Mortgage rates are at their highest in 22 years, which is hampering a housing market already under pressure from high prices.
Homebuyers face an average interest rate of 7.23 percent on a 30-year fixed-rate mortgage, which is the most popular home loan in the United States. Freddie Mac reported on August 24. This was the highest rate since June 2001.
Rising interest rates slowed demand for homes, along with existing home sales A sharp decrease from last year. Sellers who have kept interest rates low during the pandemic are reluctant to put their homes on the market because they fear they won’t be able to find a similar price when they become buyers.
Mortgage rates are affected by a number of factors, most of which are outside our control. The biggest driver is the bond market, but there’s more to it, said Melissa Cohn, regional vice president at William Raveis Mortgage, a mortgage lender.
“Most consumers look at the simple story, but there are other forces at play,” she said. “We have a much more complex economy.”
What affects mortgage rates?
It starts with the bond market.
Mortgage rates, like many other long-term loans, tend to track the rate or yield on 10-year Treasury notes, which are seen as the safer bet for lenders because they are backed by the US government. For many types of loans, lenders actually start with this rate, often referred to as the risk-free rate, and then increase it to reflect the greater risk of non-payment by borrowers such as homebuyers.
The yield on 10-year Treasury notes recently reached its highest point since 2007, rising to 4.3 per cent, reflecting the Fed’s efforts to tame inflation by pushing up borrowing costs. The Federal Reserve sets short-term interest rates, and expectations about where those rates will go have a big impact on longer-term bond yields.
When inflation rises, the Fed raises short-term interest rates to slow the economy and reduce pressure on prices. But higher interest rates make borrowing more expensive for banks, so they raise interest rates on consumer loans, including mortgages, to compensate. This went on for more than a year, as the Fed’s interest rate rose to above 5 per cent, from near zero, and mortgage rates followed suit.
A strong economy affects mortgage rates in other ways, too. A strong job market gives families more money to spend, which increases demand for mortgages, which leads to higher interest rates.
Lenders also often pool their mortgages in a portfolio, which they use to raise money by selling them to investors. These mortgage-backed securities are similar to bonds.
To stay competitive with 10-year Treasury notes, lenders need to increase yields on their mortgage-backed securities, which means higher interest rates on home loans. The gap between the yield on 10-year Treasurys and mortgage-backed securities, known as the spread, is usually about two percentage points.
Right now, the spread is like three percentage points, which has a huge impact on the housing market by pushing up mortgage rates, said Lawrence Yoon, chief economist for the National Association of Realtors.
“It’s really baffling that the spread is so widespread and persistent,” he said.
How long will rates remain high?
Economists expect mortgage rates to remain high for at least a few more months. And even when it begins to decline, it is expected to stabilize well above the 3 percent rates that homebuyers enjoyed during the early stages of the pandemic.
Mr. Yoon said he expects interest rates to start falling by the end of the year, possibly as low as 6 per cent by the spring. “Ration and economic logic say the rate should be lower,” he said, noting that the Fed had already slowed interest rate increases.
Mortgage Bankers Association, an industry group, forecast recently The average interest rate on a 30-year mortgage will drop to 5 percent by the fourth quarter of next year.
Fed officials have acknowledged that they will need to factor in the potential economic costs of raising interest rates, and Mr. Yoon said that includes damage to regional banks, such as the collapse of Silicon Valley Bank and Signature Bank.
What can a buyer do to get a lower price?
It may seem like homebuyers don’t have much wiggle room, but there are things they can do to get a lower price, said Ms. Cohn of William Raveis Mortgage.
She said having a strong credit score is important, as well as a large down payment, usually at least 20 percent of the purchase price. Buyers who can handle this may find that they are in a less competitive market, which may make it easier to close the deal.
“Prices should be lower in the next 12 to 24 months,” Ms. Cohn said, and homebuyers can refinance their mortgages when prices fall.
It also advises consumers to compare rates from multiple lenders. “There are no magic tricks,” she said. “You need to go shopping.”