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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much discuss it all. Now that said, please remember this is just to show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my colleague, mister David Fransen. David, thanks for being here.
David:Yes. Thank you for having me.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in by either texting them to 913-363-1234, or you can email them to hey mike@howtoretyone.com. Let's begin.
David:Hey, Mike. Why did mortgage rates go up after the Fed dropped rates?
Mike:Because mortgage rates aren't correlated with the Fed's overnight rate.
David:So, yeah, you might just explain what overnight rates are.
Mike:Yeah. I just explained something that probably went over everyone's head. So let's break it down to very simple terms. The Fed controls a rate at which banks or institutions can borrow from under a short term period of time. Think of overnight lending.
Mike:K. So banks, insurance companies, they have to keep a certain amount of cash on hand for certain regulatory requirements. And so what they'll do is the Fed will lend them that at a certain level and they have to pay it back. And that's that's kind of how a lot of the banking industry operates. I shouldn't say a lot of that.
Mike:I mean, it's a core component, understanding how the Fed works with banks and institutions. It is a very complex thing to understand, but that's the basics of it. K. With me so far?
David:I'm well with you.
Mike:The treasury, which does not report to the Fed and the Fed, which does not report to the treasury, the treasury manages the nation's debt or the accounts, the balance sheets, the spending, all of that. And so when the treasury says, hey, we need to issue more bonds or or notes saying we need to borrow money and we'll pay it back later. You know, bills, notes, bonds, that's what they are. They're debt instruments.
Mike:So they'll issue, let's say, a 30 year treasury, for example. They'll issue a 30 year treasury and then promise to pay it back during that time frame. Are you with me so far?
David:Yeah.
Mike:Okay. Treasuries issue bonds at an auction. That is the most important part. So the Fed does their thing with their rates with the banks, and they're negotiating. They're doing their own thing.
Mike:But the Treasury has to actually get rid of the money. They have to actually sell these bonds or the government defaults. Oh. So what the treasury does is the treasury says, alright, Wall Street. What are you willing to pay for United States debt?
Mike:And Wall Street says, I I think we're in we're coming up on good times. I think we're gonna come up on bad times. It's always pricing in the market, what the market thinks. So the treasury could say, we wanna give out our t bills at 1%. And the market says, nope.
Mike:The the return's not worth the risk we're taking. Inflation might get out of hand. I don't wanna lock up money, in that sense. It needs to be higher. I won't I won't buy.
Mike:So what's the Treasury gonna do? They're gonna increase it. Okay. How about 2%? Market says, no, we don't wanna buy it.
Mike:The Treasury says 3%. No. I think inflation is gonna be an issue. Treasury says 4%. Can you do 4.5?
Mike:This is how it works. Okay. And so the Treasury says, okay. It looks like if we offer this rate for this batch of debt instruments to the public, we should be able to get the money we need to cover the expenditures of the United States government. So when that happens, that's that's how they enter into the market, and then we hold them, and then we can trade them amongst ourselves.
Mike:K?
David:Alright.
Mike:So you've got ETFs, mutual funds, and, you know, large institutions. They've they've got these assets, and and they'll trade it. And that's a whole conversation to itself. But mortgage rates are based on the 10 year treasury rate.
David:Okay.
Mike:Because most people last around 7 years or so on their mortgage. Even though you might have a 30 year mortgage, fine. But people move every 7 years or so.
David:So they're selling or they're refinancing or
Mike:Yeah. They're doing something. They're changing their mortgage around 7 years.
David:Okay.
Mike:So the 10 year treasury is gonna be more accurate of mortgage rates than anything else. And the 10 year treasury rate is based on market sentiment. Uh-huh. What does the market think when it comes to a potential market crash or risk? Because if the markets crash as well, and this is kind of on the mortgage rate side of it, if the markets are expected to crash, people might not pay their mortgage.
Mike:Banks aren't gonna offer you a loan unless they're they're properly compensating themselves for the risk that they're taking. So if they think the market's gonna crash any day, they might increase rates as well. Because when people don't pay their mortgage, they don't get paid. It's a tough situation.
David:Right.
Mike:A lot of financial professionals, pundits, talking heads, you name it, will say, well, when the Fed drops rates, the mortgages will also drop too. And I've been guilty of that oversimplified explanation as well, but they're not actually correlated. They may influence each other, but they may not influence each other. So what do you do with this information? Here you go.
Mike:Yeah. If you wanna buy a house, just buy a house. Yeah. It's that simple. Don't time the market.
Mike:Don't time rates. If you can afford to buy a house, you do it. Uh-huh. That's it. Why?
Mike:Well, there's this thing called supply and demand. I've heard
David:of it.
Mike:You've heard of it. Yeah. Most people have. That says, hey, here is how much I can afford. Here's the house I could afford to buy.
Mike:If mortgage rates were to drop, the house you were about to buy would go up in value because you could afford more money to borrow to buy that house. Mhmm. So if mortgage rates drop, the prices of homes increase. If mortgage rates increase, the price of homes typically will go down. Now it's not an immediate situation, but it's its own independent thing.
Mike:That's why the real estate market is its own uncorrelated market. It's not necessarily correlated to the bond market. It's not necessarily correlated to the stock market. It's not necessarily correlated to interest rates or the alternative market or these all the other different markets. It's its own thing.
Mike:It's still subject to the principles of economics, supply and demand, and you can't time it.
David:So if the Fed does drop rates, the only thing we might notice if if we have some, like, credit card debt.
Mike:If the Fed drops rates drastically, it would have to mean that or the markets are crashing and inflation is not an issue. If inflation is not an issue, then people would be more willing to buy treasuries like the 10 year treasury at a lower rate. If people are more likely willing to buy the treasury at a lower rate, then mortgage rates could go down. So there's a series of events that have to happen for mortgage rates to actually go down. And it's not like dominoes.
Mike:There are several things that have to happen. And this is important, especially for retirees, because your home is typically your biggest asset, but you shouldn't put it in your portfolio because you need to live somewhere.
David:Yeah.
Mike:If you want to move, you're selling your house and move into another house and that it will go up and down with the market as well. I mean, you could get really nitty gritty if you're willing to wait for a couple of years. Maybe you could time it, but that's not really timing it. That's just waiting until it makes sense for you. That's okay.
Mike:There was a famous trader, t Boone. I think it was his name. Who said something to the effect of if you need a deal real bad, you're gonna end up with a real bad deal. Yeah. So don't let yourself be in a situation where you need mortgage rates to go down.
Mike:Plan your retirement. Plan your lifestyle. Plan what you need in the way that gives you flexibility. And then allow yourself the ability to change course or make adjustments along the way. You're listening to how to retire on time.
Mike:That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.
Mike:This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.