WSJ Your Money Briefing - Why You Shouldn’t Expect a Rapid Drop in Mortgage Rates

Episode Date: August 14, 2024

A rough day in the stock market like what we saw last week could mean good news for home borrowers in the form of lower mortgage rates. But there are reasons not to expect rates to drop quickly anytime soon. Wall Street Journal Heard on the Street columnist Telis Demos joins host Ariana Aspuru to discuss the market forces that impact mortgage rates. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Introducing TD Insurance for Business with customized coverage options for your business. Because at TD Insurance, we understand that your business is unique, so your business insurance should be too. Contact a licensed TD Insurance advisor to learn more. Here's your money briefing for Wednesday, August 14th. I'm Arianna Espudu for The Wall Street Journal, filling in for J.R. Whelan. The sharp stock market declines earlier this month led to a quick dip in mortgage rates. But some key factors that influence the rates lenders offer

aren't budging, meaning rates could stay high. Mortgage rates have a few things kind of priced into them, and people kind of got really nervous at the beginning of last week about the economy and about the market that ebbed over the course of the week. That meant that stock prices came back up, treasury yields came back up, mortgage bonds came back up because what the bank is quoting you as a mortgage rate is sort of based off of all that.

A lot of those daily measures that we also check in on, we saw those kind of going back up over the course of the week. Wall Street Journal heard on the street columnist Telus Deimos joins me to talk about it after the break. AI may be the most important new computer technology ever, but AI needs a lot of processing speed and that gets expensive fast. Upgrade to the next generation of the cloud, Oracle Cloud Infrastructure or OCI. OCI is the single platform for your infrastructure, database, application development, and AI needs. Do more and spend less like Uber, 8x8, and Databricks

Mosaic. Take a free test drive of OCI at oracle.com slash wall street, oracle.com slash wall street. Bad news for the stock market could be good news for home borrowers. WSJ heard on the street columnist, Telus Demos joins me to discuss. Telus, earlier this month, we saw a huge dip in the stock market. And in turn, the market saw rallies in treasuries and mortgage-backed securities. Why is that? That's a classic flight to safety trade. So when what people call risky assets like stocks are going down really fast or a lot or sort of unexpectedly,

a lot of times what you'll see is people will run to what they consider generally more safer assets. And oftentimes that includes debts of the U.S. government. So you have Treasury bonds and then you have mortgage bonds, which they're considered much safer sort of things to hold than stocks are. And so what you see is very typical in a situation like this. You see prices going down, you see treasury yields going down, and mortgage bonds, which in some ways are priced off of treasury bonds, those usually move in the same direction as

treasuries do in those situations. You just touched on this a little there, but the big question in your story is all about when we may see these mortgage rates go down. How do the price of those treasury bonds influence mortgage rates? Mortgage rates have a few things kind of priced into them and among them is the sort of benchmark interest rate that they might use, which is basically like the treasury bond of a similar sort of duration. So when treasury yields go down, what you usually see are mortgage rates going along

with them. And that's again, because those mortgage rates are sort of priced off of what treasuries are doing. So those things tend to move in the same direction when treasury yields are going down, meaning people are buying treasury bonds, usually mortgage rates are going with them. So right now, what's standing in the way of lower mortgage rates? Well, so we did see mortgage rates kind of take a big tumble during last week's kind of market mess, but then we saw them tick back up in daily measures of

mortgage rates. So a lot of times when we talk about mortgage rates, we're usually thinking about these weekly sort of averages, but there are some things that measure mortgage rates on a more day-to-day basis, and a lot of those things pointed to mortgage rates drifting back up over the course of the week. We saw mortgage rates kind of recover from this big drop that they had, and we saw treasuries do the same, right?

We saw people pushing treasury yields back up a little bit. And so that's also typical. Things seemed, after people kind of got really nervous at the beginning of last week about the economy and about the market, that ebbed over the course of the week. And so that meant that stock prices came back up, treasury yields came back up, mortgage bonds came back up. And then in turn, again, because what the bank is quoting you as a mortgage rate is sort of based off of all that. A lot of those daily measures that

we also check in on, we saw those kind of going back up over the course of the week. And as we're talking about this relationship with what happened in the stock market and mortgage prices, an interesting thing that you point out in your story is that we're seeing mortgage rates can be higher than they might have been in the past despite seeing similar treasury levels. Why is that happening? So this is something that's been happening really for a couple of years now. Let's just go back to like what goes into a mortgage rate.

You have the treasuries kind of forming the base of it and then you add things on top of it there. And then one thing you would add on top of that is, okay, what do investors want to pay for a mortgage bond that influences what they pay for the mortgage loans that go into that bond. And what we've seen is that mortgage bonds have not been bought up with the same gusto that they were prior to when the Federal Reserve started raising interest rates a couple of years ago. And a couple of things are driving that. One is that the Federal Reserve itself was a huge buyer of mortgage bonds, which helped kind of keep mortgage rates down.

The Federal Reserve stopped doing that because they didn't want to stimulate the economy anymore, and so they weren't buying mortgage bonds. Big banks, big banks were big buyers of mortgage bonds. Big banks had kind of a little crisis, not so little for some, but had a crisis last year that was partly based around the fact that they were holding a lot of bonds that lost value as mortgage rates went up. And so banks weren't as big of a buyer of mortgage bonds

as they were in the past. And so when you take out these two big buyers, what you're left with is like mortgage bonds got a little more expensive than you would normally expect them to be given where interest rates are, right? So you'd expect mortgage rates to rise when interest rates rise, but they were rising more than you might have seen in the past. And so that's been one of the things that we've been writing a lot about and just sort of talking a lot about is that mortgage rates are somewhat even higher than they might be given where interest rates are because of some other stuff that's been going on in the

market. And so what people are seeing right now is that these rates are staying high for a bit. This leaves home buyers in a tough spot. What can they look out for to know when rates might start ticking down? If the Federal Reserve starts to really aggressively cut interest rates, that probably would lead to mortgage rates also coming down. Some of these things that have been happening for the last couple of years, big banks not really being big buyers of mortgage bonds, even some investors who at times were reluctant

to sort of jump into mortgage bonds, those things should probably start to take care of themselves. Also, mortgage lenders probably will get a little more aggressive in their pricing, trying to grab a little bit more refinance business if they think it's there to be had. So there are some forces that should really help push mortgage rates down over the next couple of years. If you're thinking about when exactly to sort of start looking at the market and when that opportunity might come, it may not be as quickly as you hope.

And the reason I wrote that it was sort of a tricky time is because one thing that would probably bring down mortgage rates a lot is what we saw last week, which is like a big fear about the economy, a sell-off in the stock market, a rush into other bonds, maybe the Fed coming to cut more aggressively, and then seeing mortgage rates come down. Maybe that works for you. Maybe that's exactly the scenario you're not hoping for, but that's kind of where we are in the short term. Even if in the longer run, there's a lot of things that point to mortgage rates going down a little bit over that longer term as well. That's WSJ heard on the street columnist Tellus

Demos. And that's it for your money briefing. This episode is produced by me, Ariana Aspuru, with supervising producer, Melanie Roy. Thanks for listening. ["Sweet Home"]