Welcome to another episode of Selling Greenville your favorite real estate podcast here in Greenville South Carolina I'm your host as always Stan McCune Realtor right here in Greenville and you can find all of my contact information in the show notes if you need to reach out to me for any of your real estate needs just a reminder please like rate review subscribe comment anything like that as you're listening or watching it takes 1 second please do that and that's pretty much all I ask of you guys do that use me as your realtor that's it today I want to try to have a little bit more optimistic tone in so far as I can I know we've been talking a lot about kind of depressing things with regard to just the state of the market now if you're a buyer maybe you're not depressed if you're a buyer maybe you're hearing or a potential buyer maybe you're hearing you know that mortgage rates are up demand is down that you know we're shifting more towards a buyer's market you hear that and maybe you're like okay this is great this is what I've been waiting for but for the vast majority of people when they start to hear that home prices are going down and all of that that's not something that they want to hear that mortgage rates are super high that's not something that they want to hear a lot of people bought a few years ago operating under the Assumption that mortgage rates would be much lower today than they were back then well guess what mortgage rates right now are near their highest point since in in decades basically now they did go a tick higher a few years ago but that didn't last for very long I'm recording this on October the 5th and on Mortgage News Daily which is at aggregator website that I and many others like to use it is saying the 30 year fixed rate mortgage sits at 7.57% on average okay all depends on what you would qualify for and you know various credit scores income all of that but that is an average from a reliable website all right that's what we use on this podcast for kind of tracking where things go there are other metrics that you can use but Mortgage Daily is pretty pretty stable what I want to do with all of that in mind is think through what are five scenarios whereby we could actually see mortgage rates come down in the immediate future now I'm not going to say that these are the base case scenarios okay let's be realistic some of these are not likely to happen and so I want to excuse me present these scenarios as these are probably the five most likely ways that we could see mortgage rates come down and I'm not going to pontificate too much as to whether I think they're going to happen or not but you can decide for yourself whether you think they're going to happen or not and so we're just going to start right at the top with the one that would probably be the best scenario right out of all of these and that is that inflation cools without the economy falling apart now in case you don't know there is a direct connection between inflation and mortgage rates I'm gonna go over this real quick as inflation goes up that causes a few different things to happen first off the that increasingly makes it more likely that the Fed is going to increase their rates okay now just because the Fed increases or decreases their rates doesn't mean that mortgage rates go up or down they don't exactly follow the Fed funds rate what mortgage rates follow is the 10 year yield follows bond yield so as bond yields go up mortgage rates go up as bond yields go down mortgage rates also tend to go down specifically the 10 year yield is where we find the closest correlation between the two I apologize I'm gonna have to clear my throat a few times I'm recording this in in the morning my throat has not fully woken up as you can tell so the long story short is the bond market is looking at what's happening in terms of in in terms of inflation and they need to be more comfortable accepting long term yields for one reason or another and for the most part investors when inflation is hot they want to stay away from bond yields and from buying Treasury bills and bonds and all of that as inflation comes down or let's say that there is some sort of unsettling thing happening in the economy then that's when investors run to safer assets such as government bonds such as precious metals things of that nature and that's what happens at that point the other thing happening in all of this that's scaring bond investors is the deficit and the reality is that you know when Trump came into office and again I don't want to get super political but we're going to have to get somewhat political on here when Trump went to office there were these promises of cutting waste fraud and abuse and potentially bring down the deficit and the opposite has happened in terms of the deficit at least we're seeing the deficit go up at unprecedented levels right now and that is also scaring bond investors from investing in US debt it's like well is this debt going to actually be repaid or are we going to you know inflate try to inflate our way out of this debt which is traditionally what the US government does rather than actually cutting spending they simply devalue the dollar to make the spending that they've done less impactful if that makes sense and so all of that to say basically everything has been happening in in the economy with inflation increasing that's a result of tariffs that's a result of the war in Iran that's a result of gas prices being higher which is tied to the war in Iran and a variety of other things as those things have come into the system that's caused inflation to increase and that's caused all of this uncertainty and various things happening that's caused that's had the after effect of bond yields going up and then mortgage rates have followed all