Interest Rates Are Getting Hot and Bothered

Welcome to the Skeptical Investor Newsletter. A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

This week, we’re talkin’ interest rates drop, real estate activity spike, and where the heck did the Fed even come up with 2% as our inflation target? Hint: it has to do with….New Zealand?

Let’s get into it.

This week, I’m off to Chicago to teach a class to fellow agents on representing investor clients, and to show newer agents how they can become investors themselves. Oh and to promote my new book: The 5-Ways Real Estate Investors Make Money and Build Wealth. You can pick up your copy here (print version coming soon).

A fact that may shock you: most real estate agents do not actually own real estate, and are uninformed when they try to sell it to you. Would you buy a car from someone who had never driven a car? Sure you can study the numbers, buy all the famous books, and read this amazing newsletter…but, unitl you are operating in the arena, you just don’t have it.

So before I take off, I had a few thoughts knocking around my noggin I wanted to get out there to you all. In short: interest rates are starting to get very attractive.

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As of August 14th, rates have dipped to a year-to-date low of ~6.5, down more than a 1/4 point in just the last couple of weeks. In fact, interest rates have been down every week since January 1st.

And if you can stomach the higher monthly payment, the 15-yr mortgage just dipped into the ~5.9% range.

This demands attention.

Why is a 6.5% interest rate significant? Well, there really is no purely logical reason. Historically, rates have been much, much higher. And acticity was at normal levels. But context and recency bias matter in people’s brains.

When I was born, rates were…checks notes…~15%.

But lately, sub-7% has meaning.

For some psychological reason, likely because homebuyers re-anchored themselves to a 3-4% base during COVID - paying 7%+ rates is just too much for people to stomach. But as we descend a little lower, folks get a little hot, a little bothered and a lot eager to buy some real estate.

Now, rates have been range-bound between 7.1% - 6.6% for the better part of the year. And on the few occasions that momentum took us below that… a little magic starts to happen. We see a pop in applications for mortgages to purchase a home.

Here is a chart showing pre-COVID to today. It’s been 3 years of high rates and 1/2 the number of mortgage purchase applications.

And it may not look like it from the chart, but mortgage purchase applications today are on a quiet bull run.

For the last year, we have been on trend higher, up 17% YoY, and 28 consecutive weeks of positive YoY growth (Mohtashami).

Last year's dip toward 6% rates yielded (get it? :) ) far greater results, adding hundreds of thousands to annual home sales in the weekly data. If we near 6% again, it will likely repeat.

Let me give you a real-world example.

Anecdote Alert! Over roughly the last fortnight (not the game GenZ’ers), incoming leads contacting our real estate brokerage to purchase real estate have increased dramatically. Not 20%. Not 40%. But, 400%. I'll say it again. My lead volume has increased 400% in the last two weeks as rates approached 6.5%. Most of these leads want to buy before the end of the year and the mix is mostly investors, who are seeing thier cash flow numbers improve.

There is massive pent-up demand in the system.

Without yet the benefit of hindsight, I think the August and September data will show this was a turning point in real estate activity.

We may have bottom-ticked the market last week. I predict activity will up from here (seasonally adjusted).

That is, IF rates don’t tick back up again.

In other words, even if mortgage rates remain elevated, even modest steps down will have a meaningful impact on the market.

6.5% rates = escape velocity.

What if Rates dip lower?

If we get a 5-% handle on rates, the market will ignite. Remember, we are at half of the number of real estate transactions that we should be seeing right about now in a “normal” market. This could still happen by year’s end, but it is more likley we are there by Spring 2026.

The Fed’s next meeting is September 17. And they will, in my humble opinion, cut rates .25%.

Strap in.

Probably not.

The single most important part of real estate is finding deals and educating yourself. Go read some books, listen to free podcasts, and get your finances in order. Here is a list. If you do that, everything else will follow.

BUT if you think you must get some help, for the love of god, do not buy an expensive course, or pay for a “coach,” or “mentor.” Do NOT hire a guru.

Get professional advice from someone who actually owns, manages, and brokers real estate.

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Ok, back to business.

We often hear that the Federal Reserve’s target for inflation is 2%. That is their published target.

But why? This wasn’t always the case. And where did that number come from anyway?

The Fed’s explicit 2% inflation target (measured by the Personal Consumption Expenditures (PCE) index), was formally adopted in January 2012, in a report called the “Longer-Run Goals and Monetary Policy Strategy.” This marked a shift toward greater transparency in monetary policy, but the 2% target's roots extend back to the late 1980s, in none other than….New Zealand.

