Navigating Texas Real Estate: Mortgage Rates Forecast and Market Update

(0:08) Well, hello everybody. You, of course, have tuned into the Texas Real Estate and Finance (0:12) podcast and I am your host, Mike Mills, a North Texas mortgage banker with Geneva Financial. (0:18) And I'm here each and every week to bring you the latest and greatest in stories all (0:22) around the world of real estate.

Now, the every week statement is a bit of an exaggeration (0:26) this time because for the last two weeks I brought you absolutely nothing. So a week ago (0:32) I was outside the contiguous 48 states as they called it and I took my family on a cruise (0:36) to Alaska and spent most of last week on a father and son trip to the Manning passing (0:41) academy in Louisiana. My son, if he earns it, will be a quarterback next season as a (0:46) freshman.

And if you have a son that has aspirations of being quarterback that's going (0:49) from seventh to 12th grade, I highly recommend it. It was a fantastic experience. My son (0:54) learned a ton.

We had a great time. It was hot and swampy, but otherwise it was really (0:58) awesome. So I highly encourage it.

And if you've never been to Alaska before, highly (1:02) encourage that too. I went from the wonderful weather of Alaska where it was anywhere between (1:08) 40 to 60 degrees on a regular basis to the swamps of Louisiana where it was 95 and (1:13) humid and I was sweating all day long. So quite a big dichotomy, but I'm back here (1:17) again to talk to you guys and I couldn't be more excited.

My family and I haven't (1:21) really traveled a ton this year and we just happen to have things back to back. (1:24) So here we are, but we are back at work and I'm thrilled to be here again and I hope (1:28) you guys are eager for another update this week. So let's get to it now.

(1:31) Just as a friendly reminder, right now I am here talking real estate into this (1:34) microphone, but when I'm not doing this, I'm helping your clients get a loan to buy (1:38) the home of their dreams. And these days it's getting harder and harder with homes (1:41) at all time highs and high interest rates, but my team and I excel at problem (1:45) solve. We do loans that most cannot.

We have bridge loans, construction loans, (1:48) physician loans, zero down payment loans, fixed and flip loans, home equity lines of (1:53) credit, and whatever type of loan you can think of, we can usually do. So if you (1:57) need help or have any questions at all, just give me a shout. I'm a phone call away.

(2:00) Also, if you get some value from today's episode, please share it with your (2:03) network, likes, comments, shares, and reviews help us conquer the ever-changing (2:07) algorithm so we can reach more listeners just like you. So do me a favor, (2:12) take a second, give us a little love. I'd greatly appreciate it.

Alright, enough (2:15) of all that, what are we talking about today? Well, as always, I will tell you (2:19) where mortgage rates are currently and why, and more importantly, where they will (2:23) be for the next couple of years. It's time to break out the crystal ball (2:26) prognostications and let you know where rates are headed so you can prepare (2:29) your buyers and sellers. I'll update you on the most recent housing numbers for (2:32) the nation.

Inventory has been climbing, but it's starting to level off. But here (2:36) in North Texas, we've reached a 12-year high in housing inventory. Are (2:39) prices gonna crash soon? We'll discuss.

I also have some news quick hits in and (2:43) around real estate. I'll tell you which agents are selling all the real estate (2:46) these days. You'll find out how Netflix plans to possibly save commercial real (2:50) estate and a scary reason why your day is getting a little bit longer these (2:53) days.

And for a main story, I'm gonna show you how to predict where interest (2:57) rates are gonna go and introduce you to a tool that you may have heard of, (3:00) but probably have no idea how it really works or why. I know I didn't, (3:05) so stay tuned to the end to broaden your financial brain with me. But we (3:08) start today's episode like we do every single market update with every (3:11) realtors favorite question.

Hey, Mike, what are the rates? Well, despite (3:15) dropping below 7% briefly about two weeks ago, rates are staying stubbornly high (3:19) in that 7% range right now and starting to move up even more. So (3:23) according to Mortgage News Daily, as of July the 1st, the conventional (3:26) 30-year rate average interest rate was 7.14%. The average 30-year FHA rate (3:32) was 6.62%. The average 30-year VA rate was 6.64%. The average 15-year (3:38) conventional rate was 6.49% and the average jumbo interest rate was 7.3%. (3:43) So despite rising unemployment, declining retail sales and low consumer (3:47) sentiment, interest rates are staying stubbornly high because right now (3:50) your elected politicians just cannot stop themselves from spending. We're (3:54) going to discuss this more at the end here, but just know this.

