Mortgage Rate Model

The current 30 Year Fixed Rate Mortgage is at 5.3% and people want to know if it’s headed much higher. I make a case why I think the 30 Year FRM is actually more likely to head lower than higher. I show you my model that was used to support my opinion and show you where you can get the raw data for free.

Hey everyone i want to make a video to follow up on the one i did last week where i focus on real estate now i want to focus on mortgage rates more specifically the 30-year fixed rate mortgage i’ve been asked questions where do i think it’s going to go i’ve also heard people give opinion without supporting facts what i want to do today is give you my opinion but

More importantly show you the data behind how i develop my opinion it’s a very simple model that you can go out and get the data for free and make your own opinion you see if you’re a real estate agent if you’re in the mortgage industry clients are relying on you for you to help them at least give them an indication of where you think rates are going to go of

Course no one knows but the purpose is to give them an informed information so they can make an informed decision that’s the purpose of the video again what i’m looking to do now is create a community where people have opinions supported by data once that person at my point of view if you disagree by all means go ahead and do so but do it with data and tag me

On your video so i could see what it is that you’re looking at so let’s go ahead and get started i’m going to share my screen the first thing we’re going to look at is where is the 30 year fixed rate mortgage for that i’m gonna go to freddie mac freddie mac publishes a survey every single week where they go out and they ask mortgage brokers what rates are you

Offering to get a gauge of what the market is doing for the 30-year fixed-rate mortgage they do it every week the last they published was the 28th of july so every thursday they put this out the latest data we have is 5.3 percent on the 30-year fixed rate mortgage looking at the chart a couple of things to notice one is that you’re seeing the 30 year fixed rate

Mortgage increase quite a bit what you’re seeing here now is that it peaked at about 5.8 percent then came down to about 5.3 percent what i’m going to argue is that the 30-year fixed rate mortgage is possibly too elevated and more likely than not it’s going to come down there are a lot of people that are saying that the 30-year fixed rate mortgage is going to

Spike to 10 plus percent because of inflation data i’m actually going to give you a model of why i think that’s the opposite of what’s going to happen we’re going to see the 30th fixed rate mortgage come down now remember this is a model so what i’m telling you now is as of today with the latest state i have today as new data comes into my model my projections

Can be updated so i’m going to keep publishing these updates to keep you informed of what i see as new data comes in this is a chart that i showed on my last video what we’re looking at here is a 30 year fixed rate mortgage and a 10-year us treasury yield what you see in blue is a 10-year u.s treasury yield which is a risk-free rate and then above that you see the

30-year fixed-rate mortgage and it trades above the 10-year us treasury yield right you see it from 1970 and the reason i go back to the 70s that’s the most data that’s available by fred and as i mentioned before fred is a free source she can go out there and get the data directly from the federal reserve and it’s free so i went and got that data but just looking

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At the graphical representation here you see that the 30-year fixed rate mortgage is always trading above the 10-year us treasury yield and so what i wanted to do is can i gather some information from this chart that allows me to make an accurate projection or at least give allows me data to make an educated guess of where i think the 30-year fixed rate mortgage

Is going to go and so what i did is i did an analysis and what i’m going to do is show you my conclusion and then i’m going to go into my spreadsheet to give you a high level of how i came up with this uh conclusion here so what we’re seeing here is that i’m saying my model works pretty well what we’re seeing here are these dots you want these dots to be very close

Together meaning what i forecasted turned out to be pretty close to the actual so for now just take it for what it is again we’re going to come back to this at the end and i’m going to tie it all in for you the current 10-year us treasury yield is 2.62 at least as of yesterday this is moving quite a bit but when i did this analysis was as of yesterday so i’m going

To stick to that 2.62 i notice that the average difference between the red line the 30 year fixed rate mortgage and the blue line the 10-year us charger yield is 1.71 on average and so what i’ve done is if i take the current 10-year us treasury yield of 2.62 i add the average spread of 1.71 it tells me the projected 30-year fixed rate mortgage should be 4.33 now

You might be asking well so what how good does that model actually project with the actual 30-year fixed-rate mortgage so let’s go into the data and then we’re going to come back and conclude here so here’s my spreadsheet and what i’ve done is i’ve downloaded the data directly from fred you see my source here i’m going to break down my spreadsheet so you get a lay

Of the land and then i’m going to show you the output in column a what you’re seeing is dates these are monthly dates starting in 1972. column b tells me the 10-year us treasury yield at every single point in time so in this case on january 1 1972 the 10-year u.s treasury yield was 6.09 percent column c tells me what the 30-year fixed-rate mortgage was at that

Point so 7.44 was a 30-year fixed-rate mortgage on january 1 1972 and finally the spread the spread is the difference between the 30-year fixed-rate mortgage and the 10-year us treasury yield right that was at red line in blue line and the difference was 1.35 that means that the 30-year fixed-rate mortgage was above the 10-year us treasury yield by 1.35 i did the

Same thing for february so february the 10-year u.s treasury yield was at 6.04 percent the 30-year fixed rate mortgage was 7.33 and the spread the difference was 1.29 so i did this over and over every single month going all the way to the end of 2021 and what i found is on average that spread was 1.71 that’s where i got that number on my previous slide where i

Added the current 10-year u.s treasury yield to 1.71 so you might be asking well who cares what can i do with that so i’m going to go ahead and show you a quick analysis here again with a very simple model that does a pretty good job at forecasting and so what i’ve done is i added on on 1-1 1972 as i said the 10-year u.s treasury yield was 6.09 percent if i add

