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The Reason Why Mortgage Rates as so High

Mortgage rates are a key consideration for many prospective homebuyers today. If you're contemplating your first purchase or looking to sell your current home for a better fit, you're probably wondering why mortgage rates are currently high and when they might decrease. Here's some information that will provide the context you need to answer those questions.


1. Why are mortgage rates so high?


The primary factor influencing the 30-year fixed-rate mortgage is the supply and demand for mortgage-backed securities (MBS). Mortgage-backed securities are investment products similar to bonds, consisting of bundles of home loans and other real estate debt purchased from issuing banks. When investors buy MBS, they effectively lend money to homebuyers.


The demand for MBS plays a role in determining the difference between the 10-Year Treasury Yield and the 30-year fixed mortgage rate. Historically, the average spread between the two is 1.72%. However, as of last Friday morning, mortgage rates stood at 6.85%, resulting in a spread of 3.2%—almost 1.5% above the norm. If the spread were at its historical average, mortgage rates would be 5.37% (3.65% 10-Year Treasury Yield + 1.72% spread).



This significant spread deviation is highly unusual. Typically, such wide spreads occur during periods of high inflation or economic volatility, like the early 1980s or the Great Financial Crisis of 2008-09.


Historical data shows that the spread has decreased after each peak, indicating that there is room for improvement in mortgage rates today. So, what factors are contributing to the wider spread and high mortgage rates currently?



The demand for MBS is significantly influenced by the associated investment risks. Presently, these risks stem from broader market conditions, such as concerns about inflation, the potential for a recession, the Federal Reserve's interest rate hikes aimed at curbing inflation, negative media narratives regarding home prices, and more.


To put it simply, when risks are lower, demand for MBS is higher, resulting in lower mortgage rates. Conversely, when risks are higher, demand for MBS decreases, leading to higher mortgage rates. Currently, the demand for MBS is low, causing mortgage rates to be high.


2. When will rates go back down?


Odeta Kushi, Deputy Chief Economist at First American, addressed this question in a recent blog post:


"It's reasonable to expect that the spread and, consequently, mortgage rates will decrease in the second half of the year if the Federal Reserve eases off its monetary tightening measures and provides investors with greater certainty. However, it's unlikely that the spread will return to its historical average of 170 basis points, as some risks are expected to persist."


In summary, the spread will decrease as investor fears diminish. This means that mortgage rates should moderate as the year progresses. However, accurately forecasting mortgage rates is challenging, and no one can predict with certainty what will happen.


In conclusion, understanding the factors driving current mortgage rates and the potential outlook for their movement can help you make informed decisions. Keep an eye on market conditions and expert insights to gauge when mortgage rates might decrease.

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