Why More Fed Cuts WON’T Get Us Below 6%

Dave:We just had our first Fed rate cut in nine months a day. Many investors have been waiting for a while, but in the days since mortgage rates have climbed back up. So what gives and what happens from here Today we’re diving into the mortgage rate outlook for the rest of 2025 and into 2026. Hey everyone, welcome to On the Market. I’m Dave Meyer. Thank you all so much for being here. It’s great to have you. Last week we had a panel show where we talked a little bit about fed rates, but I wasn’t there. I picked a bad week to take a vacation because I missed Fed reaction day after nine months of waiting for a Fed rate cut. I was actually out right after that and actually since a lot of things have happened, even since the rate cut a couple of days ago, I wanted to give you my thoughts on what we’ve learned over the last week, what happens from here, or at least what’s likely to happen from here and how both the commercial and the residential markets might react to this and spoiler, they will probably react pretty differently.So that’s what we’re going to get into today. We’re going to start with exactly what happened and I will do my best to sort of break down mechanically why rates are going in the direction that they have. We’ll talk about what happens from here. So we’ll sort of build on some of the underlying finance economic stuff. It’s not boring, I promise. It’s actually quite important for real estate investors to understand because this will help you understand where we go from here. And it’ll also give you a lot of clues and data that you should be keeping an eye on for the rest of the year or really forever as an investor because it’ll give you hints about where mortgage rates are going in the future. And then I’ll talk a little bit about how commercial real estate and residential real estate are going to react differently.That’s the plan for today. Let’s get into it. Alright, first up, what actually happened? I am sure because this is coming out a week later, everyone knows by now, but the Federal Reserve finally cut interest rates. It’s the first time they’ve done this in nine months and they cut by 25 basis points. If you’re not familiar with that, that just basically means 0.25% and that’s basically what people were expecting to happen. Some people had been speculating about potentially a 50 basis point cut or half a percent, but I think most people felt just given the rhetoric of the Federal Reserve, Jerome Powell over the last couple of months, that they weren’t going to go too aggressively after rate cuts just yet. And so 25 basis points was what was expected and that’s exactly what we got. And this is important because since the rate cut, we’ve actually started to see mortgage rates go back up.They actually dropped down to about 6.15% was I think the I saw in any of the aggregated data, which is pretty good. That’s actually a full percentage point from where we started in January. We were almost at 7.2 back then, so that was great. But just in the weeks since the fed decision, we’ve climbed back up to 6.35, so not crazy, but things have gone back up and one of the main reasons was that we got what we were expecting in terms of the Fed rate cut because people who trade bonds, who buy mortgage-backed securities, stock investors, people basically obsess about what the Fed is going to do all the time. And there are even websites that track the probability of rate cuts and all of these investors are betting on what the Fed is going to do well ahead of what they actually do.So we got what we were expecting. Then we also had something called the summary of economic projections, which is basically the Fed forecasting where they think rates are going to go. And these are the people who literally vote on where the federal funds rate is going, telling you where they think that is going to go. So traders, people who follow this pay a lot of attention to that even though they’re pretty much always wrong. As we’ve seen over the last couple of years, the Fed doesn’t know what they’re going to do. They are database, they’re going to look at what’s happening in the labor market and inflation and make decisions based on that, but they give you an indication of what they’re thinking at that moment. So because we got the rate cut we were expecting and because the summary of economic projections projected two more rate cuts this year, but nothing crazy, not something like, oh, we’re going to really prioritize rate cuts over the next year.That’s why we haven’t really seen that much of a reaction either in the stock market or in the mortgage market. And in fact, we are starting to see the mortgage market go back up. Now I want to explain why that is because if you listen to the show or you follow me on social media, you’ve probably heard me say throughout this entire year that I don’t think mortgage rates are going down as much as people say they’re going to. My projection since about a year ago has been pretty much the same that I think the path for mortgage rates is down but modestly and slowly that it’s going to tick down slowly and that I didn’t think we were getting below 6% this year. And I am sticking with that even though the Fed just said they were probably going to cut rates two more times this year.And so for a lot of people who frankly don’t fully understand how mortgage rates work, and that’s not an insult, I’m