Today’s mortgage rates are top-of-mind for many homebuyers right now. As a result, if you are 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:
1. 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). 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.
The large spread is very unusual. “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 1980’s or the Great Financial Crisis of 2008-09” according to George Ratiu, Chief Economist at Keeping Current Matters.
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 as a result. Currently, demand for MBS is low, so mortgage rates are high.
2. When Will Rates Go Back Down?
“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” according to Odeta Kushi, Deputy Chief Economist at First American.
Leave a Reply