What goes up must come down. That’s what they say, at least. But it seems as if mortgage rates have been testing this old axiom.

When I bought my house in March 2022, average borrowing costs on a 30-year note ran about 3.2%. That’s right before inflation took hold and the Fed started raising rates left and right.

By October, mortgage rates had already surged to 7.1%. One year later, they peaked near 8%. That’s a rapid increase of nearly 500 basis points.

A little math to drive home the point:

The monthly principal and interest due at 4% on a $400,000 mortgage is $1,909. A one percentage point uptick to 5% raises the note to $2,147. At the recent peak of 7.9%, buyers are locked into a monthly payment of $2,907. That’s an extra $1,000 in monthly interest expense — for the next 360 months.

The last time we saw rates this high was more than two decades ago, back in September 2000.

I have a friend in the mortgage industry who explains rather simply that his job is to sell money. Well, money has gotten pretty darn expensive lately (even more so for borrowers with less-than-perfect credit).

So naturally, fewer people want to buy it, which explains the steep decline in new loan applications.

Take Rocket Mortgage (NYSE: RKT), one of the nation’s biggest lenders. Before the rate surge, the company originated 1.2 million annual loans with a face value of $340 billion. Last year, lending volume dried up to just 289,000 loans worth $78 billion.

Those are drastic declines of 75% and 77%, respectively.

Nationally, mortgage originations plunged from $4.4 trillion in 2021 (when rates nosedived during the lockdowns) to just $1.6 trillion last year. Unfortunately, we haven’t made much headway since then.

You can see why many potential new homeowners have put their construction plans on hiatus. And why existing home sales have also been on the downswing (who wants to move and trade a 3% loan for 7%).

Prohibitive mortgage rates have been a heavy economic drag. After all, the housing sector represents one-sixth of the country’s entire GDP.

Elevated rates haven’t just hindered lenders, but also builders, realtors, painters, lumberyards and even your neighborhood Home Depot.

But with inflation cooling back down toward 2%, mortgage rates should normalize as well, right?

Indeed, they should. That process has already begun, albeit at a stubbornly slow pace.

But when the Fed finally starts to loosen this month, borrowing costs are likely to fall in earnest — bringing long overdue relief to consumers…

And unleashing potential gains for investors.

What the Data Shows

It should have already happened.

Just as many economists believe the Fed waited far too long to initially address inflation with rate tightening, some now argue the central bank has taken too long to reverse course.

We’ve been holding at this peak for 13 months and counting.

To be fair, the timing is tricky. The inflationary embers must be completely doused.

Act too soon and they can reignite. Too late and the economy can easily slide into recession.

Policymakers have been walking this monetary tightrope for months. But now the time has finally come to safely bring rates back down.

Those aren’t my words. They come straight from Fed chief Jerome Powell at last month’s financial summit in Jackson Hole, Wyoming:

The time has come to adjust policy. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data. The upside risks to inflation have diminished, and the downside risks to employment have increased.

For the first time in quite a while, the slowing labor market is becoming more of a threat than inflation. Payroll growth decelerated to stall speed in July, with unemployment creeping higher for the fourth straight month.

And now, after re-crunching the data, the Labor Department has just released an unsettling revision showing that 818,000 fewer jobs have been created over the past year than originally estimated.

That will certainly bolster the argument for a September rate cut (perhaps signaling a more aggressive half-point reduction).

In fact, traders are now pricing in a 100% probability of a rate cut this month, followed by a strong chance of two follow-up rate cuts in November and December.

It’s really just a question of how much and how fast.

You’ve likely run across terms such as “unwinding” and “dialing back.” They’ve become increasingly common in recent weeks — a succinct way of saying that the Fed is poised to switch gears.

Bond yields have already been sliding downward in anticipation. The influential 10-Year Treasury yield has slipped back below 4% for the first time in a while.

In turn, mortgage rates have eased as well.

Bankrate has the current national average for a standard 30-year fixed rate instrument at 6.46%.

That’s more than double the norms from just a couple years ago — yet still almost a point-and-a-half below last year’s peak.

For anyone on the fence about borrowing, that’s a big step in the right direction.

Source: Freddie Mac

While few things in the financial world move in a nice straight line, the macro picture strongly points to further “wobbling” in the downward direction of mortgage rates over the next 12-18 months.

According to Bloomberg, traders are currently anticipating 200 basis points of rate cuts, which would drive the Fed Funds rate from 5.25% to 3.25%.

The CME has never seen this many bullish wagers in the Treasury futures market (remember, bond prices and yields move in opposite directions).

Even if Powell and his cohorts ultimately prove more circumspect, borrowers are still likely to see some relief on the near horizon.

And that should stimulate mortgage activity. The CEO of online lender Better.com reports seeing “massive increases in demand every time rates come down.”

Lendingtree (NSDQ: TREE), which helps consumers shop for the best loan and insurance rates, has already raised revenue forecasts amid rising platform traffic.

Of course, buyers still must contend with a general lack of housing inventory and a steep increase in median prices over the past few years.

But for millions, mortgage rates have been the biggest obstacle.

So when rates suddenly dipped to 7.0% back in June, the number of mortgage applications immediately swelled 16% the following week. And refinancings (which are even more rate sensitive) bounced 28%.

Since then, existing home sales broke a four-month slump in July. They are now running at an annualized pace of 3.95 million.

As for new-built properties, the Mortgage Bankers Association (MBA) reports a 9.4% increase in new mortgage applications in July.

A Taste of What’s to Come

There is still a long road ahead.

Housing starts are currently running at 1.2 million annually. That means we are breaking ground on about 100,000 new homes per month.

While residential construction rates can be choppy from quarter to quarter depending on weather and other factors, this is roughly equivalent to pre-COVID levels from 2019.

But for comparison, more than 2 million new homes were going up each year during the last market boom in the first half of the 2000s. That includes towering condo developments and other such projects.

Fueled in part by rampant speculation, easy money, and soaring real estate prices, lenders and builders both got caught up in the frenzy and overindulged.

It was great while it lasted. Then the party ended. In classic boom-to-bust fashion, fields of unsold homes built on “spec” sat vacant, prices collapsed, and building activity ground to a halt.

It was an ugly time of upside-down mortgages, bank foreclosures, and distressed real estate short sales.

Nobody wants to see that again. Builders have been overcautious ever since (which explains the chronic lack of housing stock).

For decades, it took about 1.5 million new homes each year to keep up with demand. We’re still lagging that number today, particularly on a per-capita basis accounting for population growth.

And residential building permits (a good indicator of future construction) are at the same levels as they were in June 2020.

All of which is to say we are nowhere near a cyclical market top. But the market is strengthening.

Thanks to robust job growth, millions of first-time buyers who had previously rented or cohabitated with family are now buying places of their own.

And, of course, falling mortgage rates are helping the affordability quotient.

For investors, the question is where best to nail down gains?

You could start with some of the names we’ve already just mentioned, such as Rocket Mortgage or Lendingtree. I’ve also grown more bullish on builders like Beazer Homes (NYSE: BZH).

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