The Main Reason Mortgage Rates Are So High

<article class="post-710446 post type-post status-publish format-standard has-post-thumbnail hentry" id="post-710446"><span class="entry-date">June 7, 2023</span><div class="entry-header center-block text-center"><h1 class="entry-title">The Main Reason Mortgage Rates Are So High</h1><div class="shareBlock"><div class="shareTitle">Share</div><div class="shareIcons"><a aria-label="Twitter Share Link" class="twitter solid display-inline-block" data-tracking="Post,Social Post Link Clicked,Twitter" href="http://twitter.com/share?text=The+Main+Reason+Mortgage+Rates+Are+So+High&amp;url=https%3A%2F%2Fgilliggroup.com%2Fblog%2Fthe-main-reason-mortgage-rates-are-so-high%2F" target="_blank"><span class="force-hidden">Twitter</span></a>
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</div></div><div class="post-tax post-category"><span></span><a href="../category/realtor-blog/index.html" rel="tag">Realtor Blog</a></div><div class="post-tax post-post_tag"></div></div><div class="entry-content"><div><img alt="The Main Reason Mortgage Rates Are So High Simplifying The Market" decoding="async" loading="lazy" src="https://media.agentaprd.com/sites/222/20230607-the-main-reason-mortgage-rates-are-so-high.webp" style="display: block; margin-bottom: 5px; clear: both; max-width: 100%;" width="358"/>
<p>Today’s mortgage rates are top-of-mind for many <a href="https://www.simplifyingthemarket.com/2023/06/01/the-true-value-of-homeownership/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">homebuyers</a> 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: </p>
<ol>
<li>Why Are Mortgage Rates So High?</li>
<li>When Will Rates Go Back Down?</li>
</ol>
<p>Here’s context you need to help answer those questions.</p>
<h4><strong>1. Why Are Mortgage Rates So High?</strong> </h4>
<p>The 30-year fixed-rate mortgage is largely influenced by the supply and demand for mortgage-backed securities (MBS). According to <a href="https://www.investopedia.com/terms/m/mbs.asp" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank"><em>Investopedia</em></a>: </p>
<blockquote><p><em>“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.”</em></p></blockquote>
<p>Demand for MBS helps determine the spread between the <a href="https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">10-Year Treasury Yield</a> and the 30-year fixed <a href="https://www.freddiemac.com/pmms/pmms_archives" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">mortgage rate</a>. Historically, the average spread between the two is 1.72 (<em>see chart below</em>):</p>
<p><a href="https://files.keepingcurrentmatters.com/content/images/20230606/20230607-for-50-years-the-30-year-mortgage-rate-has-moved-in-unison-with-the-10-year-treasury-yield.png" rel="noopener noreferrer" target="_blank"><img decoding="async" src="https://files.keepingcurrentmatters.com/content/images/20230606/20230607-for-50-years-the-30-year-mortgage-rate-has-moved-in-unison-with-the-10-year-treasury-yield.png"/></a></p>
<p><span style="color: rgb(33, 33, 33);">Last Friday morning, the </span><a href="https://www.mortgagenewsdaily.com/" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">mortgage rate</a><span style="color: rgb(33, 33, 33);"> 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 </span><a href="https://www.cnbc.com/quotes/US10Y" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">Treasury Yield</a><span style="color: rgb(33, 33, 33);"> + 1.72 spread).</span></p>
<p><a href="https://files.keepingcurrentmatters.com/content/images/20230606/20230607-why-are-mortgage-rates-so-high.png" rel="noopener noreferrer" target="_blank"><img decoding="async" src="https://files.keepingcurrentmatters.com/content/images/20230606/20230607-why-are-mortgage-rates-so-high.png"/></a></p>
<p>This large spread is very unusual. As George Ratiu, Chief Economist at <em>Keeping Current Matters</em> (KCM), <a href="https://twitter.com/GeorgeRatiu/status/1661766282465669124" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">explains</a>:</p>
<blockquote><p>“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.”</p></blockquote>
<p>The graph below uses <a href="https://fred.stlouisfed.org/" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">historical data</a> to help illustrate this point by showing the few times the spread has increased to 300 basis points or more:</p>
<p><a href="https://files.keepingcurrentmatters.com/content/images/20230606/20230607-spread-between-the-10-year-treasury-and-the-30-year-fixed-mortgage-rate.png" rel="noopener noreferrer" target="_blank"><img decoding="async" src="https://files.keepingcurrentmatters.com/content/images/20230606/20230607-spread-between-the-10-year-treasury-and-the-30-year-fixed-mortgage-rate.png"/></a></p>
<p>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.</p>
<p>So, what’s causing the larger spread and making mortgage rates so high today?</p>
<p>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 <a href="https://www.simplifyingthemarket.com/2023/05/24/owning-a-home-helps-protect-against-inflation/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">inflation</a> and fear of a potential <a href="https://www.simplifyingthemarket.com/2023/05/02/a-recession-doesnt-equal-a-housing-crisis-2/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">recession</a>, the Fed’s interest rate hikes to try to bring down <a href="https://www.simplifyingthemarket.com/2023/05/10/the-impact-of-inflation-on-mortgage-rates/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">inflation</a>, headlines that create unnecessarily negative narratives about <a href="https://www.simplifyingthemarket.com/2023/06/05/oops-home-prices-didnt-crash-after-all/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">home prices</a>, and more.</p>
<p>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.</p>
<h4><strong>2. When Will Rates Go Back Down?</strong></h4>
<p>Odeta Kushi, Deputy Chief Economist at <em>First American</em>, answers that question in a <a href="https://blog.firstam.com/economics/mind-the-gap-between-mortgage-rates-and-the-10-year-treasury-yield" rel="noopener noreferrer" style="color: rgb(5, 99, 193);" target="_blank">recent blog</a>:</p>
<blockquote><p><em>“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.”</em></p></blockquote>
<h3>Bottom Line</h3>
<p>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.</p>
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