The Main Reason Mortgage Rates Are So High
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. 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). 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): 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). 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 as a result. Currently, demand for MBS is low, 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.” 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.
Today’s Real Estate Market: The ‘Unicorns’ Have Galloped Off
Comparing real estate metrics from one year to another can be challenging in a normal housing market. That’s due to possible variability in the market making the comparison less meaningful or accurate. Unpredictable events can have a significant impact on the circumstances and outcomes being compared. Comparing this year’s numbers to the two ‘unicorn’ years we just experienced is almost worthless. By ‘unicorn,’ this is the less common definition of the word: “Something that is greatly desired but difficult or impossible to find.” The pandemic profoundly changed real estate over the last few years. The demand for a home of our own skyrocketed, and people needed a home office and big backyard. Waves of first-time and second-home buyers entered the market. Already low mortgage rates were driven to historic lows. The forbearance plan all but eliminated foreclosures. Home values reached appreciation levels never seen before. It was a market that forever had been “greatly desired but difficult or impossible to find.” A ‘unicorn’ year. Now, things are getting back to normal. The ‘unicorns’ have galloped off. Comparing today’s market to those years makes no sense. Here are three examples: Buyer Demand If you look at the headlines, you’d think there aren’t any buyers out there. We still sell over 10,000 houses a day in the United States. Of course, buyer demand is down from the two ‘unicorn’ years. But, according to ShowingTime, if we compare it to normal years (2017-2019), we can see that buyer activity is still strong (see graph below): Home Prices We can’t compare today’s home price increases to the last couple of years. According to Freddie Mac, 2020 and 2021 each had historic appreciation numbers. Here’s a graph also showing the more normal years (2017-2019): We can see that we’re returning to more normal home value increases. There were several months of minimal depreciation in the second half of 2022. However, according to Fannie Mae, the market has returned to more normal appreciation in the first quarter of this year. Foreclosures There have already been some startling headlines about the percentage increases in foreclosure filings. Of course, the percentages will be up. They are increases over historically low foreclosure rates. Here’s a graph with information from ATTOM, a property data provider: There will be an increase over the numbers of the last three years now that the moratorium on foreclosures has ended. There are homeowners who lose their home to foreclosure every year, and it’s heartbreaking for those families. But, if we put the current numbers into perspective, we’ll realize that we’re actually going back to the normal filings from 2017-2019. There will be very unsettling headlines around the housing market this year. Most will come from inappropriate comparisons to the ‘unicorn’ years. A real estate professional is a great resource to help you keep everything in proper perspective.
Today’s Real Estate Market: The ‘Unicorns’ Have Galloped Off
Comparing real estate metrics from one year to another can be challenging in a normal housing market. That’s due to possible variability in the market making the comparison less meaningful or accurate. Unpredictable events can have a significant impact on the circumstances and outcomes being compared. Comparing this year’s numbers to the two ‘unicorn’ years we just experienced is almost worthless. By ‘unicorn,’ this is the less common definition of the word: “Something that is greatly desired but difficult or impossible to find.” The pandemic profoundly changed real estate over the last few years. The demand for a home of our own skyrocketed, and people needed a home office and big backyard. Waves of first-time and second-home buyers entered the market. Already low mortgage rates were driven to historic lows. The forbearance plan all but eliminated foreclosures. Home values reached appreciation levels never seen before. It was a market that forever had been “greatly desired but difficult or impossible to find.” A ‘unicorn’ year. Now, things are getting back to normal. The ‘unicorns’ have galloped off. Comparing today’s market to those years makes no sense. Here are three examples: Buyer Demand If you look at the headlines, you’d think there aren’t any buyers out there. We still sell over 10,000 houses a day in the United States. Of course, buyer demand is down from the two ‘unicorn’ years. But, according to ShowingTime, if we compare it to normal years (2017-2019), we can see that buyer activity is still strong (see graph below): Home Prices We can’t compare today’s home price increases to the last couple of years. According to Freddie Mac, 2020 and 2021 each had historic appreciation numbers. Here’s a graph also showing the more normal years (2017-2019): We can see that we’re returning to more normal home value increases. There were several months of minimal depreciation in the second half of 2022. However, according to Fannie Mae, the market has returned to more normal appreciation in the first quarter of this year. Foreclosures There have already been some startling headlines about the percentage increases in foreclosure filings. Of course, the percentages will be up. They are increases over historically low foreclosure rates. Here’s a graph with information from ATTOM, a property data provider: There will be an increase over the numbers of the last three years now that the moratorium on foreclosures has ended. There are homeowners who lose their home to foreclosure every year, and it’s heartbreaking for those families. But, if we put the current numbers into perspective, we’ll realize that we’re actually going back to the normal filings from 2017-2019. There will be very unsettling headlines around the housing market this year. Most will come from inappropriate comparisons to the ‘unicorn’ years. A real estate professional is a great resource to help you keep everything in proper perspective.
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