Every year I predict rates will fall: A) It’s a holiday tradition. B) I was much less wrong last year (whew).
I predicted rates would fall 1.25%, and they did in fact fall from a high of 7.26% (average mortgage rate) on January 13th to a low of 6.13% on September 16th and October 28th.
They only fell about 3/4% from the date of my prediction though, as rates were lower last December than in January.
Despite all the inflation predictions and concerns about too much Federal borrowing, I again think rates will fall – and I am even more certain this year.
My prediction is at the bottom of this blog.
I. Mr. Trump’s Demanding Lower Rates and Installing a Friendly Fed Chair
Ironically, this could push rates higher, as too much political influence on the Fed creates uncertainty and fosters inflation concerns – two things bond investors hate. So, no, Mr. Trump’s demands will not help rates.
II. Inflation Will Fall
This is a primary reason rates will fall, as long-term rates are highly influenced by inflation readings. And there are two factors that will bring inflation:
- Falling rents. Apartments were vastly overbuilt during COVID, and 2 million renters left America recently – and rents make up a huge portion of CPI.
- Falling energy prices. Oil was close to $120 a barrel in 2022, and it fell to $55 a barrel yesterday. Lower energy prices will work their way into other prices.
A weak labor market will also help inflation. So, yes, I expect lower CPI and PCE (inflation readings) – which will bring down rates.
III. Inflation Will Rise
If the economy continues to slow down, I fully expect Mr. Trump to experiment with more quantitative easing and stimulus in an election year (“…meet the new boss; same as the old boss…”). And yes, this can be inflationary. But we will not see the impact next year because of the lag effect; it will take about 12 to 18 months to feel the effects. So, we will not feel it next year.
IV. Holy Weak Labor Market, Batman!
This is the biggie. The unemployment rate has now risen from a low of 3.4% to this week’s 4.6%, a level of increase that is almost always followed by a recession. We are also seeing consistently declining payroll trends. BLS (gov’t) numbers continue to be suspect (“…meet the new boss; same as the old boss…”), but every legit labor market indicator is flashing red. And weak labor markets and recessions bring rates down.
V. Increased Demand for Mortgages
Renowned banking analyst Chris Whalen reminded listeners on Saturday’s Julia La Roche podcast that mortgage rates are heavily influenced by demand from banks and other investors (yes, mortgage rates correlate to the 10-Year Treasury, but the spread between Treasury Yields and mortgage rates is influenced by demand). Whalen thinks the demand for mortgages will increase next year, as banks move away from riskier and higher-yield alternatives.
VI. Black Swans Everywhere
There are numerous black swans flying overhead that have been fed continuously by government stimulus/excess liquidity, keeping them aloft much longer than anyone expected. But, sooner or later, they will get too fat from all that stimulus and … crash – bringing rates way down with them, as investors flee out of stocks and into the safety of bonds.
These black swans include a very weak China (reeling from falling imports, even more debt than the U.S. has, and a crashing property market), a very weak Japan (reeling from far too much public debt and/or a crashing currency), and America’s highly inflated stock market.
When these swans crash is anybody’s guess, but when they do, the markets will feel it – and rates will fall.
VII. My Prediction for Rates
Today’s average rate is 6.27%. I think rates will fall at least 3/4% next year to an average of 5.5%
This assumes, however, that none of the overweight black swans crash.
If a swan does crash though, we could see rates fall another 1/4% to 1/2%.