just commenting that there are a lot of comments out there on social media and other podcasts that people just assume that it’s a one-to-one relationship, that when the fed cuts rates half a percentage point that we’re going to see mortgage rates come down half a percentage point. Hopefully you are paying enough attention to know that is not how it works. Last year in September, fed cut rates, mortgage rates went up this September, fed cut rates, mortgage rates went back up. That is because the federal funds rate, the one interest rate that the Federal Reserve has control over impacts short-term lending rates, but not long-term lending rates. And I’m going to come back to that point several times over the course of this episode because it’s really important to understand how the housing market is going to be impacted, why commercial is going to be different than residential.And what might happens from here really comes down to the fact that the Fed does not control long-term lending rates. And when I say long-term lending rates, I mean all sorts of loans, I’m talking about 10 year US treasuries, that’s considered long-term, right? If you’re lending the government money for 10 years, that’s a pretty long time. There are 20 year US treasuries, there are 30 year US treasuries, there are 30 year fixed rate mortgages. These all fall under the bucket of long-term lending and the Fed does not have control over that. They have influence over it in so far as maybe short-term lending rates drag down long-term lending rates that sometimes happens, but other times, as we are seeing right now that doesn’t happen and short-term rates can get lower while long-term rates stay high or even get higher. That is also possible. And this concept is hugely important for everyone to understand, to really get what’s going on in the lending market and in the housing market.The Fed controls short-term rates. We’re talking about short-term bonds, we’re talking about three year loans or five year loans like the ones you get in commercial real estate. We’re going to come back to that. But long-term lending rates, yeah, they are in some ways impacted by the federal funds rate, but they’re also impacted by a lot of other things like the risk of recession, like the risk of inflation, what is going on in other asset classes, what bond yields are in other countries. There’s all sorts of things going on here and we’re not going to get into all that because I don’t want to bore you all to death. But for the purposes of this conversation, I think the reason we’re seeing this divergence and maybe a continued divergence between short-term and long-term lending rates is the risk of inflation. Now, I am saying very deliberately risk of inflation because we don’t know what’s going to happen with inflation yet, but I have been trying to say this for months and I’m going to keep saying it, that we are not out of the woods in terms of inflation yet it has come down, but it’s gone up three or four months in a row and we don’t fully understand the impacts of tariffs and other new economic policies on inflation.And this uncertainty about inflation is why mortgage rates have gone back up a little bit and it’s why I think they’re going to be stubborn. And I want to explain this to you, mortgage rates are basically tied to two things. They’re tied to the yield on a US treasury and there is a spread between US treasuries and mortgage rates. If you’re unfamiliar 10 year US Treasury, that’s basically lending the US government money for 10 years. And the reason they’re so closely correlated is because the types of people who do that type of lending to the government are similar to the types of people who also buy mortgage backed securities and make the mortgage market work. These are often bond investors, they’re hedge funds, they’re pension funds, lots of mega investors, of course individual investors buy those too. But we talk about massive billion dollar funds do these types of things.And the reason they’re tied is because as an investor you have the choice to buy a mortgage backed security, which can potentially be a 30 year loan or you can lend the US government money and the US government is generally seen as a much safer bet than the average mortgage holder. So these two things move together. Like right now, the yield on a 10 year US treasury is about four. It’s actually closer to 4.2 right now, but let’s just call it four. For the ease of math, you can lend the US government money and earn a 4% interest rate, or you could buy a mortgage backed security right now and you can earn about a six and a quarter six and 0.35 interest rate on that money. And the difference between that two is known as a spread or what it really is is a risk premium.It’s basically saying that because the average homeowner or mortgage holder is a riskier borrower than the US government, the investors who buy these things and lend this money have to charge a higher interest rate to take on that additional risk. And right now that spread is about 210 basis points or about 2.1%, and that’s how we get mortgage rates. The yield on the US treasury is about 4.2%. This spread is about 2.1% and that’s why mortgage rates are about 6.3%. Now of course, if we really want to understand where things are going, we have to go a level deeper and understand why 10 year US treasuries move the way they do and why the spread gets bigger and smaller. And