Mortgage rates are currently at a 22-year high, putting additional strain on an already expensive housing market.
According to Freddie Mac’s report on Aug. 24, home buyers are facing an average rate of 7.23 percent on a 30-year fixed-rate mortgage, which is the most popular type of home loan in the United States. This is the highest rate seen since June 2001.
The increase in rates has resulted in decreased demand for homes, with existing home sales experiencing a significant decline compared to last year. Additionally, sellers who took advantage of low rates during the pandemic are hesitant to list their homes for sale because they fear they won’t be able to secure a comparable rate when they become buyers themselves.
Various factors influence mortgage rates, many of which are beyond our control. The bond market is the primary driver, but there are other complexities involved, according to Melissa Cohn, regional vice president at William Raveis Mortgage.
The bond market and mortgage rates are closely linked. Mortgage rates, like other long-term loans, tend to follow the rate or yield on the 10-year Treasury bond. When inflation is high, the Federal Reserve raises short-term interest rates to combat it. However, higher interest rates also increase borrowing costs for banks, resulting in higher rates for consumer loans, including mortgages.
A strong economy can also impact mortgage rates. As households have more disposable income due to a robust job market, the demand for mortgages increases, pushing rates higher.
Lenders often bundle their mortgages into portfolios and sell them as mortgage-backed securities to investors. To compete with the 10-year Treasury bond, lenders need to raise the yields on these securities, which in turn increases mortgage rates.
Currently, the difference between the yield on the 10-year Treasury note and mortgage-backed securities is wider than usual, leading to higher mortgage rates. This discrepancy is having a significant impact on the housing market, as noted by Lawrence Yun, the chief economist at the National Association of Realtors.
What influences mortgage rates?
The bond market, particularly the yield on the 10-year Treasury note, is a key factor in determining mortgage rates. Lenders start with this rate, often referred to as the risk-free rate, and adjust it based on the risk associated with borrowers.
The Federal Reserve’s efforts to control inflation by increasing borrowing costs have contributed to the recent spike in mortgage rates. The Fed’s interest rate decisions impact short-term rates, which subsequently influence yields for long-term bonds.
Economists predict that mortgage rates will remain high for the next few months, and even when they begin to decrease, they are expected to settle above the pre-pandemic rates of around 3 percent.
To secure a lower mortgage rate, home buyers can focus on maintaining a strong credit score and providing a substantial down payment, usually around 20 percent of the purchase price. Additionally, comparing rates from multiple lenders and being patient for rates to potentially decrease in the future can be beneficial.