Broad Market Outlook
As we have been talking the last few weeks about how we should expect to see the 10 year retest and possibly push a bit higher as retests often do, that is exactly what we are seeing.
One could expect to see a weak equities market to follow as the interest on taking on new debt becomes more expensive for most businesses and often the average person to a much greater extent.
The big talk lately has been all these rate hikes, yet mortgage rates are already getting close to 7%, a number that most of us have never seen or be aware of in our life time. Aka only a moron would refinance right now at the highest rate in more then a decade.
Just like when we were figuratively pounding the table in 2020 and 2021 to refinance your home as we were (lowering our rate from 4.5 to 3%), right now could not be more of a worse time to lock in a loan as rates as they get extended after a 100% run up this year.
Remember when energy ran up 100% this year and most thought it wouldn't end, what happened?
Just like a winning stock on the way up the story is often a perfect one when under the hood, the engine is starting to overheat.
When it comes to interest rates or raising them, the "talk" is how they want to slow the economy down but behind the scenes its often a different game that isn't obvious until its too late.
I was talking with a mortgage lender yesterday and she had mentioned how right now the person wanting a mortgage have to pay to lock in there rate.
The key word is pay, normally the only time you would "pay" to lock in a rate would be if you were buying down the rate.
For example right now you are offered a rate of 7% on a $500k loan, if you wanted to buy the rate down, you would pay 1% of the loan amount to bring it down a point. You would pay $5,000 extra to bring the rate from 7% to 6%. Now you obviously can't buy the rate down to 0% but you get the idea.
Right now, most lending are charging that 1% fee yet only offering you 7%, you are paying extra just to get the market rate.
The obvious question is why would they do that?
Why would they charge the home buyer this extra fee for offering them what the market is serving up?
The answer is simple, lenders are smart, they know where rates are going and they know the person who buys the top of the mortgage rate market at 7% is going to be the first one to refinance when rates are back in the 4's.
Now once they refinance, the bank that was charging 7% loses out on all those decades of interest payments yet had to put up the risk to buy the home for the buyer. By charging that extra fee, they can recoup some of there risk because they know these loans wont last once rates pull in.
The tough talk is rising rates, yet behind the scenes, the people in the know are planning for a different end result, one that I feel is the same, that over the next year rates will continue to pull back instead of climbing higher.
Looking at the chart of the 10 year, right now it looks like mortgage rates are going to run to 10% just like most people 2 years ago thought Bitcoin would run to a million and 6 months ago most thought buying screenshots of monkeys would be worth a boat load of bananas, yet that often happens at the end of the runs when the story is perfect and the people in the know are on the other side of the transaction.
Let's wait for the 10 year to flush up through the retest and once it starts to turn, we can find our low risk set ups to take advantage of when the time is right.