Why are Rates so High? When will they come down?
Are you in the market to buy a home or sell your current one? The current mortgage rates are on the top of many homebuyers’ minds. Two questions that may arise are why are the mortgage rates so high and when will they go back down? Let’s take a deeper dive into these questions.
First, the 30-year fixed-rate mortgage is mainly influenced by the supply and demand for mortgage-backed securities (MBS). These are investment products that contain bundles of home loans and other real estate debt bought from banks. The demand for MBS helps determine the spread between the 10-Year Treasury Yield and the 30-year fixed mortgage rate. Currently, the spread is almost 1.5% higher than the historical average. This is largely due to the risks associated with investing in MBS, including inflation, fear of recession, interest rate hikes, negative narratives about home prices, and more. Demand for MBS is low, causing mortgage rates to be high.
Secondly, when will rates go back down? It’s reasonable to assume that 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. Though, it’s unlikely that the spread will return to its historical average of 170 basis points as some risks are here to stay.
To summarize, the spread will shrink when investors’ fear is eased, making mortgage rates more moderate as time goes on. It’s difficult to forecast mortgage rates, but one thing is for sure, the current situation is due to the risks associated with investing in MBS.