The Main Reason Mortgage Rates Are So High

Today’s mortgage rates are top-of-mind for many homebuyers right now. As a result, if you’re 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:  Why Are Mortgage Rates So High? When Will Rates Go Back Down? Here’s 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 to Investopedia:  “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 the 10-Year Treasury Yield and the 30-year fixed mortgage rate. Historically, the average spread between the two is 1.72 (see chart below): Last Friday morning, the mortgage rate was 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-Year Treasury Yield + 1.72 spread). 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." The graph 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 shows how the spread has come down after each peak. The good news is, that means there’s room for mortgage rates to improve today. So, what’s 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 like inflation and fear of a potential recession, the Fed’s interest rate hikes to try to bring down inflation, headlines that create unnecessarily negative narratives about home prices, and more. Simply put: when there’s less risk, demand for MBS is high, so mortgage rates will be lower. On the other hand, if there’s more risk with MBS, demand for MBS will be low, and we’ll 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 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.” Bottom Line The spread will shrink when the fear investors feel is eased. That’ll 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.

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Real Estate Is Still Considered the Best Long-Term Investment

With all the headlines circulating about home prices and rising mortgage rates, you may wonder if it still makes sense to invest in homeownership right now. A recent poll from Gallup shows the answer is yes. In fact, real estate was voted the best long-term investment for the 11th consecutive year, consistently beating other investment types like gold, stocks, and bonds (see graph below): If you’re thinking about purchasing a home, let this poll reassure you. Even with everything happening today, Americans recognize owning a home is a powerful financial decision. Why Do Americans Still Feel So Positive About the Value of Investing in a Home? Purchasing real estate has typically been a solid long-term strategy for building wealth in America. As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), notes: “. . . homeownership is a catalyst for building wealth for people from all walks of life. A monthly mortgage payment is often considered a forced savings account that helps homeowners build a net worth about 40 times higher than that of a renter.” That’s because owning a home grows your net worth over time as your home appreciates in value and as you pay down your mortgage. And, since building that wealth takes time, it may make sense to start as soon as you can. If you wait to buy and keep renting, you’ll miss out on those monthly housing payments going toward your home equity. Bottom Line Buying a home is a powerful decision. So, it’s no wonder so many people view real estate as the best long-term investment. If you’re ready to start on your own journey toward homeownership, let’s connect today.

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Homeowners Have Incredible Equity To Leverage Right Now

Even though home prices have moderated over the last year, many homeowners still have an incredible amount of equity. But what is equity? In the simplest terms, equity is the difference between the market value of your home and the amount you owe on your mortgage. The National Association of Realtors (NAR) explains how your equity grows over time: “Housing wealth (home equity or net worth) gains are built up through price appreciation and by paying off the mortgage.” How Your Equity Can Help You Achieve Your Goals The equity you build up over the years can be used to your advantage when you sell your current house and buy your next home. If you no longer have the space you need, it might be time to move into a larger home. Or it’s possible you have too much space and need something smaller. No matter the situation, your equity can be a powerful tool you can use to help you make a move in today’s market. That’s because it may be some (if not all) of what you need for your down payment on your next home. And how much equity you have may surprise you. A recent survey from Realtor.com finds many homeowners today estimate they’ve built up a significant amount of equity: The latest data from CoreLogic helps solidify why homeowners are feeling so good about the equity they’ve likely gained over time. As Selma Hepp, Chief Economist for CoreLogic, says: “While equity gains contracted in late 2022 due to home price declines in some regions, U.S. homeowners on average still have about $270,000 in equity, nearly $90,000 more than they had at the onset of the pandemic.” How a Skilled Real Estate Agent Can Help If you’re looking to leverage your equity to boost your buying power in today’s market, having a trusted agent by your side makes a difference. A real estate professional can help you better understand the value of your home, so you’ll get a clearer picture of how much equity you likely have. As a recent article from Bankrate says: “Hiring a skilled real estate agent can give you a realistic estimate of home prices in your area and how to price your current home. Using that figure, you can calculate how much equity you have and what your net proceeds will look like, so you can apply that money toward the down payment and closing costs of your new home.”  Having a solid understanding of your equity is key when it comes to making decisions about buying or selling your home. A skilled agent can help you navigate the often-complicated process of selling your house and ensure the transaction goes smoothly. Bottom Line Today, many homeowners are sitting on a substantial amount of equity, and you may be one of them. Let’s connect so we can estimate how much equity you have and plan how you can use it toward the purchase of your next home.

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