Mortgage rates are a critical aspect of the housing market, directly influencing the affordability and accessibility of homeownership for millions of people.
Today’s rates are influenced by a variety of factors, including the overall state of the economy, the bond market, inflation, and the Federal Reserve’s monetary policies.
I’m asked consistently about what the future looks like for interest rates. Unfortunately, there’s no easy way to answer that question because mortgage rates are difficult to predict, as there are many factors involved.
However, there is a good historic indicator of what might happen with mortgage rates, and that’s the relationship between the 30-Year Mortgage Rate and the 10-Year Treasury Yield.
Many believe that the Federal Reserve set mortgage rates – and that’s not the case. Traditionally, the movement of the 10-year treasury bond is a great measure for mortgage rates.
You can find out a bit more here from Keeping Current Matters…
The Historical Spread
Here’s a graph showing those two metrics since Freddie Mac started keeping track of average mortgage rates in 1972:
As the graph above demonstrates, the average spread between the two over the last 50 years was 1.72 percentage points.
More importantly, when looking at the trend line, readers can see when the Treasury Yield trends up, mortgage rates almost always react in the same direction. And, when the yield drops, mortgage rates tend to follow.
Finally, the gap between the two has remained about 1.72 percentage points for quite some time.
Today’s Spread
However, what’s important to notice now is that the spread is widening much more than normal. See the graph below:
The reason? It’s has much to do with the uncertainties in the financial markets today. Inflation, the recent banking foreclosures, and lack of confidence the Federal Reserve are all influencing mortgage rates and widening this spread. Investors essentially need to factor in more risk into their pricing.
Inflation is truly the critical factor affecting today’s mortgage rates. Inflation erodes the purchasing power of money over time, reducing the value of future loan repayments to lenders. To protect their investments, lenders tend to raise mortgage rates in response to higher inflation.
Therefore, understanding inflation trends can help borrowers anticipate potential changes in mortgage rates and decide when to lock in their rates for the best deal.
Moving Forward
It is also really important to understand this spread and its deviation from historical norms. What most conclude is that there’s room for mortgage rates to improve moving forward.
And, here are what a few experts think, as long as inflation abates.
From Forbes magazine:
“Though housing market watchers expect mortgage rates to remain elevated amid ongoing economic uncertainty and the Federal Reserve’s rate-hiking war on inflation, they believe rates peaked last fall and will decline—to some degree—later this year, barring any unforeseen surprises.”
Secondly, as Odeta Kushi, Deputy Chief Economist at First American, explains:
“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 . . . However, it’s unlikely that the spread will return to its historical average of 170 basis points, as some risks are here to stay.”
In Conclusion
Understanding today’s mortgage rates is vital for anyone considering homeownership or refinancing.
Mortgage rates are influenced by a complex interplay of economic factors, inflation, Federal Reserve policies, and housing demand. Being aware of these influences empowers borrowers to make informed decisions about their mortgage options, ultimately impacting their financial well-being and the overall real estate market.
Do reach out to me for more information, as it would by my pleasure to help you navigate these interesting times!
