Todays mortgage rates are top-of-mind for manyhomebuyersright now. As a result, if youre 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:

1. Why Are Mortgage Rates So High?
2. When Will Rates Go Back Down?

Heres 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 toInvestopedia:

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 the10-Year Treasury Yieldand the 30-year fixedmortgage rate. Historically, the average spread between the two is 1.72 (see chart below):

Last Friday morning, themortgage ratewas 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-YearTreasury Yield+ 1.72 spread).

This large spread is very unusual. As George Ratiu, Chief Economist atKeeping 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 useshistorical datato 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 theres room for mortgage rates to improve today.

So, whats 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 likeinflationand fear of a potentialrecession, the Feds interest rate hikes to try to bring downinflation, headlines that create unnecessarily negative narratives abouthome prices, and more.

Simply put: when theres less risk, demand for MBS is high, so mortgage rates will be lower. On the other hand, if theres more risk with MBS, demand for MBS will be low, and well 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 atFirst American, answers that question in arecent blog:

Its 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, its unlikely that the spread will return to its historical average of 170 basis points, as some risks are here to stay.

Bottom Line

The spread will shrink when the fear investors feel is eased. Thatll 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.

When you are ready to buy or sell any real estate, please call me, Marie McLaughlin 727-858-7569.

Source:https://www.keepingcurrentmatters.com/2023/06/07/the-main-reason-mortgage-rates-are-so-high/