We saw record loan volume last week, hitting a number of locked loans we have not seen since 2022.
Then…it all stopped.
The reason, of course, was the Iran war – which threatens the distribution of as much as 20% of the world’s energy supplies (sparking inflation fears).
In other words, right when things were getting good, geopolitics threw a wrench into the machine (again).
This is not the first time we’ve seen this happen. Mr. Biden’s massive spending bills in 2021 scared the bejabbers out of bond investors and pushed rates up. Ridiculously flawed BLS jobs reports have pushed rates higher on numerous occasions – for no reason. And inopportune Fed rate cuts in the fall of 2024 sparked inflation fears and pushed rates up by 1%.
Rates rose again today in response to another spike in oil prices. Despite Trump’s offer to provide insurance for vessels traveling through the Persian Gulf (after private insurers backed out of the market), energy transport companies remain apprehensive due to ongoing regional tensions and the physical risks to their ships and employees.
A Few Observations
- INSURANCE IS NOT EVERYTHING. Market analysts love to remind us that insurance plays a huge role in world trade, particularly when it comes to oil prices; if insurers won’t insure, ships won’t ship (and prices shoot up). So, Trump stepped in. But it turns out the shipping companies don’t like risking their ships and crews, even if they can be reimbursed. Who knew?
- MARKETS KNOW BETTER THAN MEDIA AND POLITICIANS (WATCH OIL PRICES). To truly see how the Iran war is going, watch oil prices. They shot higher over the last 24 hours, indicating that all is not fine despite the assurances of politicians and many media sources. Similarly, if things were as bad as Tucker Carlson and many other media sources would have us believe, WTI oil prices would be well over $100 per barrel instead of the $79 we’re seeing today (WTI was down to $64 last week).
- RATES WERE 3/4% HIGHER LAST APRIL WHEN THE 10-YEAR YIELD WAS IN TODAY’S RANGE (THE “SPREAD”). This is the good news that I love to keep repeating. The “spread” between mortgage rates and the 10-Year Treasury Yield has been tightening over the last year, which is partly why rates fell so much. The spread hit 3% in 2022; it was under 1% during COVID; it is about 2% now; and historically it has been about 1.7%. So, we can expect rates to fall further.
Housing Demand Hits a Record Low – We Need Lower Rates (Why This Matters So Much)
Crash-bro, Nick Gerli, shared this post on X today, indicating that housing demand remains near all-time record lows. As I have pointed out many times, nothing stimulates housing demand more than lower rates.
Lower rates also stimulate more housing supply, as sellers with very low rates on their homes are less reluctant to sell when rates are lower overall. And no, we don’t have an oversupply of housing, as active listings are still well below pre-pandemic levels.
When Will Rates Come Down?
Rates will fall when oil prices fall. And oil prices won’t fall until energy transport companies are assured that they will not be blown up if they sail through the Persian Gulf. Energy producers in the region are also offline due to the war.
So, even when tensions de-escalate, oil prices may not respond immediately, as it will take a while (weeks in some cases) to bring energy producers back online and get ships moving again.
As I remind readers often, interest rates are slippery up and sticky down – meaning rates tend to spike up a lot faster than they trickle. It is often the same with oil prices, too.
Even if things go well and shipping lanes and production facilities are deemed safe, rates could remain in this range for several more weeks (bond investors, shipping companies, and producers will need to be convinced by reality rather than rhetoric).
And – if things don’t go well, expect higher oil prices and higher rates.
