Many people who want to buy a home right now are thinking a lot about today’s mortgage rates. So, if you’re thinking about buying a home for the first time or leaving your present home to move into one that fits your wants better, you may be asking yourself these two questions:
- Why are interest rates on loans so high?
- When will rates start to go down again?
Here is the background information you need to answer those questions.
1. Why Are Mortgage Rates So High?
The supply and demand for mortgage-backed securities (MBS) have a lot to do with the 30-year fixed-rate mortgage. The website Investopedia says:
“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 mortgage-backed security is essentially lending money to home buyers.”
The borrowing rate was 6.85% on Friday morning. That means that the difference was 3.2%, which is 1.5% more than usual. If the gap were at its average from the past, mortgage rates would be 5.37 percent (3.65 percent for the 10-year Treasury yield plus 1.72 percent spread).
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:
After each top, the line shows how the spread has gone down. The good news is that this means that mortgage rates can still get better today.
So, why is the spread bigger and why are mortgage rates so high right now?
The risks of dealing in MBS have a big effect on how much people want to buy them. Today, this risk is affected by things like inflation and the fear of a possible recession, the Fed’s decision to raise interest rates to try to bring down inflation, news stories that make home prices sound worse than they really are, and more.
Simply put, mortgage rates will be lower when there is less danger and more desire for MBS. On the other hand, if there is more danger with MBS, there will be less demand for MBS, which will cause mortgage rates to go up. At the moment, there is not much demand for MBS, so mortgage rates are high.
2. 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.”
As investor anxiety decreases, the spread will narrow. That means mortgage rates should level down later in the year. However, no one can predict the future with absolute certainty when it comes to mortgage rates.