When (3:57) the government spends more than it takes in, they call this deficit (4:00) spending. Then we have to sell U.S. Treasuries to fund that debt, (4:04) but also need more buyers of that debt because this is going to add (4:07) more supply to the bond market, which causes bond yields to rise, (4:12) which also causes mortgage rates to stay higher. So why does adding (4:15) more bonds to the market cause rates to go higher? I'll explain (4:18) later, but just know this.

If you want lower rates, we need less (4:21) debt and to get less debt, you need to tell your elected officials (4:23) to stop spending like college freshmen with their first credit card. (4:26) So overall rates are still above 7% for the most part, except (4:29) for the government insured loans like FHA and VA. But where are (4:32) they headed and when are they coming down? Well, it's crystal (4:34) ball time.

We're going to look into the future and see where (4:37) rates are going to be by the end of next year. Well, not me, (4:39) but Fannie Mae to be precise, because they just came out with (4:42) a revised interest rate forecast for the rest of 2024 and (4:45) 2025. So right now, Fannie Mae expects that by the end of (4:48) quarter three of 2024 rates will be around 6.8% where (4:51) previously they had them at 7.1%. By the end of this year (4:54) in quarter four of 2024, they expect rates to be at 6.7. (4:57) By quarter one of 2025, 6.6. Quarter two, 6.5. Quarter three, (5:01) 6.4. And by quarter four of 2025, they expect rates to be (5:05) all the way down to the 6.3% mark where previously they had (5:09) predicted higher at around 6.6. And right now Bank of America (5:12) predicts that rates are going to be around 6.4% by the end of (5:15) 2026.

So rates are expected to go down, but they're not (5:18) expected to go down that much. And with the last few days and (5:21) adding as much debt that we have, they may even revise (5:23) these forecasts up a little bit more the next time they come (5:26) out. We'll have to see.

But barring any significant impacts (5:29) to the economy, rates are expected to stay about where (5:31) they are, maybe slightly lower, but only time will tell. (5:34) Now, speaking of significant economic impacts, I personally (5:38) think that there probably is going to be something in the (5:41) next six to 12 months that may affect these forecasts and (5:44) drive rates down. Now, look, I'm just a crazy bald man in (5:46) his 40s barking into the internet every week.

But with (5:49) all the government spending and with this being likely a (5:51) very crazy election year. And if you watch the recent (5:53) debates, you'll know exactly what I'm talking about. We (5:55) also have underreported unemployment, massive credit (5:57) card debt, and so many market numbers that are (6:00) conflicting that just don't make a ton of sense.

I just (6:02) feel like we might be getting close to something (6:05) breaking. Now, I'm not saying depression or (6:06) anything like that, but I feel like there might be (6:09) something that happens either later this year or (6:11) into the first part of next year that might flip (6:13) all these forecasts upside down on their head, (6:15) which I think probably makes rates go down a (6:17) little bit faster than what we're expecting. (6:20) Unfortunately, not for good reasons.

It's (6:21) probably going to be something bad. Now, I really (6:23) really hope that I'm wrong, but I just have a (6:25) weird little spidey sense telling that something (6:27) just isn't right. And we're kind of like in (6:30) this calm before the storm.

There's been a glitch (6:32) in the matrix somewhere and something feels (6:33) like it's coming. I'm probably crazy. Only time (6:35) will tell, but I bet we see these forecasts (6:37) that adjusted pretty heavily into next year.

So (6:40) we'll see. Hopefully I'm just a nutball because (6:42) what I really want is a thriving economy and (6:44) everybody doing well. I don't want things to (6:46) fall off a cliff or even have just significant (6:48) adjustments because that's paying for everyone.

(6:50) All right. Now let's get into some housing (6:52) numbers. Where is the market sitting right now? (6:54) So at this point in time, we're kind of in (6:56) a weird spot because inventory is rising, but (6:59) so are home prices in many markets or at (7:01) least not falling like you would expect them (7:03) to.

And in short, it's really just because (7:05) in 2024, we've had a lot of sellers that are (7:08) also buyers. Now we don't have all of June's (7:11) numbers finalized yet. And this is July 1st (7:13) when I'm recording this, but today active (7:15) listings are still below 2019 levels (7:18) nationally, but we are trending to catch (7:20) 2020 numbers.

