The Main Reason Mortgage Rates Are So High
Today's mortgage rates have become a burning topic among countless homebuyers, capturing their undivided attention. Whether you're embarking on the exciting journey of purchasing your dream home or contemplating selling your current abode to upgrade to a dwelling that perfectly suits your needs, two crucial queries inevitably arise:
Why are mortgage rates currently soaring to new heights, seemingly defying gravity? And, perhaps more importantly, when can we anticipate a comforting descent back to more favorable rates?
But fear not, for I am here to provide you with the essential context that will shed light on these pressing questions. Prepare to uncover the knowledge that will empower you in navigating the intricate world of mortgage rates.
1. Why Are Mortgage Rates So High?
The captivating world of mortgage rates revolves around the dynamic interplay between the ever-changing supply and demand for mortgage-backed securities (MBS), casting a spell on the fate of the beloved 30-year fixed-rate mortgage. As Investopedia eloquently puts it:
"Imagine mortgage-backed securities as enchanting investment products, akin to the allure of bonds. Each bewitching MBS possesses a mesmerizing collection of home loans and other mystical real estate debt, snatched away from the clutches of the banks that brought them into existence... The brave investor who ventures forth to acquire these ethereal securities is, in essence, extending a helping hand to homebuyers in need of financial support."
Within this enchanting dance lies a hidden connection between the demand for MBS and the delicate balance between the 10-Year Treasury Yield and the ever-alluring 30-year fixed mortgage rate. Behold, for history has shown us an average spread of 1.72 between these two mesmerizing forces (as illustrated in the chart below). Prepare to embark on a journey where numbers intertwine with magic, unraveling the secrets of mortgage rate dynamics.
Last Friday morning, the mortgage rate was 6.85%. That means the spread was 3.2%, which is almost 1.5% over the norm. If the spread was at its historical average, mortgage rates would be 5.37% (3.65% 10-Year Treasury Yield + 1.72 spread).
Prepare to be captivated by the astonishing revelation that lies before us, for the vast chasm between these two forces is nothing short of extraordinary. George Ratiu, the brilliant Chief Economist at Keeping Current Matters (KCM), unravels this enigma for us, shedding light on the magnitude of the situation:
"In the realm of mortgage rates, it is a rare spectacle indeed when the alluring spread reaches or surpasses a staggering 300 basis points. Such occurrences are reserved for times of mythical proportions, characterized by soaring inflation or tumultuous economic upheaval, reminiscent of the tempestuous early 1980s or the earth-shaking Great Financial Crisis of 2008-09."
To truly comprehend the magnitude of this revelation, cast your gaze upon the graph below, which unveils a mesmerizing tale told through historical data. It unveils the few cherished instances when this formidable spread dared to ascend to majestic heights, reaching a remarkable 300 basis points or more. Brace yourself, for what lies ahead is a visual testament to the extraordinary nature of these extraordinary times.
The graph reveals a promising trend of decreasing spread after each peak, indicating a favorable opportunity for mortgage rates to improve today. So, what's behind the wider spread and high mortgage rates? The demand for Mortgage-Backed Securities (MBS) is influenced by various factors, such as inflation, potential recession fears, the Federal Reserve's interest rate hikes, negative narratives about home prices, and more. In essence, lower risk leads to higher MBS demand and lower mortgage rates, while higher risk results in lower MBS demand and higher mortgage rates. Currently, with low MBS demand, mortgage rates remain high.
2. When Will Rates Go Back Down?
Unveiling insights from a recent blog post by Odeta Kushi, the Deputy Chief Economist at First American, we delve into an intriguing question:
Will the spread and mortgage rates make a retreat in the second half of the year, should the Federal Reserve ease its monetary tightening stance and grant investors a dose of much-needed certainty? While a glimmer of hope shines on the horizon, it's important to note that the spread may not revert to its historical average of 170 basis points, as certain lingering risks persist.
In this captivating analysis, Kushi paints a dynamic picture of the potential trajectory, leaving us eagerly anticipating the unfolding events that could shape the mortgage market in the coming months.
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.
