If we really needed proof of the relationship between interest rates, contracts, concessions, sold prices and lead versus lag data, ohh man do we have it.  

Since April 25th of this year, interest rates have been on a significant downward trend, dropping by more than a full percentage point over the 4 months of May through August, hitting a low on September 16th.  But In just 8 days between October 3 and October 11, interest rates moved from 5.5% on a conventional 30 year fixed loan to over 6.125%. 

The impact we are seeing on every aspect of the real estate market is astounding.  But where will rates go and what does this mean for the real estate market this winter and next spring?  

First, a little background on how and why rates move.  

Mortgage Rates Tied to 10 Year Treasury Bonds

A 10-year Treasury bond is a loan the U.S. government is selling to investors to raise money.  The bond yield is the interest rate the government offers to pay investors for buying bonds, and becomes a contract for 10 years. The yield has become the benchmark for other interest rates and a key indicator of investor sentiment about economic conditions. 

Mortgage rates are tied to 10-year Treasury bonds because they are both long-term assets and investors in both are similar: 

• Long-term assets
• Mortgages are long-duration assets because people tend to stay in their homes for a long time. The interest rate on a long-duration asset should reflect the interest rate of other long-duration assets, like the 10-year Treasury bond. 
• Similar investors
• Both bonds and mortgage-backed securities (MBS) are attractive to investors looking for stable returns. MBS are bundles of home loans that are sold on the bond market, and they compete with other low-risk investments like Treasury bonds. 
• Lender needs
• Lenders need to make MBS attractive to investors compared to Treasury bonds. If Treasury yields are high, mortgage rates must also be high to attract investment. 

Rates Rose Over the Last Month

Mortgage interest rates rise and fall based on investor confidence in the broader economy.  When investors are optimistic about the economy and expect business growth, they tend to invest in riskier assets like stocks. However, when there are concerns about the economy, investors shift toward safer options like 10-year Treasury bonds. As demand for these bonds decreases, their yields rise (making them more attractive to investors), pushing up mortgage interest rates since both are long-term financial products competing for the same pool of capital. Essentially, when investors prioritize safety, mortgage rates tend to drop.  

Three key factors have driven mortgage rates higher in the past month. 

1. First, the Federal Reserve dropped the overnight funds rate by 0.5%, the largest single reduction in 16 years.  This encouraged investment in riskier assets and drove up bond yields.  
2. The September 2024 jobs report showed strong labor market performance, with 254,000 new jobs and a 4% wage growth, signaling economic strength. 
3. While the recent inflation report showed inflation has not dropped as much as anticipated, the market responded positively, expecting the Federal Reserve to drop the overnight funds rate at least one more time before year end.  

These factors led investors to move away from safer assets like bonds, reducing demand and pushing up yields, ultimately causing mortgage rates to rise.

Lead Versus Lag Measures

Now the impact we are seeing in the real estate market falls into two categories.  

1. We see the results of interest rates being very low from just 30 days ago compared to today.
2. And we see the lead measures of activity today that help us predict what will happen in the coming months.  

Lead and lag measurements are critical concepts in analysis, prediction and performance management. Lead measures are proactive, focusing on the activities and behaviors that drive future results. These indicators are predictive, offering insights into what actions are needed today to influence outcomes tomorrow. For instance, in a sales environment, the number of cold calls made or customer meetings scheduled would be lead measures. They are directly within your control and help you steer the process toward desired results.

Lag measures, on the other hand, are reactive and focus on the final outcomes or results that have already occurred. These indicators are typically the “bottom line” results, such as revenue generated, customer satisfaction scores, or market share. Lag measures are important for assessing success, but by the time they are available, it’s too late to influence them. They reflect the consequences of the lead measures, serving as a mirror of past performance.

For example, if you’re managing a fitness program, a lead measure might be tracking how many times a week you exercise or how many calories you consume each day. These actions directly influence the outcome. The lag measure, in this case, would be your weight or body fat percentage after a set period. By focusing on lead measures, you can better control the process that will ultimately affect the lag results.

Lead and Lag of Real Estate Relative to Interest Rates

Lag Measures

Below are a bunch of charts that each show interesting data.  But that data is all based on what happened 25-40 days ago, or since properties were going under contract when interest rates were much lower.  

Sold price, the median sold price across the Denver market has been increasing for the last 30 days and seasonally is at an all time high.  Why, because rates dropped and buyers had more buying power. 

Seller Concessions declined markedly last week.  Why?  Because the majority of seller concessions have been for rate buy-downs.  Rates hit a 2 year low 30 days ago and when rates are lower, buyers would rather negotiate price than have the seller buy their rate down even further.  

The median days on market actually has a slight downward trend over the last 6 weeks.

And last week saw a slight uptick to 33.8% of properties sold for at or over the original asking price.  This sort of movement typically only occurs in the spring markets as buyer demand increases.  

Remember, these are lag measures.  We are measuring the result of what happened when rates were lower 25 to 40 days ago.  

Lead Measures

The best lead measure we have for real estate activity is interest rates. Here is the chart from the St. Louis Federal Reserve measuring average 30 year fixed mortgage rates year to date. 

We can see a clear correlation between when rates started to decline early May of this year, and a substantial increase of buyer activity as measured by weekly home showings.  

At risk of belaboring the point, the height of buyer activity over the last 3 years was in early spring of 2022.  On March 3 of 2022 a 30 year fixed mortgage was approximately 3.5%.  By June, it was almost 6%.  Over the same period of time, buyer showing activity plummeted from 35,000 home showings per week to about 18,000. 

So What’s Next?

When rates rise, buyer showings slow down, marketing time gets longer to sell homes and prices fall.  Rates have risen in the past month.  The question is, what will happen through the remainder of the winter months and into next spring. 

As we now understand, when the economy is looking strong, investors don’t look to invest in Treasury bonds and rates typically go up.  But when the economy is looking weaker, investors seek safety.  

While recent reports may suggest some economic stability, some experts disagree.  Warren Buffet, arguably America’s greatest investor of all time has increased his company’s cash position by more than 65% this year, to $280 billion dollars.  Buffet believes the economy is weak and the stock market overvalued and a correction is coming.  Jamie Dimon, CEO of JP Morgan Chase has been warning his shareholders, investors and private banking clients of an impending recession for some time and like Buffet, believes the market is overvalued.

We believe a recession is inevitable for a host of reasons we’ll dive into in another article, but in many ways that will be good news for real estate.  As economic weakness rears its head, investors will seek safety, buy bonds and rates will go down.  We see this happening throughout the next 12 months and the result will be a significant increase of buyer activity, more market volume and home value appreciation.