Why Federal Reserve Rate Cuts Have Not Pulled Mortgage Rates Lower
When the Federal Reserve trimmed interest rates by 75 basis points between July and September, many analysts expected mortgage rates to fall with them. Rates fell through October (moving from 6.95% in July to 6.08% in September) but then started rising again until hitting 6.84% in November. Current rates are 6.69% at the time of writing.
The problem is that mortgage rates are more closely tied with the 10-Year US Treasury, which has been rising. The US was estimated to have auctioned $1 trillion in bonds in 2023 and needed to issue $2 trillion more in 2024 as well as potentially refinance or restructure more than $8 trillion of older debt. With higher inventories of bonds on the open market, the US had to offer higher yields to attract investors, which pushed the mortgage rates upward in an opposite direction to Federal Reserve cuts. Historically, when the Fed trimmed the Federal Funds Effective Rate, it pushed bonds lower. But in this cycle, with global Central Banks also issuing a lot of paper (global issuances were estimated to be up nearly 18% Y/Y in 2024), competition for investors is high.
This situation is expected to get slightly better in 2025, and bond rates could come down and fall more in lockstep with Federal Reserve rate trimming activity. But for now, higher mortgage rates are keeping some home buyers out of the market. Refinancing is surging when rates touch lower rates temporarily (many customers looking to refinance are watching rates closely and in a recent week when rates fell, refinancing activity was up 27% W/W).
Source: CNBC
Chasing Opportunities Emerging from Changing Political Conditions
With the US election in the rear-view mirror, the incoming Trump Administration will reportedly take some aggressive measures that could lead to increases in real estate activity (in some regions of the country).
For instance, all parties agree that the demand for electricity over the next 10-20 years outstrips the US capacity to supply it. The US will need to increase production by 27% between now and 2050 to keep pace with demand and a sharp 9% increase in the next three years alone.
The argument is how to best create the kilowatt increases needed to meet that demand. The Department of Energy, which is expected to come under the direction of appointee Chris Wright, will be focused on proliferation of traditional fossil fuel production, issuing new leases for drilling and fracking, and creating better distribution channels. This will increase demand for various industries, lift manufacturing activity for some sectors and perhaps slow demand in others.
Many analysts are starting to lean toward natural gas powered electric plants for the near term (and potentially smaller nuclear powerplants (small modular reactors) in the 10-20 year horizon). Many of these new natural gas power plants will be built nearer to natural gas deposits where production of the fuel and use in electricity generation can be optimized. That could also begin to influence site selection choices for new domestic manufacturing facilities (which is growing at a 16% annual rate). Quick processes for approving development of these natural gas powerplants will be a focal point for the new administration.
The easing of LNG export restrictions will also lift demand for new natural gas conversion infrastructure and shipping/distribution infrastructure. Heavy European demand for LNG resources could provide a long horizon for developers, and if Congress can pass legislation (rather than a simple executive order that can potentially be reversed in the next administration) to free up LNG exports, that would ensure continuity and give many the confidence that they need to invest in this infrastructure.
Many other decisions and policy changes will have a similar effect, creating opportunities for new development and perhaps slowing demand in other sectors (areas that the new administration will target for cuts in spending).
Source: Peak Nano; Transport Topics
