162k new jobs = higher interest rates?!

I’m gonna start with the bad news just to get it over with.

Mortgage rates hit their highest level in over a year as a global bond selloff intensified and Fed Chairman Kevin Warsh signaled in a closely watched speech that the central bank may soon need to raise benchmark interest rates. The average 30-year fixed mortgage rate rose to 6.71% this week.

Traders currently see roughly 50-50 odds of a 25-basis-point rate increase when the Fed meets in mid-September.

That was the headline. Before this morning. Here is where it gets complicated.  We found out that the economy added over 160k new jobs, triple what was expected and the unemployment rate held steady.  This is a really strong number and it landed on a morning when the bond market was already nervous about a rate hike from the Fed…

So there are two very important things I want you to understand about what comes next.

The Bond Selloff and What It Actually Means

A bond selloff driven by investor fears over inflation and rising government debt has rattled markets and threatened to raise borrowing costs for everyday Americans looking to purchase a home or a car. The yield on the 30-year Treasury reached 5.3% earlier this week, its highest level since 2007, while the 10-year Treasury yield, which influences mortgage rates, rose to 4.7%, up from 4.2% at the start of the year.

Here is the thing about bond selloffs that most people do not understand.

Your mortgage rate does not follow the Fed funds rate. It follows the 10-year Treasury - plus a spread. And that spread is set by how nervous investors are about holding mortgage bonds. The gap between Treasury yields and mortgage rates remains wider than normal but much better than it’s been for the last year or two.

That spread compression story is still the most underreported factor in this rate environment. And I will die on a hill arguing that it matters more than whatever Warsh does on September 17th.

If Warsh hikes and the bond market believes he is serious about killing inflation - long-term inflation expectations fall. And the 10-year goes down. The hike that everyone is afraid of could be the thing that actually lowers your rate. 

Kara Ng, senior economist at Zillow Home Loans, said that while the Treasury's buyback effort will inject some relief into the bond market, the factors that pushed yields up in the first place aren't likely to fade anytime soon. "For mortgage borrowers, that means rates may be elevated for longer."

Elevated for longer. Not elevated forever. There is a difference. And this week I want to talk about the thing that could change the picture faster than any Fed meeting.

The AI Angle Nobody Is Connecting to Your Mortgage Rate

This week I shot a reel about something I have been thinking about for months and I want to expand on it here because the 60-second version cannot do it justice.  As evidenced by the keyboard warriors losing their minds in my comments section.

Let me back up and start from the beginning. There is an argument gaining traction in financial circles that goes something like this. Rates are high right now because of inflation and government deficits. But by early 2027 the entire narrative shifts to one thing: artificial intelligence.

Northern Trust's Mike Hunstad, who heads the firm's $1.4 trillion asset management division, put it directly: "It's almost like AI is your monetary policy. And it's going to be more effective than anything the Fed or really any central bank around the world can do."

Kevin Warsh himself has described the AI boom as "the most productivity-enhancing wave of our lifetimes - past, present and future." Warsh has argued (prior to taking office when he used to actually tell us how he feels) that the Fed should incorporate the expected disinflationary benefits of AI into its policy framework now rather than waiting for the data to arrive - allowing rates to fall further and faster than current projections suggest.

Here is how the math works in both possible futures.

If AI works - and the productivity gains are real and widespread - the economic impact is massively deflationary. Everything technology touches gets cheaper. Costs come down. Inflation cools structurally. We saw something similar play out in the 1990s with the internet. Many economists give Federal Reserve Chairman Paul Volcker full credit for reducing inflation in the early 1980s, but a compelling case can be made that the internet was a significant deflationary force in its own right. Anyways, if AI works – rates fall.

If AI does not work - if the bubble bursts, if the Nasdaq drops 50%, if the trillion-dollar valuations prove to be fake news - investors dump risk assets and run into the safety of Treasury bonds. Massive demand for Treasuries pushes yields down. Rates fall. 

See how both roads for AI lead rates in the same direction?

The combination of AI-driven productivity gains, the deflationary pressure of a slower labor market (whether the data accurately reports that or not), and the prospect of leaner mortgage operations creates a compelling case that mortgage rates are more likely to fall than rise over the coming years.

Of course, this good news comes with a “but”…

Why Lower Rates Are Not Good News Anyway

Every buyer sitting on the sidelines right now is waiting for the exact same signal.

Rates drop. They all come back. Into the same houses you want. With the same offer you were going to write. Except now there are thirty of them evaporating your negotiation power.

On a $400,000 loan, the difference between today's 6.67% and a forecast late-2027 rate near 6.25% is roughly $110 per month, or about $1,320 a year. Home prices are projected to rise 2-3% annually through that window, meaning a buyer who waits 18 months on a $400,000 home could face $12,000-$18,000 in added price before any rate benefit lands.

Quick reminder that isn’t evil but somehow seems to land that way every time I say it: You can refinance a rate.

The AI argument for lower rates in six to twelve months is also the best argument I have seen for getting serious about your housing search right now. Because the same thing that brings rates down is the thing that brings every waiting buyer back - and when they come back they come back all at once.

For prospective homebuyers who have been sitting on the sidelines waiting for relief, that may finally be the light at the end of a very long tunnel.

The question is whether you want to be in line with the crowd, or watching it from your window.  The window of the house you own.  That you negotiated amazing terms on.  And are about to refinance.

What This All Means Right Now

The irony of a blowout jobs number in this market is that it simultaneously hurts affordability and improves negotiating conditions. I know that’s hard to sit with but a strong jobs market means the Fed has cover to hike. A hike pushes rates higher. Higher rates thin the buyer pool further. And a thinner buyer pool means the motivated seller who has been sitting on an expired listing is even more negotiable than they were yesterday.