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In 1988, amid efforts to combat decades of high inflation (averaging over 10% from 1970 to 1990), New Zealand's Labour Party Finance Minister Roger Douglas made a casual remark during a TV interview, stating he wanted inflation to “[fall to around 0-1%].” It was just this off-the-cuff remark - not deep analysis - that prompted the Reserve Bank of New Zealand (RBNZ) to formalize an inflation-target, of 0-2%.

To get inflation down, New Zealand's newly formed RBNZ aggressively raised short-term rates to 15%—quickly reducing inflation to 2% within a year, which, as you can imagine, did cause some significant economic pain, including stagnation and rising unemployment, from 1989 to 1994. The target range was later widened to 0-3% and then 1-3% by 2002 for flexibility. Despite initial public resistance, the framework's success in anchoring expectations drew international attention, with RBNZ officials like Arthur Grimes invited to events such as the US Federal Reserve’s annual Jackson Hole symposium. This influenced other central banks: Canada adopted a 1-3% target in 1991, the UK followed suit in the early 1990s, and the European Central Bank aimed for below but close to 2% by the late 1990s. By the 2000s, 2% had become a global norm for developed economies. Including ours.

The US Fed's path to 2% was more gradual, shaped by internal debates and a preference for policy flexibility. U.S. economists began advocating for inflation targeting in the mid-1990s, influenced by international examples. Early discussions favored 1.5%, but by 1996, the FOMC informally settled on 2% during meetings, though it remained unpublished under Chairman Alan Greenspan, who valued "constructive ambiguity" to avoid political scrutiny or market constraints. Key advocates included Richmond Fed President Al Broaddus and his adviser Marvin Goodfriend, who pushed for transparency to build credibility; St. Louis Fed President Thomas Melzer raised the idea in 1994; and Janet Yellen (who later became a Fed Chair in 2021 under Biden), initially opposed, but then supported 2% by 1996.

The 2008 financial crisis highlighted the need for clearer communication, as rates hit the zero lower bound. Incoming Chairman Ben Bernanke, a proponent of inflation targeting, formalized the 2% goal in 2012 to anchor expectations and align with the Fed's dual mandate of maximum employment and price stability. The target was reaffirmed in 2020, with a flexible approach allowing temporary overshoots to average 2% over time.

Thus, our 2% target inflation number was not derived from rigorous academic models or lengthy empirical studies, but emerged somewhat arbitrarily as a global standard adopted by numerous central banks slowly over time.

In other words, everyone was doing it, so we did too.

Hmmmm….I guess so?

It's evident that real estate activity strengthens as rates approach 6.5% and then 6%. We haven't seen sustained levels below that since late 2022, yet new home sales match 2019 figures from a sub-6% era. For existing homes, rates in the low 6s will likely result in 500,000 sales annually, moving us from the recent 4 million range toward 5 million.

Recent data underscores this momentum. In early July and August, 30-year mortgage rates dipped to around 6.6%, the lowest since April, boosting prospective buyers' purchasing power. New home sales rose then modestly to 627,000 units annually, with average prices softening to $501,000, while existing home sales fell 2.7% to 3.93 million units, though inventory surged 24.8% year-over-year—the 21st straight month of growth. This buildup gives buyers more options and negotiating leverage, but median existing home prices hit $435,300, reflecting persistent affordability challenges.

Anecdotes from the trenches highlight the shift: Real estate investors have ramped up, accounting for over 26% of home purchases so far in 2025, often paying cash or leveraging equity to snag properties before individual buyers can act. One investor I spoke with recently house-hacked a duplex in a growing suburb, using an FHA loan to cover most of the cost while renting out the other unit—turning a potential expense into immediate cash flow amid dropping rates. This is a great strategy for a budding real estate agent, eager to get in the game but lower expenses. And since they are an agent, they can get 3% commission on the sale, meaning the house is nearly free. I call this the Agent Hack :)

Will the Fed pour a little gasoline on the fire in September and cut rates?

I think so.

And markets agree, pricing in a wild 99% chance of a 25-basis-point cut, fueled by July's unemployment ticking up to 4.2% and weak jobs data signaling labor softening. But rates are coming down, even without Fed action. Even if the Fed does nothing and inflation continues its broader downtrend (despite a slight uptick to an expected 2.8% in July), the labor market is softening. The bond market will do its job for them, and rates will come down.

Perhaps the Fed is really just a bystander to the larger and more powerful bond market?

Either way, this evolving landscape spells opportunity. Stay data-driven, read this newsletter, and let's navigate it together.

Until next time. Stay Curious. Stay Skeptical.

Herzliche Grüße,

-The Skeptical Investor

P.S. if you need a little push, here is my new book! It is a MUST for all real estate investors. The 5 Ways Real Estate Investors Make Money and Build Wealth: Anyone can create wealth through real estate. Including You! (yes yes it’s a shameless plug, but us authors make ~$1/book, FYI. This is about education!). So pick your copy up today!

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