Oil prices fell sharply over the last few days, but rates remained high largely because inflation is now baked in – and will likely get worse no matter what.
Hence, our best hope for lower rates in the near term is a good old-fashioned stock market crash – something I’ve blogged about many times.
I am bringing it up again, though, because Ed Dowd was just on Thoughtful Money (Kooky Valuations Lead to Downturn), explaining why we’ll see a 40% to 50% stock market correction by year’s end – and 20% to 30% in the “near term.”
Dowd makes a very strong case (oil price shocks, struggling consumers, overvaluations, private credit crash, China’s weakness, etc.), which is why I say “the” stock market crash rather than “a” stock market crash.
I looked back at historical data to see how much stock market crashes bring down rates, and the results were both fascinating and encouraging (if you’re in the mortgage industry).
In 1987, the stock market famously crashed by almost 30% over 4 days, and 10-Year yields fell 1.5% in response. This is because investors sell stocks and move into bonds en masse (in what is called a “flight to safety”) when stocks correct – and that massive increase in demand for bonds brings down rates.
The table below shares data from the five most recent crashes.
Note that 2022 was the lone exception – when rates did not fall in response to a stock market crash. But – that is because the Fed was hiking rates very aggressively, making bonds too risky.
Dowd makes it clear that the Fed will not be hiking this time and will instead be cutting.
Note, too, that mortgage rates don’t fall in lockstep with 10-Year yields, but they do correlate closely (a 1% drop in the 10-Year will cause mortgage rates to drop by 60 to 85 basis points).
So – Mr. Dowd’s near-term (within 3 months) prediction of a 30% crash could easily result in a 1% drop in mortgage rates. And a full 50% correction over the next six months could cause mortgage rates to drop by 2%.
So once again – Woohoo, a crash is coming!
I should add, though, that this is not “woohoo” for everyone.
High-end and luxury real estate markets (like the SF Bay Area) see sharp slowdowns after a stock market crash, while lower-end markets, like we see across the Sunbelt, respond positively.
I suspect all the people who see their 401(k)s cut in half will also be none too happy.
I often mention that we always need to expect the unexpected nowadays because our economy is in uncharted (debt-laden, government-influenced) territory.
Hence, while everyone seems to think higher rates are here to stay, there are many surprises that could bring rates down – and a good old-fashioned stock market crash is just one of them.
