by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Why, if the Federal Reserve Bank is keeping rates at nearly zero, are mortgage rates rising from their August lows?
Try to imagine that mortgages are cheeseburgers and it starts to make sense. Imagine that the mortgage industry is a lot like the fast food/casual dining industry and it makes even more sense. In my last post here, I tried to give you some background on securitized mortgage lending (aka as ‘nearly every dammed loan being funded today‘) but just think of mortgages like cheeseburgers.
If you want a cheeseburger, you have lots of choices: Big restaurant chains (like In N Out) sell cheeseburgers, as do big franchised networks (like McDonalds and Burger King) and tens of thousands independent “burger joints” in every burg across our fruited plain.
Now, imagine that there was a “Federal Meat Provider” which set the wholesale price of meat to make cheeseburgers. A health crisis hit so the Federal Meat Provider dropped that price of meat to a stupendously low figure so everyone could eat. Subsequently, the chains, franchisees, and independent operators dropped the retail price of a cheeseburger to an historically low price. Predictably, people were lined up at every burger restaurant in the country, waiting 5 hours to get that cheap burger. What would you do if you owned a restaurant?
Hire more people so you could sell more cheap burgers and (hopefully) retire when the Federal Meat Provider raised the price of meat again, right?
Well, it’s not that simple. There are new rules about selling cheeseburgers and those new employees have to be trained. Moreover, while the Federal Meat Provider is trying to keep cheeseburger costs low to help people during the health crisis, the various State Employment Agencies won’t let the burger restaurant owners hire just temporary / part-time employees without added costs and regulations. Add in that the local School Board wants to levy higher taxes on burger restaurant owners. On top of those problems, nobody really knows when the Federal Meat Provider will raise the wholesale cost of meat so it’s hard to predict demand beyond a 3-6 month time frame. At a certain point, the big restaurant chains, local franchisees, and independent burger joints say,
“We can’t sell no mo’ burgers than we are selling right now”.
The burger lines, which used to be 5-hours long, have dropped to a 2-hour long line… and every hungry person in that line is complaining about the poor service. The employees are fighting with one another because everyone is stressed out. Some long-time employees are quitting or jumping ship to another burger restaurant. Napkin makers, condiments providers, and dairy farms are busy too so that’s jamming up the supply chain. The burger restaurant owner could potentially wreck his brand so he has two options: only sell burgers to long-time customers and/or raise the retail price of cheeseburgers. He might just do both.
That’s why mortgage rates are higher today than they were in August even though the wholesale cost of money has stayed low. What can you do about it? If you have a super-special relationship with someone in the mortgage industry, call them. Otherwise, get in line and hope prices don’t go higher.
If you need a “super-special friend” in the real estate finance industry, stalk me on LinkedIn.
