It has been a wild ride in the treasury market.  Rates spiked to 7.5%, but recently have plummeted back to below 6%? Now they are rising again.  What does this mean for real estate sales?  Will the lower rates be enough to turn around the slowing market?  Will rates return to pandemic lows?  Will lower rates slow the slide in values? 3 reasons rates have plummeted and predictions on where rates head in 23.


What is happening in mortgage rates?

30 year fixed rates peaking in November around 7.5%, fast forward to the end of December and rates have fallen to around 6%.  This is a huge drop saving borrowers hundreds a month and spurring a refinance boom of anyone who financed even a few months ago.


Why are treasuries and in turn rates now falling?

Remember the federal reserve does not “set” mortgage rates. The federal reserve can only change short term rates (prime rate).  Mortgage rates are determined by the market and pegged to the 10 year treasury which is the future expectations of inflation and the economy.

There are three primary reasons rates are falling:

  1. Future inflation expectations: For whatever reason even though wages continue to increase along with most other items, people seem to think inflation is going to magically recede and the market is starting to buy this argument.
  2. Weaker economic expectations: The inversion of short term rates over long term rates shows that there is an implied weakness in future economic activity that could lead to a recession.  In a recession the federal reserve would typically back off on rate hikes and engage in easing
  3. Market not believing the fed will raise rates as high as they say: The federal reserve continues to say that they will raise rates higher and hold them for longer.  The market is not believing the federal reserve for whatever reason and continues to price in lower peak rates for a shorter period of time.

The market might not be correct on their rate expectations:

“Markets aren’t prepared for how far US central bankers are willing to go to tame the hottest inflation in a generation”, according to Morgan Stanley’s Jim Caron.

Even though Federal Reserve officials are predicting raising interest rates above 5% next year, traders continue to under price the future path of policy tightening, the New York-based bank’s chief fixed-income strategist said in a Bloomberg TV interview Wednesday.

There is a huge disconnect between what the fed is saying and what the market is predicting.  At the end of the day, only one can be right.  Like Morgan Stanley above, I am betting on the fed which means there is substantially more turmoil ahead.

Will rates continue to fall to pandemic lows?

I do not believe that rates will drop substantially more until the federal reserve reverses course which will likely not occur until 2024.  Furthermore, the reason that rates were so low during in the past is because the federal reserve through their quantitative easing policy was buying billions in mortgage bonds driving rates substantially lower than they should have been.  The QE program likely drove rates at least 1-1.5% lower than normally.

In the next cycle, the federal reserve is not going to have the luxury of quantitative easing which means rates will not fall to their prior lows.

How will the drop in rates influence sales?

Sales of existing homes fell 7.7% in November compared with October, according to the National Association of Realtors. The seasonally adjusted annualized pace was 4.09 million units. That is weaker than the 4.17 million units housing analysts had predicted, and it was a much deeper fall than usual monthly declines.

Even with lower rates, sales were down 35.4% year over year, marking the tenth straight month of declines. That was the weakest pace since November 2010.  This shows that rates have not fallen far enough to spur a jump in purchases.   Furthermore, rates are not the only driver of declining prices, a surge in inventory along with weakening demand is the culprit.



Will the plummeting rates slow the slide in prices?

Although the national association of realtors is sounding a very optimistic note “The market may be thawing since mortgage rates have fallen for five straight weeks”,  It is doubtful that the dropping in rates will have a huge impact on the decline in prices.  There was considerable speculation in real estate that is now unwinding.  We are seeing this with a surge in inventory.  Furthermore rates are still almost double their prior rates.


Unfortunately just because the market is pricing in lower rates does not mean that the items above will come to fruition.  It is very likely that inflation stays stickier for longer which will radically alter market expectations and in turn mortgage rates.  Although It is good news that rates are dropping off their highs, I don’t think this will be enough to slow down the price corrections coming this spring as rates are still roughly double their pandemic lows of 3%.  Furthermore with inflation remaining higher, the federal reserve will not be buying mortgages anytime soon which will ultimately lead to higher terminal rates for mortgages. 


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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors MagazineThe Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.


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