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It’s Getting Worse, how long will it last?

9 · 26 · 22

It’s Mike Lynch with Ameri First Financial. Happy Monday morning. It’s time for your Monday morning mortgage update for the week of September the 26th. Man, this month is almost gone. Hope everybody had a great weekend. I had a great weekend. Rode my mountain bike, rode my road bike, hit golf balls in the river with friends.

Spent some relaxing time with Gail. Just had a nice weekend. So let’s get to it. Uh, I got a lot of stuff to cover today. Uh, so what happened last week and what’s happening this week? We all know the Federal Reserve raised. The Fed fund rate another three quarters of point on Wednesday. It was a probably the most important meeting of the, uh, year that they’ve had.

And it wasn’t so much raising that rate. It’s what they said. I sent out a special report, uh, that really broke that down if you need it. If you didn’t get it, let me know. It’s worth watching. But what happened last week is, Pricing got worse by over a hundred basis points. That means that there was a market sell off on the bond market.

Money flowed out of that bond market and pricing got worse over a hundred basis points the week before, over a hundred basis points since October 2nd. Let’s look to the chart here cuz it’s really, uh, interesting to look at this. And if you look since October 2nd, this big downturn, red meaning. That money’s flowing outta the bond market.

We’ve really seen a deteriorating bond market and, and this is a representation of mortgage backed securities in the bond market. It’s where mortgage rates are determined. I’m not determined by the fed raising that rate. This is determined by the trading and mortgage backed securities in the bond market.

And when we see red, we see a little greens in here with some markets slightly improved, but when we see. Go down. That basically means that rates are getting worse and there really was a sharp, sharp decline, Uh, a more drastic decline in the market starting September 12th, a couple weeks ago. And you can see a big, big decline.

But one thing is interesting, if you look on the 21st, which was last Wednesday, the market actually improved. When the Red Fed raised their Fed fund rate. Uh, but then on Thursday, on Friday, on today, uh, big selloffs in the market. Huge selloffs. So we’ll talk about that. Um, let’s talk about what we’re looking at.

I always try to give you three things that are gonna affect the market. Number one is inflation. That’s no surprise. Number two is the fed. Uh, and number three is I wanna talk about how long we can expect this to last cuz it’s, it’s getting worse and it’s affecting all of us. Uh, it’s affecting our business.

Uh, it’s affecting our clients, our buyers and sellers, and what they wanna do and what they’re willing to do. So let’s talk about inflation. We all know that inflation is, The death of mortgage rates. Uh, and I’ll talk about that, but inflation in the US is not just a problem. It’s inflation around the world.

We are in a global economy. Well, this week on Friday, the pce, the producer’s consumer index, some key measure of inflation that the Fed likes to pay attention to. It strips out food and energy, which are the highest costs that they’ve been, and really looks at our core economy, and we expect that to go up.

If that PCE report that comes out Friday is higher, showing higher inflation, guess what rates are gonna go up to? Um, the Bank of England? This was really the biggest issue that we’ve seen over the last couple days. And if I go back to the chart here, you can see that the day after the Fed raised the Fed fund rate, Huge selloff in the bond market today.

If you look at the charts today, we’re over a hundred point selloff in the bond market. So think about that. Last week was over. The whole week ended with over a hundred points the week before, over a hundred points, and just today it’s already a hundred point selloff. Why? Because the Bank of England, which is a major.

You, a major economy around the world is finally saying, Wow, inflation is a problem. Now keep in mind they have, and a lot of economies around the world have really ignored inflation. Our Fed ignored it, but they really have, They’re federal, they’re equivalent of federal reserves, and now they’re really realizing it’s a huge issue in Europe’s having a bigger issue because, uh, their energy costs are expected to go up over 200% this winter.

Uh, they’ve had big problems with food costs, all because of the Russian, uh, invasion, uh, of Ukraine. It’s causing major, major problems over. On top of the fact, uh, of our fallout from the covid, uh, and, and all the problems, uh, that we have all had globally because of how that was handled. And, and really that’s what’s pushing us into a recession.

So, um, Bottom line is, uh, that Bank of England, now that they’re starting to say, Hey, we’re gonna probably raise our Fed fund rate, they’re equivalent over 200 basis points by the end of the year. This is a huge, huge increase. And that’s really having widespread effects around the world, uh, and it’s absolutely affecting our, uh, our bond market.

Uh, the second thing is a fed, So last week, the Fed. This week, all the Fed members are gonna start talking and interviewing and giving their insight on what’s happening with the economy. And really what we’re looking for is are they in line with the general Federal Reserve policy? Are they gonna say things different?

How do they see those individuals see the economy moving forward in the next year or two? When is the recession really gonna hit? We’re already technically in one, but the federal, but uh, our administration is not admitting it. And, uh, how long and how hard is this recession gonna be? Um, and then the last thing is, how long will this last?

How long will these high rates last? How long, uh, will this start to affect the, uh, the housing industry? And so it all depends on how long inflation will stay up, uh, and important things to understand about, um, inflation. So it’s horrible for interest rates. Why think about this if you have. A 1 million uh, dollars in a bond, and that yield is 4%, or the rate is 4% and inflation’s 1%.

Your actual rate of return is three, right? Four minus one is three. Now, if you have that 4% bond that you purchased and the yields 4%, but inflation, inflation is three, you’re getting a very meager 1% rate of return. So what happens is those yields start to go. Which really equals rates, uh, and uh, to give investors a rate of return.

Now that’s a very simplistic way of explaining it, but that’s why generally, uh, inflation is bad for, uh, bonds and mortgage backed securities are traded in the bond market, and that’s why we’re seeing our mortgage rates go up. It’s not because a federal reserves raising their rates, it’s because inflation is outta control.

The second thing about inflation is a fed raises that fed fund rate like they did last week. Fight inflation. Why? Because when they raise that fed fundraise, it makes things more expensive. Businesses more expensive to operate. People buy less stuff. Businesses eventually lower their prices. That lowers inflation.

Uh, and that’s a very, very draconian way of doing it. Uh, and three, many of the top economies around the world are also experiencing inflation. Worse inflation than we have. And we are a global economy and it absolutely has an impact on our economy. Um, for flight fighting inflation takes time. As a Fed does this, it doesn’t just flip the switch on inflation overnight.

It takes time and we have to weather this storm, um, has. Raising this fed fund rate and fighting and inflation put us into recession. Absolutely unequivocally, it has. We are headed, we’re technically already in a recession, and the real question is how long and how hard this recession’s gonna be. Now keep in mind the housing markets.

Typically, if you look historically at recessions, you exclude the last big recession we had in 2008, nine and 10, which was caused by the housing market. Housing markets actually have done fairly well. Rates come down during a recession, and housing values typically hold their own. So it’s gonna get harder before it gets better.

Uh, the real story is, or, or the real comment is, how do we advise our clients? What do we tell them? Uh, and, uh, how do we answer those difficult questions? So, um, the. General consensus is that we’re going to, uh, be in this rate market for the ne next six to nine months. Starting in the, uh, the first quarter or the second quarter of next year.

We’re gonna start to see inflation come down, which will then, uh, affect those interest rates. Um, so if you have any questions or comments, please let me know. Oh, one thing, we are absolutely in a locking position. We are not floating. Uh, as, as I showed you on the chart here, uh, the market is already up. Now it’s down below a hundred points.

This is a live read, uh, but uh, we are absolutely locking interest rates and not floating. If you have any questions or comments, please let me know. If you know somebody that could benefit from this video, please forward with them. Have a great productive week and we’ll talk to you soon. Byebye.

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