Creating Urgency with Clients in a Declining Rate Environment (Part 1 of 3)

Do you ever find client’s making a real estate decision, based on misinformation? [Insert Zestimate joke here] 

The truth is that overcoming misinformation is an important, but oftentimes difficult part of our job as we shift a customer’s perception from one reality to another. During periods of low housing activity driven by higher mortgage rates, a declining rate environment can be an exciting signal of transition in the market. Consequently, a declining rate environment can also mislead potential buyers and sellers into waiting too long before taking action with a home purchase, missing the opportunity to get a great home at a great price. 

Over the next three articles, we’re going to break down our 3-part playbook to help you create urgency with your clients in a declining rate environment, helping you look like a rockstar while helping your client realize the real estate goals.

3 Steps to Create Urgency in a Declining Rate Environment (1 of 3)‍

1. Educating on Mortgage Rates vs. the Prime Rate

A common misperception buyer’s have about mortgage rates is that mortgage rates are the same as the prime rate managed by the Federal Reserve. When the Federal Reserve executes a rate cut, oftentimes the impact from the rate cut has already flowed into lower mortgage rates. Buyers who expect future prime rate cuts by the Federal Reserve will automatically equate to lower mortgage rates are making a dangerous assumption that might cause them to miss their window to purchase.

A great example of this trend is in 2024 when the Federal Reserve announced a 50-point cut to the prime rate on September 18, but mortgage rates had already declined by over 100 basis points in the weeks leading up to the announcement*. 

Why did mortgage rates decline in the five months leading up to the Federal Reserve announcing a prime rate cut? Lets unpack!

Did you know mortgage rates are actually driven by investor appetite? Mortgages are bundled and sold as a financial investment product called, Mortgage Backed Securities (MBS). Investors purchase MBSs and collect a return via interest payments made from borrowers over a long period of time, similar to 30-year and 10-year treasuries. The reason why mortgage rates started to fall before September 18, 2024 was due to MBS investors expecting a prime rate cut and adjusting mortgage rates in anticipation.

Since treasuries and MBSs are so similar as an investment product through their yield and timeline to return income, interest rate activity between the two are very similar. But if they’re so similar, why aren’t the interest rates the same for the two, you ask?

1. 30-10 Spread - This is defined as the difference between the 30-year treasury rate vs. the 10-year treasury rate. When the spread is large and 30-year treasury rates are higher, investors are more prone to purchase this product, causing mortgage rates to increase. When 30-10 spread shrinks, investors are more prone to move to other investment products, causing mortgage rates to decline.
   
   
2. Prepayment Risk - This is defined as the risk that a borrower will pay back a loan, either partially or in-full before the original maturity date. If investors fear newer mortgage products purchased will refinance sooner than expected, due to declining prime rates, the interest earned on the MBS will be lower, making the return less attractive and cause interest rates to remain higher than the prime rate. 

Both the 30-10 spread and prepayment risk are variables that can cause mortgage rates to behave differently than the prime rate. While a great lender can help your client understand these differences, providing a surface level education to your client can be important to help them consider getting pre-approved sooner than later. 

Read Part 2: Creating Urgency with Clients in a Declining Rate Environment