your clients,

not to over promise anything because you can't guarantee where things are going. And similar to how I tell people about pricing when people say there's going to be a crash, like there's not a lot of signals. There's going to be a crash because there's no inventory to buy. I'd say the same thing about rates. There's not a lot of signals

that there should be a rate cut right now. Powell has said from the start, he's played it so conservative in every point, saying things like, well, we'll see, well, we'll see. Every optimistic piece he dampers down. He's trying to ensure that he lands as softly as possible, and that's the way he's doing it. So unless we get inflation rates,

CPIs in the two range or the one point something range, there's no incentive for him to make any sort of cuts. What will be interesting is to, see will they raise the rate before they change their expectation? That's that's kind of the competing forces right now to me. I mean there's three options for the Fed, right? They, well, four really, but we'll sort of the election cycle, right? I was just going to talk about that. Now the Fed is independent of the of the government, right? So the president can't tell the Fed what to do theoretically. We don't know how that communication actually works. Powell's worked in multiple

administrations across different presidential candidates or he seems like a very very, very, he seems like a very Very moderate. I mean, he worked for both of the current candidates, right? So he doesn't seem like he's taking orders from anybody. But I could imagine if you're the president right now and you're running for your election, you don't want him raising rates. Correct. That's going to have a negative impact on the economy. It's going to have a negative impact on the stock market. It's going to create negative buzz around what you're doing. So you're not wanting that. It seems like right now. I mean, there are four options. Do what they've been doing and just keep it the same as they've been doing and see what happens. Drop the rate and see if that does anything. But that seems like that. like it's going to make the numbers that they're that they're putting out here worse. Yep. Raise the rate again, which would be a complete break from what they said earlier in the year, or change their expectation of what inflation is going to be long term. They have been so hard pressed on this 2% number. I've talked to a lot of people about, well, what if they just said it was 3 now?

More people think it should be 3. Well, there you go. And that's what's so interesting as we look at it is what's going to create the most sustainable capitalist economy in the United States, and that's what they're trying to accomplish. So it's going to be really fascinating to hear what they come out with, what, again, Powell talks about. But I think you make a great point with the political part is that in an election year, you could see all sorts, you could see stuff happen in every direction. Because like you said, a rate cut looks really good for the Democrats. Maybe. If then maybe that will drive inflation up

and that will look really bad. Maybe, right, but a rate hike looks terrible. It looks worse. So, yeah, and again, like you said, he's worked for Democrats, Republicans, across many. I mean, he was, wasn't he, he was a big part of even when Obama was in office? He's been around a long time. In some regard, not as the chair of the Fed, but he's worked for a lot of different political parties. And at least through this whole thing, he seems like he's making his own decisions or decisions with, you know, the help of the other people that are in better.

at the Fed. Yep. Other economists that are helping make that call. So, yeah, I'm fascinated to see how it plays out. But to your point, a lot of people don't even know that. I mean, I talked to a seller of an expensive property I have for sale right now. And we've had action the last few weekends. And then last weekend we didn't have any.

And they're, you know, she's talking with her husband going, well, what the heck? Why are we not getting any showings? And she's pretty tight in. And she's like, well, the rates went up half a point in the last 10 days or whatever. Went and looked. I'm like, yeah, that's 20% down in your house. That's like three, 400 bucks a month. Yep.

It's a lot of money. Just on that little half point, most people don't understand that in real time, that is making people make real decisions. And maybe they're saying, well, I know we were going to go to this number, but maybe it's this number minus 50,000 or 100,000 or what have you. So we still haven't seen, at least on our team's perspective,

from our micro perspective, a massive drop in demand. It's still been pretty strong. What I would say, though, is there's more scorer. squeezing happening right now in real time. And I'm seeing it at a micro level, right? But rental properties, for example, our rental properties, I talked about this. And this is less interest rates, but more just inflation in general in terms of costs, et cetera. The demand for our rental properties this year has been slower than it's been in prior years. And it's been

surprising. Same houses as prior years would have 30, 40 people interested have 10 now, right? I think monetarily people are more squeezed than they've been in prior years, which is going to impact and flow downward. That's more of a rental property thing, but it will also impact how first-time homebuyers are looking at things. I did have a listing this weekend had a lot of activity on it. It was at a first-time home buyer price point. It did sell the first weekend. But the number of offers we got was limited. We had more buyers say, hey, we're going to probably offer. And then I talking to the agent said, hey, they looked at the monthly payment with the new rates, and they're going to hold off now. So I heard that three times over the phone. So I, and

And Luke had one go on in St. Louis Park for some homebuyer price point. And he didn't, he didn't get any offers this weekend either. Which three weeks ago, that house would have been snapped up. So, like, this, this market always ebbs and flows by the month, by the week, et cetera. And certain things will cause it to ebb and flow a little bit more than other things. What I've seen, though, is historically, as rates rise more quickly, like when you see a 50 basis point jump in one week, it tends to create a pausing effect for buyer behavior, right? They just go, oh, shoot, maybe I'll just want. weight. And then if it normalizes, then they re-evaluate their world and then they say, does this make sense? Does it not make sense? But anytime things go up really fast, it tends to kind of freeze everything. And so if this continues, I think it's either going to be prices will get impacted by it because interest rates will impact prices and affordability. Or buyer activity will once again dissipate where we're seeing like rentals, my general hypothesis is more people

are just moving in with their parents because we have a lot of like 20 to 24 year old clients. Well, and Jim, Jim talked about that a lot. And again, we're not in 2007, 2008, but he said that was the toughest rental market for him, too. And I said that's so interesting because people couldn't buy like they needed to rent. And he said the biggest driver of rental rates up or down is how much space per square foot people are occupying, really. So it's that consolidation factor. You know, we typically have four bedroom houses, 1,800 square feet. That's 450 square foot per person in that house.

but if all of a sudden, you know, a big sector of that market that was renting those properties decides they're going to live in their parents' basement because it's empty and it's free. Yep. Then that takes a lot of people off of the table, right? One of our current tenants moved out of the house they were renting to move in with their parents. So interesting. To save money for a down payment to buy a house. But it's, yeah, I think it's as financials are more squeezed, it just becomes more of a reality for people. So it'll be interesting to watch. I mean, we're talking like very small micro situations, right?

We're not proposing that there's going to be a slowdown in the market immediately. But a market that had been very resilient, right, up from January through now, is showing a couple of little cracks, at least from what I'm seeing, that do suggest maybe it's going to slow down. I mean, I'm not saying it's going to halt. I'm not saying prices are going to drive backwards. But the chaos that we've seen, I think could potentially subside for a little bit. and you layer in the commission thing for agents on top of that in July, that's going to have an impact on activity no matter what, because no one's going to know what the heck's going on. So it'll be interesting to see kind of what the market brings for these next few months.

As I think buyers are going to be, you know, potentially squeezed by some of the rates and obviously just confused about how some of the other things are going to impact them in the future. So more to come. But at the end of the day, I think it's really interesting right now to watch kind of how this has impacted everything. Yeah. And that's all we have today on the nerdy agent podcast, Sands Luke. As always, be better. Bye-bye.