Multiple rate cuts by the Fed and cooling inflation should make mortgage rates lower, right? Not really. Mortgage interest rates remain high because they are dictated by the 10-year Treasury bond, not the Fed's overnight lending rate. The Fed’s “short term” rate influences consumer-side short term lending rates, like car loans, lines of credit and credit cards.
The 30 year mortgage rate is the result of investor appetite at a given time. The bond market is sensitive to current and future inflation, global unrest, national debt, labor market and overall economic strength. The 10-year Treasury bond yield, plus a markup – the spread – determines long term mortgage rates. When investors are optimistic, bond demand rises which drives down the rates, which drives down mortgage interest rates.
You may recall that during the pandemic, the Fed was buying vast quantities of MBS (mortgage-backed securities), which created high demand and kept rates low. As part of its “quantitative easing program” the Fed was purchasing up to $40 billion per month. By the time the purchases ended in March 2022, the Fed had bought a total of about $1.33 trillion in MBS. Without competition from the Fed, private investors are setting the price, demanding higher returns for the same risk.
It is extremely unlikely that we will see the market return to the days of 3%. Maybe. Some day. No time soon. Buyers are slowly returning to the market as they come to accept that putting off that waiting for rates to decline another half point is not furthering their life goals.
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Ed and Terri Smith