Bank On Borrowers, Not Rate Predictions

Chasing rate forecasts wastes resources better spent on cold, hard business

Insider

Contributing Writer

Lenders and loan originators who listened to and relied on economists’ predictions hoped that lower rates would materialize all through 2023. Their disappointment carried through until September of 2024, when the Federal Reserve cut interest rates for the first time in four years.

Not only did rates stay elevated for longer than most forecasters projected, mortgage lenders and originators who believed predictions, and based on those predictions, banked on business that never materialized, should rethink their business model.

Predicting the economy’s ebb and flow is very difficult, especially when it comes to complex systems like the U.S. bond markets, and given the number of variables and global “moving pieces” that have an impact on the mortgage rates shown to borrowers. The general explanation why rates have moved higher than “experts” prophesied is that the U.S. economy proved much stronger and more resilient than expected.

Strong economies foster higher rates, and slow economies, lower rates. The U.S. economy is built on housing and jobs. On the housing front, homebuyer affordability has eroded for years as prospective buyers grapple with relatively high interest rates and low housing inventory, which has supported high home prices.

As we move toward the end of 2024, there continues to be a scarcity in existing housing supply, strong seasonal demand, and demographic trends supporting further market strength. There is little reason for the Federal Reserve to significantly lower rates to help housing prices.

“Successful lenders, brokers, and loan originators do not ‘bank’ on someone’s predictions, but instead focus on hard numbers, analytics, and performance.”

—Rob Chrisman

In terms of the jobs market, the unemployment rate has moved higher, into the 4% range, but nonfarm payroll numbers continue to be strong. One can slice and dice the employment figures however one sees fit, but the bottom line is that employers continue to add a healthy number of new jobs, helping to keep the economy on solid footing. The Federal Reserve has a close eye on labor market developments, which have largely indicated a jobs market that has remained resilient despite aggressive efforts to cool it down. High demand for workers usually fuels stronger wage growth and, in turn, inflation. The continued fear of higher-than desired inflation kept rates higher than some thought would occur.

“Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening,” so said Peter Lynch, the respected investor and manager of Magellan Funds. Sure enough, as we moved through 2024, earlier predictions proved incorrect. The Fed lowered rates in September, at last, and in doing so also signaled that the economy, labor markets, and inflation are on the right track.

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today,” one may think. Moderating inflation has taken pressure off the Fed, but even with the latest cut, borrowing conditions are restrictive. Going forward, the economic data will be important to track, as always, to see if the economy remains as strong as it has been in recent quarters.

Like the weather, the economy will do what the economy will do. Lenders and loan officers cannot determine the direction of the bond market, but they can prepare for changes in direction or make their businesses immune from interest rate movements by focusing on products and services their clients request. Successful lenders, brokers, and loan originators do not “bank” on someone’s predictions, but instead focus on hard numbers, analytics, and performance.