that’s where it really comes back down to inflation right now because if you are one of these investors, the people who lend money to the US government in massive quantities or buy mortgage backed securities in massive quantities, your biggest fear is inflation because you are basically saying, I’m going to give you the government or you homeowner money for the next 10 or 30 years and I’m going to get interest payments back and I’ll get my principal back at the end of that loan.But if there’s huge amounts of inflation during that time, the money that I get paid back either in those interest payments or with the premium at the end of that term, it is going to be worth less. And so if you are concerned that inflation is going up, that means your return on those investments, your return on lending the US government money, your return on lending to a homeowner in the form of a mortgage is going down. And so those investors are going to demand higher interest rates both on bonds and on mortgages for as long as they’re fearful about inflation. All of this brings us back to the point why has mortgage rates gone up since the fed cuts rates? Well, the Fed rate cut will impact short-term interest rates, but lower interest rates increase the probability of inflation and the markets are already worried about inflation Again, they have gone up three or four months in a row and we don’t know the full extent of how the impact of tariffs are going to trickle through the economy.Most economists believe that there is more inflation coming in the next couple of months or next couple of years potentially that we’re not going to see some wall where inflation hits the economy all at once, but we’re going to see it gradually reenter the economy over the next couple of months. That is what most experts on this think. And so if you take that opinion and then you add to it the prospect of lower interest rates, which can be are not always but can be inflationary, that’s why people who buy US treasuries and people who buy mortgage backed securities are now asking for only slightly higher mortgage rates right now because they need to cover for the risk of inflation. Now, I know it’s a lot to learn, but it’s super important here because this is the crux of basically the whole housing market right now is where are mortgage rates going?It’s super important for us. Is there going to be a crash? Are we going to have this great stall? Are we going to see prices going up? So much of it comes down to affordability. And affordability right now is primarily dictated by mortgage rates. Mortgage rates are being dictated by inflation. And so we sort of need to understand the chain reaction of things that are going on to be able to forecast what’s happening in the housing market. So it’s really important that everyone understands this. We have to take a quick break, but when we come back, we’re going to talk about where things go from here based on what we just learned. Stay with us everyone. Welcome back to On the Market. I’m Dave Meyer giving you my reaction to the fed rate cut last week and the fact that mortgage rates have gone back up in the last couple of days before the break, I explained that my opinion is that mortgage rates are going back up and are going to be stubborn for at least the rest of this year because of the risk of inflation and uncertainty about inflation.Now what we’ve seen all year is this pendulum sort of swing back and forth between fear of inflation, which is sort of winning the day right now and fear of recession. And that comes in the form of a weaker labor market and that can actually drive down yields and actually bring mortgage rates down. And that’s this sort of tug of war that we have been in for this entire year. That’s why mortgage rates aren’t moving that much is because one week investors will be more afraid of a recession and rates will go down. Then the next week they’ll be more afraid of inflation and rates will go up. And like I said, I think inflation is winning the day right now, but we just don’t know what’s going to happen for the remainder of this year or into 2026. And I’m saying this and bringing it all up because I am sure everyone listening to this episode right now is wondering what’s going to happen with rates for the rest of the year.Well, I don’t think all that much to be honest. Could they go down another quarter point? Yeah, that definitely is in the realm of possibility. Could they go up another quarter point? Yeah, I think that’s also within the realm of possibility, but I don’t think we’re going to see any dramatic difference in either direction. I think unless we see a massive inflation print that that will push up mortgage rates. But I think that’s unlikely. Or if we see horrible job numbers and huge amounts of layoffs, that could push rates down maybe below six, but I think that’s also unlikely. And so as I’ve been saying, I think they’re going to hang out sort of where they’ve been over the last couple of months and that to me is okay because we don’t want either of those scenarios to happen. We don’t want a massive inflation print to come out that would be terrible for the economy.We also don’t want the labor market to fall apart. That is also terrible for the economy and for the average American, what I would rather have is see a gradual restoration of affordability in the housing market and that comes from hopefully flattening