right what does all that mean for this first scenario I said inflation cools without the economy falling apart how might that happen well it could happen in a variety of ways first off remember that when inflation cools that doesn't mean prices are coming down okay that's deflation that's very very rare now we could see a deflationary situation with regard to the war because of the combination with gas prices we'll talk about that that's a scenario we are going to discuss but one thing people don't fully understand often times is that when inflation cools that just means that things are getting more expensive at a slower pace that doesn't mean things are getting cheaper that doesn't sound good however from the standpoint of investors if investors see that that changes how they behave OK and a and in some ways investors would prefer an environment where inflation cools where things are getting expensive more slowly than just things deflate and actually get a lot cheaper and there's a variety of reasons for that because that could impact profit margins all sorts of things where investors have their other investments so the way that this could happen and again this is the best case scenario is that all of the things that have happened the past several years that have caused this in uptick in inflation right inflation went way up during Covid that's a result of supply chain pressures that's a result of all the stimulus that both Trump and Biden threw into the financial system through at American households with all those stimulus checks etc. then after you know the supply chain shock finally went away all that money got out of the system we saw inflation start to come down well it started to go back up under the Trump administration as a result primarily of tariffs and the war with Iran we've talked about this a good bit here's where and in previous episodes we talked about that a good bit here's where inflation could actually start to cool if the effects of those two things tariffs and the war in Iraq which primarily is affecting oil prices gas prices etcetera if basically the initial shocks of those things get out of the system then we could see inflation come down in fact this was the argument of the Trump economist for all for basically the entire first year of his presidency was that don't worry this is going to be a one time impact on inflation this isn't going to be durable right this we're not going to continue to see inflation well unfortunately that has not happened and again part of that is that not only do we have the tariffs but then we also had this oil shock that's happened that's caused even more inflation and so basically everything that's happened the past two years has been what you would do if you wanted to add inflation to the economy but perhaps the argument that was made during the first year of this of this current administration is still in the cards from the standpoint of you know assuming we don't add other wars or whatever into the mix or additional things that I can't predict into the mix eventually there will be a point at which okay hopefully gas prices aren't continue to increase oil prices aren't continue to continuing to increase and that causes inflation to basically stall and prices are still very high they're not coming down but they're not going up at the same level that they currently are if that were to happen and the economy maintained its current level of strength spending etcetera etcetera that's a scenario where we could see the Fed cut rates maybe we could see bond investors realize you know what maybe we should invest in government debt for one reason or another and then we could see bond yields come down and then that would bring mortgage rates down that's the best case scenario the next best case scenario is that Trump simply changes his course on trade and somehow tensions with Iran ease okay so if and maybe one or the other too right either one of these could be could be useful so if we were to roll back the tariffs for instance some of these tariffs and were to then inject basically it would almost be like injecting stimulus into the system because it would basically free up a whole lot more trade with other countries and make things cheaper overall that would actually potentially be that deflationary scenario that we just talked about where we could actually see prices come down alright if you've been looking at the price of a beef the price of coffee the price of all sorts of different things it's out of control you know a lot of that has to do with tariffs again the arthuron so much of that straight of hormuz being under their control we would need to see some sort of scenario whereby oil prices come down where that straight isn't just completely in a state of flux which it has been since that war started now are either of those likely scenarios again I'm going to let you guys decide I'm not I'm not going to I'm not going to get into pontificating on any of that I'm just simply saying these are ways that this could that this that we could see mortgage rates improve now No. 3 unfortunately even though I'm trying to be more positive in this episode this is kind of the negative the negative way of being positive and that's that the economy weakens enough to produce a recession okay so whether that's a result of all of these other things that I've talked about whether there's something else that happens that causes a recession it's a very strange economy right now if you've ever seen the Big Short which is one of my favorite movies where it revolves around the 2008 financial crisis and one of the central themes of that movie is that nothing was making sense and companies and the government and the financial markets tried to basically not let the cat out of the bag in terms of just