However, days on the market (7:23) are still under 30 days on average, but (7:25) they are rising. The median and existing (7:27) home sales price jumped 4.9% from May of (7:30) 2023 to $438,601 according to (7:35) Redfin, the highest price ever recorded (7:37) and the 11th consecutive month of year (7:39) over year price gains. But the inventory (7:42) of unsold existing homes grew 6.7% (7:44) from the previous month to 1.28 million (7:47) at the end of May or the equivalent of (7:49) about 3.7 months of supply at the (7:51) current monthly sales pays.

(7:53) And Kay Shiller says that we're up 6.3% (7:55) year-over-year on the median home (7:56) price. Now with inventory increasing, but (7:58) still not up to healthy housing market (8:00) levels, you would think that builders are (8:03) continually ramping up (8:04) and continuing to build homes, which would (8:06) help drive prices down more, (8:08) right? Well, if you think that, then you (8:10) forget that builders like to make money (8:12) just like you do. So no, they are not (8:14) building more homes right now.

In fact, (8:17) single-family housing starts sank (8:18) 5.2% in May, and that's the fifth (8:20) decline in the last six months. (8:22) And oh, by the way, you can expect (8:24) continued weakness over the summer. (8:26) Single-family permits have been (8:27) declining for the last four months, (8:29) while builder sentiment hit its lowest (8:30) level for the year this June.

See, they (8:33) see the inventory increasing as well, (8:35) and they don't want to add to it (8:36) because it would affect (8:37) their sales price of homes, which would (8:39) in turn affect their profit, which (8:41) would in turn (8:42) affect the share price for their (8:44) investors. If home prices are going up, (8:46) sales must be going up as well, right? (8:48) Well, according to the May 2024 (8:50) existing home sales report from the (8:52) National Association Realtors, (8:53) sales volume fell 2.8% (8:56) year-over-year to an annualized rate (8:58) of 4.1 (8:59) million homes. That number also marked a (9:01) decline of 0.7% from the previous (9:04) month in April, and June's numbers (9:05) aren't looking any better.

But at the (9:07) same time, prices hit an all-time high (9:09) of $438,000. 4.9% (9:12) year-over-year increase and marked the (9:14) 11th consecutive month of (9:15) year-over-year gains. So how is this (9:17) possible? We have rising inventory and (9:19) declining sales, (9:20) but still rising prices.

What the hell (9:22) is going on? So you have to understand (9:24) that even though inventory is (9:25) increasing, three and a half months of (9:27) supply is still well below the six to (9:29) seven months of supply (9:30) that you need to have a balanced (9:32) housing market. And we're barely (9:33) halfway there. And oh, by the way, a good (9:35) chunk of that available supply (9:36) are new builds that are not complete (9:38) and they are not ready to move into or (9:40) have even started yet in some cases.

(9:42) And if people can't move into those (9:43) homes, then they can't list and sell (9:45) their homes. So this kind of still (9:46) skews the available supply for actual (9:48) purchase that's on the market right (9:50) now. So even with rising inventory, (9:52) home prices are still going up, at least (9:54) nationally, which just drives a point (9:55) home how horribly short an inventory (9:57) were in the market over the last (9:58) several years.

And that's why you've (10:00) seen home values go up (10:01) in some cases 50% just in the last four (10:03) years. So if builders aren't going to (10:05) pick up the slack on supply (10:06) in order to help prices truly fall, (10:08) then we're going to have a really (10:08) hard time hitting that six-month mark (10:10) where you can start to see some (10:11) pretty significant declines (10:12) in home prices because of the (10:14) available supply. It just is what it (10:16) is.

Now again, that is the national (10:18) housing market. So what is the market (10:19) in Dallas-Fort Worth where I'm at look (10:21) like right now? Well, according to the (10:22) Dallas Morning News, (10:23) North Texas hit a 12-year high-end (10:25) inventory on the market (10:26) just last month. So home prices here (10:28) must be crashing, right? Well, sort of.

So (10:30) for the first time this year, (10:32) the DFW median sales price (10:34) is actually down 1% to only (10:37) $405,000. However, over the last 30 (10:40) days, we've only added about 11,000 (10:42) new listings to the market and that's (10:43) down 8% from this time last year. (10:46) But we do currently have about 39,000 (10:48) homes for sale right now, which is (10:49) just under (10:50) our recent peak of 40,000 homes and (10:53) the summer of 2019.

And over the last (10:54) 30 days, the North Texas market has (10:56) seen about 8,500 sales. Right now, (10:59) average days on market is right around (11:00) 22 days and 18% of homes are still (11:02) selling above list price. (11:04) Hello, North Dallas, Frisco, Plano area, (11:06) but about 36% of homes are dropping (11:08) prices.

