I Still HATE Permanent Buydowns; 5 Reasons Why Rates Will Keep Falling; 5.5% By The End Of May

I. I Still Hate Permanent Buydowns! This Is Why…

A “permanent interest rate buydown” is simply the act of paying “points” or “origination fees” to buy down one’s interest rate.

Buyers or sellers can pay for them – and I hate them.

1 point (1% of the loan amount) will permanently buy down an interest rate by about 1/4%.

The problem is that borrowers often refinance before the buydown cost is recouped through lower payments or the lower rate.

This is a particularly severe risk, as many analysts expect rates to continue trending downward.

II. I Still Love Temporary Buydowns! This Is Why…

A “Temporary Buydown” is where the seller or lender pays points on behalf of the buyer to buy down the rate significantly more, but only “temporarily.”

A 3-2-1 buydown, for example, buys down the rate 3% in year one of the mortgage, 2% in year two, and 1% in year three.

But – after year three, the rate goes back to the full market rate. I describe the “Temporary Buydowns” in much more detail here: The Beauty of Buydowns!

I LOVE temporary buydowns for several reasons:

1. They are awesome marketing tools for sellers. Sellers could market a rate as low 2.99% today!
2. They offer legitimate and significant payment relief to buyers.
3. THEY ARE REFUNDABLE! If buyers refinance before the temporary buydown period is up, they get the unused cost of the temporary buydown refunded and applied towards their principal (even if the sellers paid for the buydown). So, there is no wasted money.

III. 5 Reasons Why Rates Will Keep Falling

Renowned banking analyst Chris Whalen recently said he expects rates to continue falling through May. Barry Habib of MBS Highway recently shared similar sentiments, as have many other analysts.

I am repeating the reasons why they think rates will keep falling because there are so many other analysts screaming about “inflation and high rates” coming.

1. The money supply tightened up 12 to 18 months ago. This is the primary reason inflation has been cooling (despite PPI today), as the money supply is the primary driver of inflation. However, there is a lag effect.
2. There is still very strong demand for Treasuries/U.S. debt. We constantly hear that the world will stop buying U.S. Treasuries because our deficits are out of control and we’re issuing too much debt. That is not true … yet…per analysts like Jim Rickards and Brent Johnson. A) The world absolutely needs and relies on our debt for liquidity and collateral; there is no alternative. B) The U.S. remains more trustworthy than other countries, and its fiscal situation is no worse than that of other countries.
3. Rents and energy prices continue to fall. Rental rates and energy prices (both huge influences on prices) continue to fall – but the government’s 1950s inflation calculation methods are not picking up on this sufficiently. This bodes well for inflation readings in the future – and rates respond sharply to cooler inflation.
4. The labor market continues to show signs of weakness. Yes, the government’s (BLS) report was strong, but private sector reports, e.g. ADP, continue to show weakness. And the Fed focuses on the labor market.
5. The “spread” between mortgage rates and Treasury Yields will continue to tighten. I’ve mentioned this several times in recent weeks, but the spread between the average mortgage rate and the 10-Year-Treasury is about 1.7% historically. It was as high as 3% after COVID, and it is now about 2%. So, we have another 3/10% to go to get back to historical norms – and we seem to be heading there for many reasons (more stable market, more mortgage demand from banks, government encouragement, quantitative easing, etc.)

The average rate is around 6.0% today, but I would not be surprised to see it as low as 5.5% by the end of May.