Mortgage Rates for Home Buyers

Today’s mortgage rates are top-of-mind for many homebuyers right now. As a result, if you’re thinking about buying for the first time or selling your current house to move into a home that better fits your needs, you may be asking yourself these two questions:

 

  • Why Are Mortgage Rates So High?

  • When Will Rates Go Back Down?

Here’s context you need to help answer those questions.

 

Why Are Mortgage Rates So High?

The 30-year fixed-rate mortgage is largely influenced by the supply and demand for mortgage-backed securities (MBS). According to Investopedia:

 

“Mortgage-backed securities (MBS) are investment products similar to bonds. Each MBS consists of a bundle of home loans and other real estate debt bought from the banks that issued them . . . The investor who buys a mortgage-backed security is essentially lending money to home buyers.”

 

Demand for MBS helps determine the spread between the 10-Year Treasury Yield and the 30-year fixed mortgage rate. Historically, the average spread between the two is 1.72 (see chart below):

 

Mortgage Rates typically move in unison with the 10 year United States Treasury Yield

 

A few weeks back, the mortgage rate was 6.85%. That means the spread was 3.2%, which is almost 1.5% over the norm. If the spread were at its historical average, mortgage rates would be 5.37% (3.65% 10-Year Treasury Yield + 1.72 spread).

 

The spread between the 10 year Treasury Yield and mortgage rates is about double the norm.

This large spread is very unusual. As George Ratiu, Chief Economist at Keeping Current Matters (KCM), explains:

 

“The only times the spread approached or exceeded 300 basis points were during periods of high inflation or economic volatility, like those seen in the early 1980s or the Great Financial Crisis of 2008-09."

 

 

The graph below uses historical data to help illustrate this point by showing the few times the spread has increased to 300 basis points or more:

 

The graph shows how the spread has come down after each peak. The good news is, that means there’s room for mortgage rates to improve today.

 

So, what’s causing the larger spread and making mortgage rates so high today?

The demand for MBS is heavily influenced by the risks associated with investing in them. Today, that risk is impacted by broader market conditions like inflation and fear of a potential recession, the Fed’s interest rate hikes to try to bring down inflation, headlines that create unnecessarily negative narratives about home prices, and more.

 

Simply put: when there’s less risk, demand for MBS is high, so mortgage rates will be lower. On the other hand, if there’s more risk with MBS, demand for MBS will be low, and we’ll see higher mortgage rates. Currently, demand for MBS is low, so mortgage rates are high.

 

When Will Rates Go Back Down?

Odeta Kushi, Deputy Chief Economist at First American, answers that question in a recent blog:

“It’s reasonable to assume that the spread and, therefore, mortgage rates will retreat in the second half of the year if the Fed takes its foot off the monetary tightening pedal and provides investors with more certainty. However, it’s unlikely that the spread will return to its historical average of 170 basis points, as some risks are here to stay.”

 

Bottom Line

 

The spread will shrink when the fear investors feel is eased. That’ll mean we should see mortgage rates moderate as the year goes on. However, when it comes to forecasting mortgage rates, no one can know for sure exactly what will happen as so many factors can alter investor sentiment.

 

If you have any questions on this article or other real estate challenges, please contact me directly. 

 

Until next time, stay real informed!

 

Rich Allen

REALTOR®, ERA Key Realty Services

the realinsyghts group™

508-686-0940

rich@realinsyghts.com

 

 

The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. RLA Insights, LLC, the realinsyghts group™ and ERA Key Realty Services do not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. RLA Insights, LLC, the realinsyghts group™ and ERA Key Realty Services will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.