Understanding the Key Factors Behind High Mortgage Rates
Presently, mortgage rates hold significant importance for numerous prospective homebuyers. Consequently, if you are contemplating your initial?homebuyers?or considering selling your existing property to transition into a more suitable home, you might find yourself pondering over the following inquiries:
Here’s context you need to help answer those questions.
1. Why Are Mortgage Rates So High??
The predominant factor impacting the 30-year fixed-rate mortgage is the interplay between the supply and demand of mortgage-backed securities (MBS). As stated by?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.”
The level of demand for mortgage-backed securities (MBS) plays a vital role in determining the difference between the?10-Year Treasury Yield?and the 30-year fixed?mortgage rate. Over time, the average spread between these two rates has been 1.72, as illustrated in the chart provided:
During the morning of the previous Friday, the?mortgage rate?stood at 6.85%. Consequently, the spread amounted to 3.2%, surpassing the typical margin by nearly 1.5%. If the spread were aligned with its historical average, mortgage rates would be 5.37% (calculated as the sum of the 3.65% 10-Year?Treasury Yield?and the 1.72 spread).
The significant disparity in this spread is highly uncommon, as George Ratiu, Chief Economist at Keeping Current Matters (KCM),?points out:
“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.”
领英推荐
The provided graph utilizes?historical data?to visually depict this observation, highlighting the instances when the spread has surpassed 300 basis points or more:
The graph demonstrates the gradual decrease in the spread following each peak. Encouragingly, this indicates that there is potential for an improvement in today's mortgage rates.
Therefore, what factors are contributing to the wider spread and the current elevation of mortgage rates?
The demand for mortgage-backed securities (MBS) is greatly influenced by the perceived risks associated with investing in them. Presently, these risks are influenced by broader market conditions, such as concerns over?inflation?and the possibility of a?recession. Additionally, the Federal Reserve's interest rate hikes aimed at mitigating?inflation, negative narratives in headlines regarding?home prices, and various other factors contribute to the current risk landscape.
To simplify: when the level of risk is lower, there is a higher demand for mortgage-backed securities (MBS), leading to lower mortgage rates. Conversely, when the risk associated with MBS is higher, the demand for MBS decreases, resulting in higher mortgage rates. At present, the demand for MBS is low, which explains the high mortgage rates observed.
2. When Will Rates Go Back Down?
In a?recent blog?post, Odeta Kushi, Deputy Chief Economist at First American, provides an answer to this question:
“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
As the apprehension among investors diminishes, the spread is expected to contract. Consequently, it is anticipated that mortgage rates will gradually stabilize throughout the year. However, when it comes to predicting mortgage rates, the exact trajectory remains uncertain, as it is difficult to foresee with absolute certainty.