(11:09) Hello, everywhere else. However, our (11:10) months of supply is still (11:12) only about three and a half months, (11:14) which is better but not great (11:15) because remember, you need (11:17) six to seven months of supply to (11:19) have a healthy, (11:19) balanced housing market. And although (11:22) migration to Texas has certainly (11:24) slowed in the last several months, at (11:26) least from (11:26) other states in the country, Fort Worth (11:28) is still second among the top 50 (11:31) cities in the U.S. (11:32) and population growth in just the last (11:34) 12 months, growing at a clip of 2.2%. (11:36) But if you read national headlines, you (11:38) think the Dallas-Fort Worth area (11:39) housing market is falling off a cliff.

(11:41) We're busting at the seams (11:42) with listings, but it's all (11:45) perspective. You know, (11:46) remember when the pandemic hit and you (11:47) couldn't find toilet paper anywhere (11:49) and how today, when you go to the store, (11:51) you can easily get your Charmin? It (11:53) doesn't mean Charmin is cheaper or in (11:55) overabundance. (11:56) It just means we're kind of getting (11:57) back to normal levels.

So right now, in (11:59) housing, (12:00) you can get the Sam's thin toilet paper (12:02) that breaks up every time you use it (12:04) anywhere you want. But that nice soft (12:06) quilted northern (12:07) is still really expensive and still hard (12:09) to find. (12:10) So, happy shopping.

All right, let's (12:12) get to some quick hits in the news (12:13) around the world of real estate. So (12:15) right now, business is slow, (12:17) but someone selling homes, who is it? (12:19) Well, in a study published by my (12:21) favorite housing site, Resi Club in (12:22) Lance Lambert last week, the top 1% (12:24) of realtors right now make up 15% of (12:27) home sales (12:27) over the last 12 months. So even with (12:30) high rates, (12:31) many top realtors are not just holding (12:33) their market share, (12:34) but they're actually taking.

In fact, in (12:36) Texas, the top 1% of realtors (12:38) make up 19% of the total sales. The top (12:40) 5% of realtors do 37% of the (12:43) business (12:43) and the top 20% do 64% of the (12:47) business. That's the 80-20 rule and (12:49) full effect or 60-20 in this case.

(12:51) Little math. So, how is this? Well, they (12:54) cite skill, (12:55) experience, you know, doing it for a (12:56) number of years. They cite market (12:58) knowledge.

These agents are experts in (13:00) areas that they live or they're experts (13:01) in relocation. (13:02) They cite networks as a reason, (13:04) meaning they're very active in their (13:06) community. They know a lot of people.

They (13:07) have a lot of friends. (13:08) They don't stay at home and wait for (13:10) the phone during and a lot of these (13:11) people have repeat clients. (13:13) If you do business, you do more (13:15) business.

You pick up the phone, you (13:16) call your class clients, (13:18) you ask them questions, you check in, you (13:20) make friends and the last thing is (13:21) marketing. (13:22) These agents let everyone know that they (13:25) sell real estate. (13:26) This is the person who wins.

The person (13:27) that doesn't love social media, the (13:29) person that doesn't want to embarrass (13:30) themselves, (13:32) the person that doesn't go out to the (13:33) networking meetings, (13:34) they're not the ones selling. The ones (13:36) that are active, the ones that are (13:37) out there, the ones that are building (13:38) their network, (13:39) the ones that are making relationships, (13:41) these people are taking greater and (13:42) greater marketing. So, if you're not (13:44) in that 20%, (13:45) you're probably just missing some (13:47) aspect of those top agent qualities and (13:49) you can do it.

(13:50) It's not rocket science. It just (13:52) requires a little bit of work. (13:54) Next, did you know that Netflix is (13:57) trying to single-handedly save (13:59) commercial real estate? (13:59) Well, not really, but it was a good way (14:01) to lead off the story.

(14:02) Actually, what's going on is the (14:04) Galleria in Dallas is getting a new (14:06) tenant and they are trying to do to (14:08) commercial real estate (14:09) what they did to entertainment. So, (14:11) Netflix has chosen the North Dallas (14:13) Mall to house one of the company's (14:14) first (14:15) Netflix house locations. The (14:17) experimental entertainment venue (14:19) per a news release will offer (14:21) immersive experience based on iconic (14:24) Netflix titles (14:25) such as theme dining and live (14:27) entertainment including food, (14:28) beverages, and merchandise.