how weak the economy was and then eventually every all the dominos started to fall at once and that's when the entire the entire thing collapsed could we be in a scenario like that I think it could be right because we're not none of the numbers seem to indicate a recession in terms of when we're looking at unemployment rate it did tick up a little bit recently but it's nothing crazy in terms of spending GDP all of that nothing is giving us any indicators that a recession is nearby but it feels very weird it feels very weird everyone feels like the economy is bad you look at the at the polling that you know where people talk about what they think about the economy it's very very negative people are not happy they don't feel like they feel like they're being left behind in this economy why is it how is that happening when we don't have any indicators towards a recession it's confusing and so I don't think it's super unrealistic to think we could see a recession sooner than later but again there's no data for that right that's just a vibes thing and I'm not a vibes guy I try to provide as much data and base my decisions off of data as much as possible but if that were to happen if we were to see a recession that would immediately result in the Fed responding with lowering their rates investors would go to safe havens like the bond market we would immediately see I mean that would be the most dramatic way to see mortgage rates come down it would just be at the expense of the broader economy which we don't want right that's not the way that we want rates to come down but that is one of the scenarios in the cards No. 4 Washington earns back some fiscal and institutional credibility listen I don't think people fully realize how spooked the market is right now over the deficit like this is probably the well at least since I've been adult an adult this is the most spooked that I have personally seen investors over the deficit you know a lot of times the deficit is just one of those things where it's like ah whatever who cares you know it's only the Rae Dalio's of the world that that care about the deficit you know there's only a handful you know what's his name Spencer Ship or whatever the gold guy you know there's a few people that are constantly ringing the bell about the deficit and constantly saying it's gonna collapse it's gonna collapse where the USSR 2.0 etcetera etcetera and it never happens right well guess what the bond market is concerned that it may actually happen and honestly that's the most concerning to me out of everything is how investors have been responding to the deficit in in a way that they haven't in the past and there's absolutely no concern on either side of the aisle for reducing spending and so there there's no I again I'm not really trying to get into scenarios here but this one I'm not really sure how this would happen but it is one way that could happen let's say that in November we have a changing of the guard as it were in terms of who's in power at the very least in in the house and or the Senate perhaps then we could see something whereby you know the budget becomes at least more disputed I would think that we would see a lot more government shutdowns probably next year if that were to happen and you know what we could see is a scenario whereby spending at least slows down I don't know if the deficit would actually come down that seems fairly unlikely but perhaps it could and maybe politicians start to pick up on the fact that this actually is important that that investors do care about this and that this is causing ripples negative ripples throughout the economy all the spending all the spending and so if investors felt like you know what our spending is starting to get under control the risk of our nation defaulting and just in general is fairly low or lower than it was we could then see more enthusiasm towards investing in government debt which would then bring all of those yields and mortgage rates back down as well even if the Federal Reserve doesn't do anything okay and this has happened before not as a result of the deficit but we had a scenario where bond yields came down around 100 basis points without the Fed doing anything and that was just that investors felt like things were different they saw things different than the Federal Reserve and so that is a scenario whereby we could see that happen No. 5 and this is my last one we could see the mortgage market itself become less expensive to finance so kind of already alluded to this but mortgage rates can decline even without a huge Treasury rally if investors accept a smaller premium for holding mortgage backed securities okay this is a little bit outside the box but calmer interest rate markets can help because uncertainty about refinancing makes those securities more costly to hold basically so and in a severe downturn renewed Fed purchases of mortgage backed securities could also help although that would be a you know ultimately a conditional policy response not something to assume this is I think probably this is something that I'm not sure is likely to happen but again it very well could because we could see investors realize that they need to reallocate and reconsider their resources as well and perhaps accepting less for mortgage backed securities would be the result you know the mortgage backed security conversation was a huge part of what happened in 2008 those mortgage backed securities were filled with junk loans mortgages it was a bunch of trash if you watch The Big Short you will get a little bit of an education on that they did a good job of kind of explaining some of that and thankfully those mortgage backed securities at least on paper are much safer assets now than they were back then but investors have to decide if they are