I don't think I can say this enough: expectations are the most important thing we can manage in life. 😳

This is true for real estate professionals managing their clients' expectations.

And for spouses, parents, and friends managing the expectations of those around them.

Why?

Because all frustrations in life stem from missed expectations. 💡

• You expected to get Ruth's Chris, but you got Steak n Shake instead..
• You expected to see them, but they had to work late..
• They expected to close on the house tomorrow, but now It's delayed a week..

Sometimes, even positive surprises are bad if you're the type that doesn't like anything unexpected to happen.

How does this relate to interest rates and the Fed? 🤔

Because the market's expectations around Fed rate cuts weren't met and now mortgage rates are moving higher..

We all get ahead of ourselves

Outside of the election and the Jake Paul vs. Mike Tyson fight, the Fed finally cutting interest rates was one of the most anticipated events of the last 12 months. 😬

And we finally got what we've been waiting for: the Fed cut interest rates. 😁

Except now that it's here, it's not as awesome as we expected.

From the day the Fed cut rates, mortgage rates have gone up. 🤬

It's totally confusing to get this outcome - unless you understand the point we started with about expectations.

You see, we got ahead of ourselves twice now. ✌️

First, towards the end of 2023.

Mortgage rates dropped ~25% as investors began expecting Fed rate cuts in the near future.

The expectations bubbled up and reached a peak when everyone thought we'd get 6 Fed cuts to start off 2024.

And then we didn't get any cuts. 😱

Expectations were missed and rates rebounded higher by nearly as much as they had fallen. 📈

Second, we hit the repeat button as investors expected another 6 Fed cuts to end 2024.

Mortgage rates declined ~20% in anticipation, only to be met by a Fed who reluctantly cut and warned investors were expecting too much. 😤

And back up mortgage rates went..

Finding Opportunity

This brings us to today.

We've got a Fed who's cut rates twice, but mortgage rates that have gone up nearly 25% since the first cut was announced. 😵‍💫

This isn't because of the actual Fed cut rates.

It's because investors are walking back their expectations of the 4 other cuts in the future. 😲

As we lower our expectations (in the market and life) it can be painful and we might throw a tantrum or two.

We thought we'd get something that we're no longer getting.

Now, this doesn't mean mortgage rates won't come back down in the future. 🤷‍♂️

But, it highlights some important takeaways we should keep in mind:

✅ The market is always looking ahead. It's not as much today's action that matters as much as what everyone expects in the future.

✅ This is why you don't need to wait for the Fed to cut rates to get the best deal. The best time to act is when expectations are at their highest.

✅ Missed expectations can cause more damage than the actions themselves. In business and life, focus on underpromising and overdelivering as much as possible. Keep this in mind during every deal you work.

✅ Because people overreact, you can expect it to happen both ways. We went from expecting too much to possibly expecting too little. I think we could see a reversal in mortgage rates in the coming months. Be ready to act if that happens.

When things seem to be going in one direction, they're ripe for a reversal. 🎢

Don't wait for the Fed to take action thinking it will get you the best deal.

Act when expectations are extreme and you might get the best deal of all. 🚀

Dr. Alex Stewart
Founder

Still have questions? Here's some common frequently asked questions and answers:

Q: Why do mortgage rates rise even when the Federal Reserve cuts interest rates?

A: Mortgage rates are influenced by various factors beyond the federal funds rate. Even if the Federal Reserve cuts interest rates, strong economic data can lead to an increase in mortgage rates as lenders anticipate higher inflation and stronger economic growth.

Q: How does the federal funds rate affect mortgage rates?

A: The federal funds rate sets the benchmark for borrowing costs in the economy. While it does influence mortgage rates, lenders also consider other factors such as the 10-year treasury yield and overall economic conditions when setting mortgage rates.

Q: What role does the 10-year treasury yield play in determining mortgage rates?

A: The 10-year treasury yield serves as a benchmark for fixed mortgage rates. When the yield rises, mortgage rates typically follow suit, as lenders seek to maintain their profit margins amid changing economic conditions.

Q: How does strong economic data impact mortgage rates?

A: Strong economic data can lead to increased consumer confidence and spending, which may drive inflation. As inflation rises, lenders may increase mortgage rates to offset potential risks, even if the Fed cuts interest rates.

Q: What is the relationship between inflation and mortgage rates?

A: Inflation erodes purchasing power, prompting lenders to raise mortgage rates to protect their returns. If inflation expectations increase due to strong economic data, mortgage rates may rise despite cuts in the federal funds rate.

Q: How do mortgage lenders set their rates?

A: Mortgage lenders consider a range of factors, including the federal funds rate, 10-year treasury yield, economic growth prospects, and inflation. They use this data to assess risk and determine competitive mortgage rates for borrowers.

Q: Will mortgage rates drop if the Federal Reserve continues to cut rates?

A: While a cut in the federal funds rate can lead to lower mortgage rates, various factors such as market conditions and economic outlook can cause mortgage rates to remain elevated or even rise, despite the Fed's actions.

Q: How does the presidential election affect mortgage rates?

A: The presidential election can create uncertainty in the markets, which may affect mortgage rates. Candidates' economic policies and their potential impact on economic growth can influence investor sentiment, thereby impacting mortgage rates.

Q: What are the implications of the economic deficit on mortgage rates?

A: A growing economic deficit can lead to higher interest rates as the government borrows more to finance its spending. This can drive up the treasury yields, which in turn may cause mortgage rates to rise as lenders adjust to the increased risk.