and then declining inflation numbers with a job market that stabilizes a little bit because we’ve seen the job market steadily getting a little bit worse, and if we see that stabilize and inflation stabilize, that’s the best case scenario in my mind. Even if that means rates stay in the low sixes or in the mid sixes because it means we’re going to be getting back to a healthier economy than we are in right now. And I think that’s entirely possible. I don’t know if that’s going to happen, but I do think that’s within the realm of possibility. I just don’t think we’re going to know in the next couple of months.And I know people are very frustrated by that. They want to know is there going to be crazy inflation? Is the labor market going to fall apart? Are we going to get to a healthier economy? We just don’t know. And the people who influence rates and who influence markets, these massive investors, they also don’t know They have the same level of indecision and confusion that we do, and that’s why I just don’t think they’re going to make any huge bets or change their behavior in any significant way in the next couple of months. To me, that’s the most probable outcome. Now, I think it’s important to mention that my opinion here is not alone. When I talk to other people on the show economists, when I look at other forecasts, most people are saying something similar that it’s just not going to change that much.And as investors, we just need to prepare for rates to stay somewhat close to where they are today. And I have been preaching that for a long time and I just continue to say that we need to as a community, as listeners of this show, we need to just deal with the scenario that we’re in right now. We need to accept the rate to environment that we’re in, the affordability environment that we’re in and make decisions based on that. Now, if you decide that you don’t want to invest in this kind of rate environment, that’s up to you. If you decide that you want to wait and see if rates get lower, that’s also up to you. It’s not what I would recommend because I do think there are going to be deals coming in this market for as long as affordability stays as low as it has been, there are going to be better deals on the market.I feel pretty confident about that. And so if you’re willing to look for deals that work with this type of rate environment, you might wind up finding great deals, but you have to underwrite them based on the rates they are today and not assuming that they are going to go down. I should also mention that it might make sense to buy today because rates could go back up if we get inflation starting to go back up again, we might see rates go up. Now, I don’t think that’s the most probable scenario, at least in the next year or two, but I’ve said on the show that I have a lot of fear about long-term interest rates. I think that we might be entering a long-term inflationary cycle in the United States that has nothing to do with politics today. It is everything to do with the enormous national debt that we have and the rising probability that politicians, whether now or in five years or in 10 years are going to try and print their way out of this.And so I think there is a reasonable scenario where interest rates go up. I’m not saying in the next year or two, but I don’t think that’s the most probable. But in five years, in 10 years, interest rates might be a lot higher than they are today. That’s why I’m personally just looking for deals that fit my buy box, that fit my long-term strategy, and if they work with today’s rates, that’s what I’m going with. So that’s my sort of biggest high level advice. Honestly, hasn’t changed all that much this year. And ideally I won’t change it that much in the future because listen, I’m not always right about these things. I will definitely be incorrect about them in the future. But so far this year I have been pretty accurate about what’s been going on with the housing market. I’ve said it’s been flat and we’re probably going to have a modest correction that is sort of what’s happening right now, said that mortgage rates weren’t going to move that much.That is sort of what’s happening right now. So I’m going to keep following the investing strategy that I outlined at the beginning of the year based on those presumptions. Of course these things can change, and if they do I will update you, but so far they haven’t. Now we got to take one more quick break, but when we come back, I want to talk about the difference in the markets and how they’ll react to this recent news because I think that the residential market and the commercial market might behave a bit differently over the next couple of months, and this is important for investors who invest in either of those markets. We’ll be right back.Welcome back to On the Market. I’m Dave Meyer giving you my reaction to recent Fed news that they cut rates 25 basis points, first rate cut in nine months. Now I’ve been talking about how rates are likely to be stubborn for the rest of this year and maybe into next year. And I should clarify at this point that I am mostly talking about residential debt there. Residential mortgages, these are properties that have four units or fewer, and this belief that those rates are going to be steady comes from the idea that most people who buy residential properties, two to four units, single family homes, buy it using long-term fixed