Could Interest Rates Drop Even Lower? (Housing Market Update)

Certified Mortgage Advisor
NMLS 1701021
November 3, 2020

When interest rated drops

Just the other week, we hit record low-interest rates of 2.27% as an average on conventional loans. And what we're seeing is an indicator that's actually showing us the interest rates could go even lower in the next 12 months. So we're going to talk through this indicator and talk through how low things could go here and what you should do next if you're anticipating rates going lower.

Citigroup Panic/ Euphoria Model

With the main metric with Citigroup/ Panic Euphoria model. This is a model that basically shows investor sentiment, and it's going to predict the next 12 months of what would happen in the stock market specifically. This is basically what's happening here is we can see over the past 12 months, we've gone up into this massive euphoria range where we're seeing investors have high sentiment, good sentiment towards the stock market.

And this is a bearish indicator when we start getting up into the euphoria point. When we start getting into these extreme levels of euphoria, we know that we're getting to the top of the stock market sentiment towards growth. Also, this is an indicator of the high probability that within the next 12 months, we'll see a decline in the stock market. That's why this is a bearish indicator and you'll see a cute little bear hanging out there.

Stocks and mortgages have inverse pricing

Now, what we also have to keep in mind is that stocks and mortgages have inverse pricing. So when the stock market does poorly interest rates actually do a lot better on mortgages because of their inverse relationship. So the stock market going down. Actually means interest rates could go down at the same time.

Extreme euphoria

So we're in extreme euphoria. We have we're at a 1.1 level. That chart there was topping out at a 1.2. So this is an indicator of a downturn in the stock market.

Pullback could lower rates

And so the pullback in the stock market is the main thing that can lower rates moving forward.

Rally: (1) TINA

Now, why are we seeing this big rally happening in the stock market? The first thing is what some people called TINA or There Is No Alternative basically. What that says is that there's no better alternative than the stock market for investors to keep their money in. Basically, it's saying all of the other options for investments are not great at the moment. So the stock market is where most investors are putting their money to be able to see better growth than everything else happening.

Rally: (2) New Buyers

Also, we're seeing new buyers who use the stock market dip initially when the pandemic started to get into the market. So you're having a lot of people who aren't experienced and that this isn't necessarily a bad thing, but a lot of people purchasing at the dip when stocks were more discounted that's what's causing this rally where stocks are going up increasing our marker where we're at in the euphoria model meaning that in the next one month, we can expect a decline in the stock market, or at least a high probability of a decline, which is really good for mortgage interest rates.


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Now, before we talk about with the rate specifically, should you buy now at refinance now because of the anticipation of rates, let's have a quick #CalmMoment because when you're seeing all of these changes happening in the market, especially with the anticipation of rates getting even lower, and homes are increasing in their value, and it's hard to put in an offer and get it accepted.

FOMO rushes things in a bad way

This fear of missing outcomes into play extremely, and when we have this fear of missing out, we tend to make decisions that aren't as rational as we should probably make moving forward. So if you're in that spot, know that it's okay to take a step out of the real estate world for just a moment and be able to gather what's really important to you.

Just because everyone else is on the train of overbidding for homes or trying to capitalize on low-interest rates doesn't mean that you have to, because just because the opportunity exists doesn't mean that you have to spring on it or that choice is even the best one for you and your family.

Set your own pace for your space

So it might be better to slow down and take a moment to take inventory of where you're at and then make a decision based on a plan and not off of all these external factors that are pushing you into emotional decisions that you might regret later on.

So should you wait to buy or refinance?

Let's answer this first question. Should you wait? I never think it's good to wait to buy just because of what humans are paid with interest rates. Finding a good deal on a home is going to be much more profitable than waiting for that home, appreciating and value, and costing more money, offering a lower interest rate. You can always refinance in the future. I don't think you should miss out on a home that is going to be great for you. And it's a great deal just because you anticipate rates dropping down a little bit further.

Now, should you refinance now this one has a little bit more nuance to it. The big question here is, okay. We're anticipating rates possibly going down even further, but how much? Because just because rates go down doesn't mean we want to miss out on savings now in anticipation of waiting for rates to get even lower.

How bond movements affect your interest rates

Mortgage-backed security bond shows, when the bond price goes up, the interest rate goes down. The bond price and rates have an inverse relationship. So what we can see over the past since January, the rates have steadily gone down because the bond price has gone up and we can see since pretty much August up until December rates have started to hit this kind of plateau a little bit.

Now, what you will see in the graph are tons of markers of resistance. These are floors of support, basically showing us that it's going to be difficult to see rates or to see the bond prices drop down much more. There are a lot of technical indicators showing us that probably isn't going to happen, but there aren't as many. Also, there are gaps that are super tiny.

There's a low probability to have higher rates

So all this to say the anticipation of rates going higher has a pretty low probability with all these indicators that we're seeing. The probability of them going lower is much more significant.

How much will they go lower?

Really, there isn't a huge decline in rates that I would anticipate we have this small gap that's happening right here. That's hovering somewhere around 40 to 50 basis points. And so what that would be at 40 to 50 basis points would on a hundred thousand dollar loan be four to $500. So that's what I'm anticipating, seeing. I expect rates won't decrease much more.

Go for it if you think you can

So personally, what I would do if I were you and looking at refinancing is if you find a refinance deal that you shop around and you really like, go for that. I would take the refinance deal now instead of waiting to see what's going to happen. Because even if rates have dropped down a little bit more, you're not going to see so much more savings that you're going to be upset about it. So hopefully that gives you a clear idea.

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