The average spread of 1.71 it gives me a forecasted rate of 7.8 over the next 12 months so what i’m saying now is that on the first of january 1972 i’m trying to project what the 30 year fixed rate mortgage is going to be 12 months out so what i do i go to the actual data so column column f is my forecast so again column f all i’m doing is taking here’s my formula

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10-year us charger yield 6.09 plus 1.71 my average spread gives me 7.8 is my forecast over the next 12 months i look at the actual so column g is the actual fixed rate mortgage not my forecast but what actually happened 12 months out so when you go 12 months out you’re going to have to go to january 1 1973 you see that the 30-year fixed rate mortgage was 7.44

I projected 7.8 however the actual was 7.44 so the difference is i over forecasted by 0.37 again this is what models are going to do sometimes you’re going to over forecast under forecast but on average you hope that it does a pretty good job i do this for every single month again going to the end of 2021 and what you start seeing here is the forecasted versus

The actual so these are the two columns that i’m looking at and if you want the data you can dm me i’ll have you sign up for something if you want it i’ll give it to you i just have to put some disclosures on here and what we’re finding is i’m going to do what’s called a correlation study it’s a very basic study all i’m looking to do is how well does my forecast

Number get close to the actual and so what i want is my forecast to be very close to the actual because that means the model is working really well when you do a correlational study you basically have a bound between one and negative one one means that both data moves perfectly up and down that means my forecast is really really well if it’s one if it’s negative

One that means it’s really bad it’s actually doing the opposite what i’m saying and zero means it’s not correlated it’s just all over the place so again just a little bit statistics and you can google about statistics if you want but just a simple correlation one to negative one the closer to one the better the model is forecasting the actual 30 year fixed rate

Mortgage so what i’m going to show you here is a correlation matrix what i’m showing is the spread forecast so that’s what i forecasted relative to the actual the what you’re seeing here is a correlation of a 0.9379 that is pretty damn good close to one of course no model is going to tell you with the 100 certainty what things are gonna do but i tell you that on

Average my motto is actually doing pretty pretty good right so let’s jump back and we’re gonna tie it all in together so looking at my 30-year fixed rate mortgage now i said yesterday the the 10-year us treasury yield was at 2.62 i’m adding 1.71 i’ve shown you why i added 1.71 that’s the average spread since 1972 through the end of 2021 and then we tested it how

Well does it project 12 months out and i showed you that it does a pretty good job close to one in terms of the correlation between the forecast and the actual so what it’s telling me is in the next 12 months i would expect the 30-year fixed rate mortgage to be 4.33 right now we’re at 5.3 percent i showed you that freddie mac study so what it’s telling me is that

The spread between the 30-year fixed rate mortgage and the current 10-year u.s yield is actually 2.68 it actually should be 1.71 so one or two things need to happen one either the 10-year us treasury yield needs to move up to narrow the gap between the 30-year fixed-rate mortgage and the 10-year us surgery yield or the 30-year fixed-rate mortgage has to come down

To meet the 10-year us treasury yield that’s the only way to narrow the gap between the two because right now it’s at 2.68 but it should be at 1.71 so which one is it well let’s think about what’s happening right now in the bond market right i’ve talked a little bit about this in the previous video is that now we’re in a technical recession we have two consecutive

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Quarters of negative real gdp growth and the market’s a little bit concerned that we’re gonna go into a slowdown so what happens investors end up buying long-dated bonds for safety when you buy bonds you push the yield down and that’s what we’ve seen in the 10-year us treasury yield is that it was at about three percent about call it about two months ago now it’s

About 2.62 it’s come down quite a bit and so if you think we’re going to go into an economic slowdown the 10-year u.s treasury yield is going to go down and that’s going to force the spread between the 30-year fixed rate mortgage and the and the 10-year us treasury yield to narrow and so what i’m thinking is that the 30-year fixed-rate mortgage has gone up too

Much and it’s going to have to come down to narrow the spread right another way of looking at it it’s this chart it’s the same data just looked at a little differently now looking at the spreads 1972 through 2021 and what you see here across the horizontal line is the 1.71 average spread what you see is when the spread is below the average it moves back up to

The average right below the average it moves back up when it’s above the average it moves back down and you see it above back down when it’s down back up right it reverts back to its mean now we’re below the average and and so we’re expecting it to actually come back up actually we’re going to be a little bit above it but we’re expecting it to narrow back down

Right and so what does all that mean it means that the 30-year fixed rate mortgage more likely than not in the next 12 months is going to come down to where it is and when i showed you the chart here we’re in fact already seeing this we saw a peak at about 5.8 now it’s at 5.3 more likely now it’s going to come down a little bit over the next 12 months so that’s

What my model is telling me now again the purpose is not to say this is what’s going to happen but rather this is what the data today is telling me this is what i’m seeing today so the purpose of the video is for you to make an informed decision if you’re looking to buy real estate either personal residence or as an investment or if you’re a professional in the

Real estate market if you’re a broker with mortgages people are going to want to know where do you think rates are going to go rather than just throw out i think they’re going to go up or down and not have anything factual behind it i’ve just given you a very simple model that you can go replicate if you want or like i said if you want the data just dm me and or

Comment on the uh the comments below and i can go ahead and give it to you but that’s it again if you disagree with me go ahead and do it but make sure you do it with data i want you to show me your excel sheet i want you to show me how well your model actually forecasts the actual data point in the future so that’s it let me know what you think and i’m going to

Keep putting new videos out there with real estate housing market also mortgages maybe you’ll incorporate stocks bonds and things like that so whatever you guys want to hear just comment below and i’ll make sure to make some videos until next time

Transcribed from video
Mortgage Rate Model By MoneyLuisG