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Why Are Mortgage Rates So High, and How Long Will They Stay Up?

Mortgage rates are running at a 22-year high, crimping a housing market already squeezed by high prices.

Home buyers face a median rate of seven.23 percent on a 30-year fixed-rate mortgage, the preferred home loan within the United States, Freddie Mac reported on Aug. 24. That was the very best rate since June 2001.

The rise in rates has cooled demand for homes, with sales of existing homes down sharply from last 12 months. And sellers who locked in low rates throughout the pandemic are reluctant to place their homes available on the market because they fear they’ll not have the ability to seek out a comparable rate after they turn into buyers.

Mortgage rates are influenced by numerous aspects, most beyond our control. The biggest driver is the bond market, but there’s more to it than that, said Melissa Cohn, regional vice chairman at William Raveis Mortgage, an actual estate lender.

“Most consumers take a look at the easy story, but there are other forces at work,” she said. “We have a way more complicated economy.”

It starts with the bond market.

Mortgage rates, like many other long-term loans, are likely to track the speed, or yield, on the 10-year Treasury bond, which is seen because the safest bet for lenders since it is backed by the U.S. government. For many forms of loans, lenders effectively start with that rate, sometimes called the risk-free rate, after which increase it to reflect the greater risk of not being repaid by borrowers like home buyers.

The yield on the 10-year Treasury note recently hit its highest point since 2007, climbing to 4.3 percent, reflecting the Federal Reserve’s efforts to tame inflation by pushing borrowing costs higher. The Fed sets short-term rates of interest, and expectations for where those will go have a giant influence on yields for longer-term bonds.

When inflation is running high, the Fed raises those short-term rates to slow the economy and reduce pressure on prices. But higher rates of interest make it dearer for banks to borrow, in order that they raise their rates on consumer loans, including mortgages, to compensate. That has been occurring for over a 12 months, with the Fed’s rate climbing above 5 percent, from near zero, and mortgage rates following suit.

A robust economy affects mortgage rates in other ways, too. A sturdy job market gives households more cash to spend, which increases demand for mortgages, sending rates higher.

Lenders also often pool their mortgages right into a portfolio, which they use to boost money by selling it to investors. These mortgage-backed securities are just like bonds.

To stay competitive with the 10-year Treasury bond, lenders need to extend the yields on their mortgage-backed securities, which implies higher rates for home loans. The gap between the yield on the 10-year Treasury note and mortgage-backed securities, generally known as the spread, is generally about two percentage points.

Right now, the difference is more like three percentage points, which has a giant effect on the housing market by pushing mortgage rates higher, said Lawrence Yun, the chief economist on the National Association of Realtors.

“It is actually puzzling that the spread is that this wide and quite persistent,” he said.

Economists predict that mortgage rates will remain elevated for at the least a number of more months. And even after they start to return down, they’re expected to settle well above the three percent rates that home buyers enjoyed throughout the early stages of the pandemic.

Mr. Yun said he expected rates to start falling by the tip of the 12 months, possibly dropping to six percent by spring. “The rationality and economic logic says the speed needs to be lower,” he said, declaring that the Fed has already slowed its rate of interest increases.

The Mortgage Bankers Association, an industry group, recently forecast that the common 30-year mortgage rate would fall to five percent by the fourth quarter of next 12 months.

Fed officials have acknowledged that they’ll have to take into consideration the potential economic costs of raising rates, and Mr. Yun said that included damage to regional banks, just like the collapses of Silicon Valley Bank and Signature Bank.

It could seem that home buyers have little wiggle room, but there are things they’ll do to nab a lower rate, Ms. Cohn of William Raveis Mortgage said.

A robust credit rating is vital, she said, in addition to a large down payment, normally at the least 20 percent of the acquisition price. Buyers who can manage which will find that they’re in a less competitive market, which could make it easier to shut a deal.

“Rates needs to be lower in the following 12 to 24 months,” Ms. Cohn said, and residential buyers can refinance their mortgage when rates drop.

She also advises consumers to check rates from multiple lenders. “There aren’t any magic tricks,” she said. “You have to shop around.”

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