Afternoon! This is MF Lending - coming to you from somewhere over the Atlantic Ocean.

*Today will be the last edition for the next few weeks. I am taking a much-needed 2-week break in Switzerland 🇨🇭 and Greece 🇬🇷 to recharge from a very busy summer.

Here’s what we’ve got for you today:

1. Fed Coffee Corner - Summary and Market Implications ☕️

By the way, this article on Agents - Best time to ask for reviews is the most clicked link in this newsletter, you should check it out if you are interested.

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Rates Today 📈

Fed Coffee Corner ☕️

The much anticipated September Fed meeting has come and gone. For those who had rose-colored glasses on while forecasting end-of-the-year rates, Jerome Powell delivered a major wake-up call.

The Fed message was simple: rates will be higher for longer

This is the same message he has been giving to traders and market participants since May/June of this year. Yet, many did not seem to believe him just a few quarters ago.

Powell laid out a roadmap of what needs to occur before the Fed considers cutting interest rates.

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 Step 1: Find “sufficiently restrictive” monetary policy

Step 2: Hold monetary policy there until inflation comes down to their 2% goal

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The bad news is this: we have not completed step 1 yet.

It is the Fed’s belief that they have not seen inflation cooling fast enough to indicate we have reached the level rates they need to be.

This comes from reports like the CPI, PCE, and Jobless claims - all indicating that the slow is not occurring at the pace the Fed wants.

How do we know this?

The Fed released their “Summary of Economic Projections” yesterday during the meeting.

In summary, this report surveys each voting FOMC member and makes a dot plot that shows the target rate for the Federal Funds Rate that each member believes is necessary over the next three years.

Said another way - it asks each Fed member where they think rates need to be to keep inflation at 2% for the next three years.

Here is the dot plot (you can also see it on pg 4 of the report):

Here is a summary of the responses based on the graph above:

• EOY 2023: 5.6%

• EOY 2024: 5.1%

• EOY 2025: 3.9%

Remember, this is the Fed Funds Rate - not mortgage rates.

The Fed Funds rate is the rate at which banks borrow money. As a comparison, today the Fed Funds Rate today is 5.25%-5.5% and mortgage rates are at 7.5% (~2% spread).

So in analyzing the responses, we can conclude the following:

• EOY 2023: 5.6%

  Conclusion: Rates will need to be raised at least one more time this year. That will bring the Fed Funds Rate to 5.5%-5.75%.

  There are two Fed meetings left (Nov & Dec) where this could occur.

• EOY 2024: 5.1%

  This is the big one. 

  Conclusion: The Fed will cut rates by .5% by the end of 2024. That’s not the narrative most of you have been hearing from your loan officers or brokers.

  This means next year, we could see only one or two rate cuts all year.

  🪩 Again remember the theme of this meeting? Higher for longer. 🪩

• EOY 2025: 3.9%

  Conclusion: The Fed will start cutting rates in 2025. By the end of the year the expectation is Fed Funds Rate just under 4%.

  What does this mean for mortgage rates? You would see mortgage interest rates between 5.5%-6% by the end of 2025.

It is worth noting that there is a massive distribution of opinion in the 2025 numbers. FOMC members have predictions of up to 5.5% and the most optimistic believe as low as 2.75%.

These predictions are, of course, subject to change as new data comes in each month, but this is a good measuring stick until the next dot plot we will receive at the beginning of 2024.

What does this mean for short-term rates?

In the short term (next 6 months) do not expect rates to come down below 7%. We are going to see these interest rates stay elevated for longer than we want.

The key metrics the Fed watches are:

• CPI

• PCE

• Jobless Claims

None of these are showing aggressive improvement. There was even a Jobless Claims report today that shows the jobs market remains unflinchingly strong.

Until unemployment rises, GDP falls, and consumer spending slows down, we will not see a change in mortgage rates.

How can you prepare your buyers?

The best thing you can do for your buyers is revisit the conversation of a 3-2-1 or 2-1 buydown.

I have been a big proponent against these since they became popular in mid-2021 when the Fed began raising rates.

My argument back then was that rates would be higher for longer. If you did a 2-1 buydown at the beginning of 2022, you are now approaching year three of your loan when you adjust to your note rate - a rate that is probably below market rates today.

Today is a much different situation. Today if you do a 2-1 buydown, Yr 3 puts you at the end of 2026 when the majority of FOMC members believe rates will be well below where they are today.

The risk is much lower today than it was two years ago.

We continue to see massive seller concessions in the Nashville market and I would expect this trend to continue. Asking for seller credits for potential buyers should be the norm.

This is all under the assumption that the client is comfortable with the monthly payment after the buydown period.

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Overall, this was one of the more hawkish meetings from the Fed. As a result, potential home buyers are likely seeing an immediate response from banks and mortgage companies issuing higher interest rates than we have seen in over a month.

The theme for the remainder of the year: higher for longer.

As the market slows, continue to provide education and value to the clients who are entering the market for the first time. It is more important than ever to focus on education over the allure of low mortgage rates and unstoppable appreciation.

Continue to become a market expert for those clients who want to dive into homeownership, that will be what differentiates the great realtors from the average in this market.

If you have any opinions or thoughts on the reports, ways to help your buyers, or strategies you have seen successful in this market - please leave a comment!! MF Lending readers should be helping each other out so we are the smartest agents in the room.

Have a great rest of the week 🪩

Thanks for reading - that is all we have for today 😎

Please forward this to your friends and colleagues if you found it valuable.

— Michael F DiLucchio