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Why Mortgage Rates Aren’t Dropping Yet: What Every Investor Needs to Know
Volatility in the Bond Market Sends Shockwaves Through Real Estate
In a rapid and dramatic shift, the yield on the 10-year U.S. Treasury surged from 3.89% to 4.38% in just two days—a 49-basis-point jump that rattled financial markets. This spike set off a wave of losses among hedge funds relying on “basis trades,” which exploit minor price differences between government bonds and futures.
As yields climbed, bond prices fell, forcing highly leveraged investors to liquidate large positions to cover margin calls. The sell-off only worsened the situation, placing further stress on a market already teetering on the edge.
For real estate investors, the fallout is tangible. Mortgage rates tend to follow the 10-year Treasury closely—typically hovering 1.5 to 2 percentage points above it. With yields now above 4.3%, mortgage rates have remained high, dashing hopes for more affordable financing in the 5% range and sidelining would-be buyers.
Although home prices have risen around 5% over the past year to a national median of $449,000, properties are now lingering on the market for an average of 111 days. The culprit? Borrowing costs that remain prohibitively high for many.
Uncertainty Spurs a Shift in Buyer and Seller Behavior
Markets thrive on stability—and right now, that’s in short supply. Talk of further bond market disruption has dampened confidence. Hedge funds are retreating, liquidity is thinning, and real estate is feeling the ripple effects.
National housing inventory has swelled to 691,000 active listings, a 40% increase year-over-year. While pending home sales are up 23% annually, roughly 35% of listings have seen price cuts, compared to just 18% a year ago.
The message is clear: buyers are hesitant. Market volatility is freezing decision-making, and investors should prepare for extended holding periods, fewer offers, and heightened competition among sellers. This isn’t a crash—it’s a recalibration.
Could the Federal Reserve Step In Again?
This situation isn’t without precedent. In both 2019 and 2020, the Fed stepped in with emergency liquidity tools like repo operations and market backstops. With nearly $1.9 trillion tied up in leveraged bond trades today, some analysts believe similar intervention may be on the horizon—possibly reviving tools like the Standing Repo Facility or Operation Twist.
Until that happens, however, bond yields—and therefore mortgage rates—are likely to remain elevated.
Investor Strategies for Navigating a High-Rate Market
Even during uncertain times, savvy real estate investors can find ways to thrive. The key is to remain informed, proactive, and adaptive.
1. Monitor the Right Economic Indicators
Keep a close watch on the 10-year Treasury yield and SOFR spreads to anticipate shifts in borrowing costs and liquidity pressure. These are early indicators of market sentiment and movement.
2. Capitalize on Market Conditions
With inventory rising and price reductions increasing, this is a favorable time to find motivated sellers. Investors who negotiate wisely can acquire properties at discounted prices with long-term upside.
3. Use Tax-Deferred Investment Tools
Consider executing a 1031 exchange to defer capital gains taxes and reinvest proceeds into cash-flowing assets. This strategy allows you to reallocate capital more efficiently while maximizing tax advantages.
Mortgage Rate Whiplash: What’s Causing the Turbulence?
Anyone tracking mortgage rates lately knows how volatile they’ve become. In early April, rates briefly dropped to a six-month low after a major tariff announcement—only to rebound toward 7% days later.
These fluctuations have a direct impact on affordability. For example, when rates fell from 6.82% to 6.55%, buyers with a $3,000 monthly budget gained about $9,000 in extra purchasing power, translating to monthly savings of roughly $600 on a $425,000 home. But those gains disappeared almost overnight.
Don’t Wait for a Crash That May Not Come
Despite the broader economic uncertainty, a full-blown housing crash remains unlikely. The main reason? Severely limited housing supply. Many homeowners are “rate-locked” with ultra-low mortgages and are unwilling to sell. This keeps inventory tight, even as demand softens.
A gradual decline in mortgage rates would certainly help restore affordability and stimulate new supply. But with the national debt ballooning, a return to sub-5% rates is improbable in the near term. As a result, builders remain cautious, and price corrections are expected to be mild.
What Investors Should Do Right Now
Instead of waiting on the sidelines, successful investors are optimizing their approach. Here’s how:
1. Enhance Property Cash Flow
You may not control interest rates—but you can boost income.
Short-Term Rentals: Maximize revenue in tourist areas by switching from long-term leases.
ADU or Basement Additions: Add usable square footage to increase rent.
Paid Parking: Monetize unused space during high-demand events.
Room Rentals: Ideal in urban or college markets to boost rent per square foot.
Co-Investment Partnerships: Share equity and costs to qualify for better financing.
2. Lock in Better Loan Terms
While overall rates are high, you can still secure favorable terms:
Special Loan Programs: FHA, VA, or NACA loans may offer lower rates.
State & Bank Incentives: First-time buyer programs often come with reduced fees.
Credit Score Improvements: A 720+ score opens access to top-tier loan terms.
Larger Down Payments: Less borrowing risk equals better rates.
Extended Loan Terms: Spread payments for better monthly cash flow.
Rate Buydowns (Points): Pay upfront to secure long-term savings.
Construction-to-Perm Loans: Great for BRRRR investors looking to minimize closing costs.
Final Thoughts: Make the Market Work for You
Interest rates matter—but they don’t define your entire investment strategy. Waiting endlessly for the perfect rate may cost you more in missed opportunities than a higher monthly payment.
Instead, align your investing strategy with your current goals, your available capital, and market conditions. Real estate continues to be one of the most powerful long-term wealth-building tools available—if you’re willing to stay flexible and strategic.
Stay informed. Stay agile. And don’t let short-term uncertainty distract you from long-term potential.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Why Mortgage Rates Aren’t Dropping Yet: What Every Investor Needs to Know
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“