The Main Cause of High Mortgage Rates
There's A Lot Going On With Mortgage Rates Nowadays
Mortgage rates today are now on many homebuyers' minds. As a result, you might be asking yourself these two questions if you're considering buying for the first time or selling your present home to move into one that better suits your needs.
- Why Are Mortgage Rates So High?
- When Will Rates Go Back Down?
Here are some tips you need to help answer those questions.
What Causes High Mortgage Rates?
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."
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 highlights how the spread has dropped since each peak. The good news is that this indicates room for improvement in mortgage rates right now.
So, what’s causing the larger spread and making mortgage rates so high today?
The risks involved in investing in MBS have a significant impact on demand for them. Today, that risk is affected by a variety of factors, including inflation, the worry about a potential recession, interest rate increases by the Fed to try to reduce inflation, headlines that unnecessarily paint a bad picture of home prices, and more.
Simply defined, when there is less risk, there is a large demand for MBS, which results in lower interest rates. On the other side, if there is less demand for MBS due to higher risk, there will be a rise in mortgage rates. Currently, mortgage rates are high because there is little demand for MBS.
When Will Rates Reduce Again?
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.”
When investors' panic subsides, the spread will decrease. As a result, as the year progresses, mortgage rates ought to decline. However, no one can predict the future with certainty when it comes to mortgage rates.
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