Imagine (14:30) waltzing with your partner to an (14:31) orchestral cover of a Taylor Swift song (14:34) on a replica of the set of (14:35) Bridgerton (14:36) and then walking around the corner to (14:38) compete in the Glass (14:39) Bridge Challenge from Squid Game. (14:41) Reads a post on the company's blog. (14:43) The 107,436 square foot (14:46) Galleria edition will be among the (14:48) first Netflix houses in the country (14:50) with another location planned in King (14:52) of Prussia, Pennsylvania.

(14:54) Both locations are slated to open in (14:55) 2025 (14:56) with plans for many future locations (14:59) depending on how these do. (15:00) So, a lot of malls have gone heavy (15:01) into the experience offerings as online (15:04) shopping is cut into the competition (15:06) for traditional mall sales. (15:08) So, like in North Texas, the shops at (15:09) Willow Bend has the Crayola (15:11) experience.

(15:11) Grapevine Mills has the Legoland (15:13) Discovery Center, (15:14) Sea Life Aquarium, and the Peppa Pig (15:16) World of Play to appeal to families. (15:18) Now, the trend isn't necessarily new. (15:20) The gallery of Dallas has had an ice (15:21) rink since 1982, (15:22) but it has accelerated as department (15:24) stores such as Belk, (15:25) Macy's, and JCPenney have closed (15:27) locations and vacated anchor space.

(15:29) So, Netflix is going to try to help (15:31) buoy commercial spaces (15:32) that are vacated because of Amazon. (15:34) I don't know if it's going to work, (15:35) but they're trying. (15:36) Anyway, I'm probably going to go check (15:38) it out when it opens up.

(15:39) Seems like a pretty cool idea. (15:40) They got to do something with all (15:41) that space. (15:42) Okay, next up in the news of crazy (15:43) things that Mike finds on the (15:45) internet and is fascinated by and (15:47) wants to tell you about.

(15:48) I don't know if I can title this (15:49) segment that, but we'll go with (15:50) that for now. (15:51) So, you think you have long work (15:52) days now? (15:53) Well, did you know that your days are (15:55) actually getting (15:55) longer and longer by the second? (15:57) That's right. (15:58) And the reason is the Earth's core (16:00) is slowing down its spin rate.

(16:02) So, scientists at USC recently found (16:04) out that the Earth's core has been (16:05) slowing its rate of spin for over a (16:07) decade. (16:07) The core that typically spins faster (16:09) than the Earth's crust (16:10) and is the mechanism at which the (16:12) Earth's magnetic field is maintained (16:14) has been slowing at a rate that is (16:17) now moving slower than the Earth's (16:19) crust rotation. (16:19) And this has altered the length of (16:21) our days by fractions of a second for (16:23) the last several years.

(16:25) So, your days are getting longer, (16:27) which means more time to work, (16:28) right? (16:28) Well, in an unrelated but possibly (16:31) related news, the Earth's magnetic (16:33) poles may be flipping very soon as (16:36) well. (16:36) Now, the poles themselves are (16:38) generated from the movements from (16:39) this core that rotates to form a (16:41) protective shield against harmful (16:42) solar radiation and cosmic (16:44) particles, also known as the (16:46) magnetic field. (16:47) And until the 1990s, the North Pole (16:49) moved about 15 kilometers per year, (16:51) which is normal and not that much.

(16:53) But since then, it's accelerated to 55 (16:55) kilometers per year. (16:56) Now, is this going to cause the (16:57) poles to flip overnight? (16:58) Maybe. (16:59) It's kind of like how magnets can (17:01) move slowly towards each other, but (17:02) once they get close enough to a (17:04) certain point, (17:05) they'll move very quickly to attach.

(17:07) It's kind of the same idea. (17:08) And this rapid move could cause the (17:09) North and South Poles to flip. (17:11) Now, what would that look like? (17:12) Well, at least according to what we (17:14) know, it wouldn't be like Armageddon or (17:16) anything.

(17:17) Again, at least based on my couple (17:18) hours of internet research, but it (17:19) certainly wouldn't be pleasant (17:20) because of solar radiation. (17:22) And when your magnetic field is (17:23) temporarily down because your poles (17:25) flip, (17:25) you're going to be hit with a lot of (17:26) that radiation, which will cause (17:27) issues for satellite communication, (17:29) cause issues for animals that use (17:30) magnetic fields to migrate from one (17:32) place to another. (17:33) And probably lots of other things (17:34) that we really can't think of right (17:35) now, because the last time this (17:36) happened was 780,000 years ago.