willing to accept a smaller premium or not and there needs to be reasons for them to actually do that and perhaps a you know with what's happening in the broader economy could ultimately result in that again way whether you think that that's likely to happen or not to me I don't see it I don't see it again I'm trying to be optimistic here but to me that that seems like a fairly unlikely scenario at least in in the current environment now here's the thing this is a rapidly evolving environment and I genuinely have no idea where this is going to go I'm personally prepared for rates mortgage rates being where they're at and or higher for longer I saw you know there's a guy that I follow that focus is heavily on mortgage rates he did a podcast recently could mortgage rates go to 9% I just saw that headline and I just I was just like I don't I don't think I can do that I don't think I can listen to this right now I don't I don't have that in me and what you'll hear is you'll hear people say and I'll probably do an episode about this sometime soon in the future you'll hear people say seven point whatever percent interest rates that's nothing historically speaking my parents my grandparents we had twenty percent mortgage rates yeah there was a small stretch where mortgage rates went up that high but you know what the cost of housing was like a year salary back then you know it's a little bit different when the median home price in Greenville at least is 320,000 like nobody is making well I shouldn't say nobody but in terms of like the average person the average person is not making $320,000 in a year okay whereas there was a a time where people could functionally in in one or two years make up the entirety of their mortgage now of course they weren't doing that but my point is that when you're looking at the mortgage rates you have to also take into account just how much more expensive the cost of housing is because again we talked about not too long ago monthly payments the whole game right now is the monthly payment everyone focuses on the headline cost of housing nobody wants to focus on the monthly payment because it's you know it's hard to calculate quote unquote but the monthly payment is everything to people right now cause they if they can't afford it they can't buy a house it doesn't matter whether the home prices have come down a little bit if you can't afford the monthly payment who cares and so that's where everything is right now and so this is where I am laser focused when it comes to thinking about all of these different things with mortgages with the economy with the real estate market as a whole and I think it's wise to prepare for this to continue on for a while longer you know I had someone ask me the other day with regard to the elections in November well what if what if Republicans unexpectedly sweep do I think that that would be positive for mortgage rates and I think the problem is right now we don't have a divided government quite frankly and so this is true of either party when either party gets undivided government and they have full control they just spend spend spend spend spend and they do whatever they want no checks and balances that's not the way our government was designed at the end of the day I mean it used to be that the president vice president weren't necessarily even from the same party right so we have very little divided government currently I do believe that's going to change in November so perhaps that is the most likely scenario whereby we could see some of these dynamics change but I don't know I don't know because honestly I don't really care for either political party right now they're both doing things that I think are pretty harmful to Americans quite frankly because they are focused on helping out the special interests and the people that give them money and again not to get too political but anyone with their eyes open can see that that's just the reality of the situation and you say well Stan how do you know that are you involved in politics yeah I am actually I'm not a politician but I'm very heavily involved in politics on the back end I met with Senator Lizzie Graham several times this past year rest in peace I met with Tim Scott staff last year I've met with Congressman Timmons several times and seen several others as well and so yeah we I'm and I'm a lot more involved on the local level than on the federal level but I keep my finger on the pulse of all these things that I'm pretty heavily involved so yeah that those are my 2 cents take it or leave it and hopefully you can maybe one of these scenarios you're like you know what I do think that scenario is going to happen and then you can have a little bit of optimism perhaps if you're a buyer you're hearing this and you're like I don't think any of those scenarios are gonna happen and I'm happy about that cause I want prices to come down I don't care about rates I've got I'm a cash buyer maybe these rates don't affect me then you might be happy as well so there are a few different ways to come about this and hopefully regardless this kind of got your head thinking your brain thinking about what could happen what the likelihoods are etcetera etcetera and that'll help you to make plans for the future that's all I have for today thank you so much for watching or listening you can catch this on YouTube Spotify Apple I Learned recently that Google Play never doesn't exist anymore at least for podcast I guess I don't know I don't I'm not an Android guy so I'm not gonna advertise there but anyway catch this on whatever platform you listen to please make sure you like rate review and subscribe on that platform and please use me as your realtor my contact information is in the show notes thank you guys so much we'll talk again next time!