rate debt. The most common is a 30 year fixed rate mortgage. And the reason I believe that rates aren’t going to go back down is what I said before. The people who do this sort of long-term lending, even in the form of buying treasuries or mortgage-backed securities are fearful of inflation and they just don’t know where inflation is going right now.They don’t know where the labor market is going right now, and therefore I think affordability in the residential market is going to stay pretty low. We need, if we want the housing market to get meaningfully more affordable where we’re going to start seeing a lot more transactions. A lot of people coming off the sideline. I think we need to get below six. I think honestly the number is more like five and a half, 5.75 to really get the market back to healthy and more robust and dynamic what all of us want to see. And I just don’t think we’re getting there in the residential market in the short term. Like I said, on the flip side of that though, commercial real estate debt is not as long term. If you buy multifamily properties or retail office or self storage, you’re probably familiar with this, but most of those loans are adjustable rate mortgages and they are shorter term.And so if you hear the term like a three one arm, that means that your interest rate is locked in for three years and then it adjusts every one year after that. Or a five-year arm is your interest rate is locked in for five years and adjust every one year after that. And the majority of commercial real estate deals are done on this kind of debt where it’s short-term debt with a balloon payment. There are of course other options, but this is how most properties are bought in the commercial real estate sphere. And because these loans, they are higher risk, but because they are shorter term, they are more impacted by what’s going on with the federal funds rate. I started this episode by explaining that the Fed and their maneuvering and lowering and raising of the federal funds rate impacts short-term lending costs much more than it impacts long-term lending costs.So if commercial real estate is based much more on short-term debt and the Fed controls short-term debt rates much more, that means that rates for commercial real estate could come down at least proportionally more than they will for residential real estate. And this could not be better news. Better news could not exist for the commercial real estate industry. Now, over the last couple of years, we have talked about the residential market being steady. It has not crashed. I personally believe we are in the midst of a correction right now, but I don’t see a crash on the horizon. The data just doesn’t suggest that that is likely in the next couple of months. I don’t really see any data that suggests it’s likely at all right now, but in the commercial space, we’ve had a crash. If you look at commercial multifamily, they’re down 15, 20% prices, retail and office, and a lot of places are down even more someplace offices down 50%.That is absolutely, I think by anyone’s definition of crash and we’re not going to get all into that. But a lot of it is because a lot of commercial operators had short-term debt and had to refinance at much higher rates. And the prospect of rates going down for commercial debt is really good for this industry. We really need for this industry to recover. It’s good for GDP, it’s good for the entire country. And what we need there is more affordability, lower rates, more clarity on the federal funds rate, and we got a lot of that this week. I’m not saying we’re out of the woods there. Certainly a 25 basis point cut is not going to save commercial real estate. Even if we have two more cuts this year and we get down to three and a half percent federal funds rate, that’s not going to completely solve what’s going on in the commercial real estate space altogether.But it will help, and I think it will help more than it will help affordability in the residential market. And if we see rates fall even further than that in 2026, then we’re starting to talk about a commercial real estate market that could get some legs and could really start to recover. Now, I don’t think we’re going back to 20 21, 20 22 levels where commercial real estate was going crazy, but I do think that if the path that the Fed has said they think they’re going on, and again, they’re not committing to that, they just say as of today, this is the path they think they’re going on. If they stick with that. I do think that spells a modest recovery for commercial real estate starting in 2026 and getting even better into 27, which is what our friend Brian Burke, who is much more knowledgeable about commercial real estate than I am have been saying for years.And he might be right yet again about the path for commercial real estate. And I just wanted to call that out because I do think we might see the residential market and the commercial market behaving differently as they always do, but they might react differently to these rate cuts going into the next couple months and into the next couple of years. So that’s what I got for you guys today. Hopefully this reaction and forecast about where I think rates are going is helpful to you. If you have any questions, of course hit me up. You can always find me on BiggerPockets or on Instagram where I’m at the data deli. Thanks again for listening. We’ll see you next time.