(17:38) But I'm sure it's going to be fine. (17:40) So sleep tight. (17:42) Okay.

(17:42) Now for our main story today, do you (17:44) want to know why rates just can't (17:45) seem to come down (17:46) even with poor economic news? (17:48) Because remember, bad economy usually (17:50) equals good interest rates. (17:52) Well, I'm going to tell you about a (17:53) tool that you can watch (17:54) and use to help predict where rates are (17:56) headed (17:56) and when they might come down. (17:58) So today we're going to take a (17:59) little tour around the world of the (18:01) bond market.

(18:02) Now, I've been in mortgage for (18:03) almost 15 years, (18:04) and I thought I fully understood how (18:06) bonds work, (18:07) but I realized recently that I really (18:09) didn't, or at least I didn't know what I (18:11) didn't know (18:12) until I learned it. (18:13) So it's kind of like going to Alaska. (18:14) I knew it was beautiful.

(18:15) I'd seen a ton of pictures, but I (18:17) really didn't know how beautiful it was (18:20) until I was standing on the deck of (18:21) that cruise ship (18:22) looking at a massive glacier. (18:23) So there's one thing to kind of (18:24) understand something, (18:26) and it's another thing to really (18:27) understand something. (18:28) And that's what we're going to figure (18:28) out.

(18:29) Now, I know this might sound like a (18:30) boring topic, but I promise you, (18:31) it's really more interesting than you (18:33) might think. (18:33) So let's start first with why rates (18:35) just cannot come down yet. (18:36) Why even with rising unemployment, (18:39) reduced spending, and a slowing (18:40) economy, (18:41) you cannot get an interest rate under (18:43) 6%.

(18:44) Because remember, again, that economy (18:46) usually equals good interest rates. (18:48) Well, you can think you're wonderfully (18:49) elected officials, (18:51) red and blue team, both. (18:53) So two weeks ago, the Congressional (18:54) Budget Office raised this deficit (18:55) forecast for 2024 (18:57) from $1.6 trillion (18:58) to $2 trillion.

(19:00) Why, you might ask? (19:01) Well, we've added an extra $400 (19:03) billion more to the national deficit (19:05) than we expected just since February. (19:08) So how is this possible? (19:09) Well, a good majority of it comes (19:10) from forgiven federal student loans (19:12) to the tune of about $150 billion. (19:15) However you may feel about it, (19:16) it's just the truth.

(19:17) Also, higher rates cause issues (19:19) for small regional banks in 2023 (19:22) and are still causing issues in 2024. (19:24) You see, the FDIC had to go help (19:26) these failing banks to the tune (19:27) of $70 billion, (19:29) which is still going on today, (19:30) and being severely underreported. (19:32) Because much of this has to do (19:33) with the struggling commercial real (19:35) estate market, but that's another (19:36) topic for another day.

(19:37) And the rest of the, quote, (19:38) unexpected spending came from (19:40) foreign aid to Ukraine and Israel. (19:42) Again, however you feel about it, (19:44) that's where it came from. (19:45) So why does higher debt (19:46) affect mortgage rates? (19:47) All right, follow me here (19:48) for just a minute.

(19:49) So if we live together (19:50) and we bring in $10,000 a month (19:52) as a household income, (19:54) but we spend $15,000 a month, (19:56) then we are in debt, $5,000. (19:59) They call this deficit spending (20:00) in government speed. (20:01) Sounds like a fancy term, (20:02) but it just means you're spending (20:03) more than you make.

(20:04) Now, that $5,000 has to come (20:06) from somewhere. (20:07) So in our situation, (20:08) we would just get a loan (20:09) or run up a credit card. (20:11) Well, thank goodness, I guess, (20:12) there isn't really (20:13) a government credit card.

(20:14) I mean, the Fed kind of is that, (20:16) but either way, (20:17) but what the government can do (20:18) is they can get loans. (20:20) So how does the government (20:20) get loans to pay their bills? (20:22) Well, they sell US treasuries (20:24) and securities, (20:25) otherwise known as bonds. (20:27) And then American investors, (20:28) foreign investors, (20:29) large corporate institutions, (20:30) and foreign governments (20:31) can buy these bonds (20:32) and essentially lend (20:33) the US government money.

(20:35) Now, when you flood the market (20:37) with billions of dollars (20:38) in US bonds for sale, (20:39) you have to make them attractive (20:41) to buy. (20:42) So you have to offer (20:43) higher interest rates (20:45) or yields on these bonds (20:47) so investors will buy them (20:49) to cover the debts. (20:50) And if rates on US treasuries (20:51) are high, (20:52) then mortgage bonds (20:53) have to offer higher rates as well (20:55) to stay competitive (20:56) and keep selling (20:57) to have people keep buying.

(20:59) So more debt means more bonds (21:01) that have higher rates, (21:02) which means higher yields, (21:04) which means higher mortgage rates also. (21:06) So even if the economy slips (21:08) further into a recession, (21:09) if the government doesn't stop spending (21:11) like Elon Musk at Christmas, (21:13) he spends a lot (21:13) because he has 12 kids. (21:14) Yeah, 12 kids.

(21:15) He just had one recently. (21:16) But even with a poor economy, (21:18) we can still have high rates. (21:19) And even if the Fed decides (21:21) to cut rates, (21:22) because bonds will still be expensive (21:25) and keep rates high, (21:26) which will keep spending low (21:27) and may even still (21:28) carry higher inflation (21:30) because of government spending.

(21:31) Then you could get into something (21:32) called stagflation, (21:34) which is really bad. (21:35) High rates with high inflation (21:36) and a slowing economy. (21:37) In fact, today on Monday, (21:38) when I'm recording this, (21:39) we saw a big sell-off in bonds (21:41) because the Bank of Japan, (21:42) which is Japan's central bank, (21:44) sold off a bunch of US treasuries (21:46) to try to keep their currency (21:47) from falling off the cliff, (21:48) which added a ton more (21:49) to US treasuries for sale, (21:50) which drove down prices (21:51) and increased yields (21:53) and therefore caused mortgage rates (21:55) to spike up.

(21:56) Views yet? (21:56) Well, there is something out there (21:57) that's a great barometer (21:58) on a day-to-day basis (21:59) to see where rates are headed, (22:01) and that's called (22:01) the 10-year Treasury yield. (22:03) Now, if you've been in mortgage (22:03) for any period of time, (22:04) you're very familiar (22:05) with the 10-year Treasury (22:06) and its correlation (22:07) to mortgage rates. (22:08) And if you're a realtor, (22:09) you might even have (22:10) some experience with it as well (22:11) because of how much (22:12) it impacts our business.

(22:13) But do you know why (22:14) the 10-year Treasury (22:15) is such a good measure (22:16) of where interest rates will head? (22:17) Well, I'll say (22:18) I wasn't 100% sure either, (22:19) but thanks to chat GPT (22:21) and a few other sources, (22:22) I got it broken down for me (22:23) in very simple terms (22:24) that I want to share with you. (22:25) So first off, (22:26) the way any bond works (22:27) is when you buy that bond (22:29) on a given day, (22:30) say today, (22:31) your rate of return (22:32) would be 4.4% (22:34) over the next 10 years. (22:35) So if you hold that bond (22:37) to maturity over 10 years, (22:39) and let's say (22:39) you invested $1,000, (22:41) you get $44 every year (22:43) for 10 years, (22:44) netting you $440 (22:46) at the end of that 10-year period.

(22:48) Now, that's not a huge return (22:49) over 10 years, (22:50) but the idea (22:51) is that money is very safe (22:53) while still guaranteeing (22:54) you some level of return, (22:56) especially if an economy (22:57) in a market isn't very secure. (22:59) So you would use that (23:00) instead of say (23:01) putting money into the stock market, (23:03) which might be very volatile (23:04) and cause you to lose money. (23:05) And oh, by the way, (23:05) if that 10-year rate drops (23:07) between now and when it matures, (23:09) you could sell that bond (23:10) for an even greater (23:11) short-term return (23:12) because buyers would be (23:13) maybe more attracted (23:15) to that bond (23:15) that has a higher yield.

(23:16) This is how the bond market works. (23:18) Safe investment (23:18) for long and short terms (23:20) with the ability to sell (23:21) or buy more bonds (23:23) that haven't fully matured (23:24) to make a profit (23:25) or possibly take a loss (23:26) if rates go up and you sell. (23:28) Now, in regards to mortgage rates, (23:30) the main reason why (23:30) the 10-year treasury price (23:32) or yield or rate (23:33) or whatever you want to call it, (23:34) it's all basically the same word, (23:35) is so closely correlated (23:37) is because of the average life (23:38) of a mortgage (23:38) is also about 10 years.

(23:40) So the 10-year treasury (23:42) closely mirrors (23:43) the average life of a mortgage, (23:44) which is why the 10-year treasury (23:46) and mortgage-backed securities (23:47) are so well correlated. (23:49) 10 years is also a good reflection (23:51) of economic expectations. (23:52) The term's not too long, (23:53) which makes predicting (23:54) the market very difficult, (23:56) but it's also not too short, (23:57) reacting to daily (23:58) and weekly items that come up (23:59) that could cause something (24:00) like an individual stock (24:01) or an index to fall, (24:03) making big swings in the market (24:04) that could be short-lived.

(24:05) 10 years is a stable time frame (24:07) to get good investor sentiment (24:08) on where they think (24:09) the market is headed. (24:10) And also because bonds (24:11) are relatively safe (24:12) and the 10-year (24:13) is in great abundance (24:15) and very liquid, (24:17) meaning they can be bought (24:17) and sold very easily, (24:19) it's also a good barometer (24:20) on where investors (24:21) feel the economy (24:22) is trending overall. (24:23) You see, it's transacted (24:24) at a very high rate, (24:25) so it's always fluctuating.

(24:27) It's never really stagnant. (24:28) So it can give you (24:28) some real-time indicators (24:29) on where the market feels (24:30) like things are headed. (24:31) And because of all this, (24:32) many policy decisions (24:33) are impacted by the change (24:34) in the yield of this bond.

(24:36) The Fed and other central banks (24:38) gauge the effectiveness (24:39) of their decisions (24:40) on monetary policy (24:41) based on how (24:42) the 10-year treasury yield curve reacts. (24:44) So just as the dollar (24:45) is the standard (24:46) on which all of their currencies (24:47) are measured in the world, (24:48) the 10-year treasury yield (24:50) is the standard (24:51) for which all of their bonds (24:52) and investment performances (24:53) are set and measured. (24:55) Auto loans, student loans, (24:56) and many other consumer loans (24:58) use the 10-year yield (24:59) as a reference point (25:00) to set and determine (25:02) their interest rates.

(25:03) So when your clients ask you (25:04) where you think rates are headed, (25:06) just hop on over (25:07) to any finance website or app (25:08) and look at the 10-year yield. (25:09) If you're seeing it going up, (25:11) then odds are (25:11) mortgage rates are also going up. (25:13) If the yield is going down, (25:14) then most likely mortgage rates (25:16) are headed that way as well.

(25:17) So from June 25th to today, (25:19) the 10-year yield is up (25:21) about a quarter of a point. (25:22) So guess how much rates (25:24) have moved up since then. (25:25) You guessed it, (25:26) about a quarter of a point.

(25:27) And now you know more (25:29) about financial markets (25:30) than about 90% (25:31) of the world's population. (25:32) Our brains grow together around here. (25:35) Well, my friends, (25:36) that is all for today.

(25:38) You know, my great grandmother (25:39) used to buy me government bonds (25:40) when I was a kid for Christmas (25:41) and it was the most (25:43) boring Christmas present (25:44) that I'd ever got. (25:44) My 10-year little old brain (25:46) could never wrap my mind (25:47) around the fact (25:48) that she was actually buying me (25:49) a government bond (25:50) at 14% interest. (25:52) Because that's where rates (25:53) were about then.

(25:53) And that money ultimately (25:55) helped me pay (25:55) for some of my college. (25:57) So thanks, Granny. (25:58) You see, the greatest trick (25:59) you can learn (25:59) when it comes to money (26:00) is how to stop trading (26:02) your time for money (26:03) and start having your money (26:05) make money for you.

(26:07) And understanding (26:08) how these markets work (26:09) and interrelate (26:10) takes you one step closer (26:11) to figuring out all this stuff (26:13) and setting yourself up (26:14) and your family (26:15) for financial success. (26:17) And I hope today (26:17) I was able to get you (26:19) one step closer (26:20) to that skill. (26:21) We're learning together here.

(26:22) Thank you everyone (26:23) for tuning in. (26:23) I hope you all (26:24) have a great Fourth of July. (26:26) I will not have a guest (26:27) this week because (26:28) of the holiday (26:28) but I may have (26:29) a little special episode (26:30) pop up.

(26:31) We'll see. (26:31) But we'll be back (26:32) with another market update (26:33) next week. (26:34) So until then, (26:35) be great humans (26:36) and keep grinding.

(26:37) Because life is (26:38) what you make it. (26:39) So make it great. (26:40) See you then.