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First the bad news.  According to the latest data from the Mortgage Bankers Association (MBA), the current average 30-year fixed mortgage rates are 2.5% to 3% higher than a year ago.  Current 30-year mortgage rates range from 5% to 6% for most borrowers (depending on the borrower’s credit score and the type of transaction).

What most people don’t realize is that current mortgage interest rates are still low compared to mortgage interest rates in the 1970’s, 1980’s, 1990’s and 2000 through 2007.  During these periods mortgage interest rates reached as high was 18% and were generally above 6%.

FUTURE MORTGAGE INTEREST RATE ENVIRONMENT

Due to inflation, the Federal Reserve has been tightening since January 2022 by reducing its asset holdings and by increasing the interest rate that it controls, the Federal Funds Rate.  The Federal Funds Rate does not directly impact mortgage interest rates (more on this later), however the change in the policy of the Federal Reserve in January 2022 does impact mortgage interest rates indirectly because a change in Federal Reserve policy impacts all types of interest rates.

As we begin August 2022, the outlook for mortgage interest rates remains uncertain.   However, there is a growing belief that sometime in the second half of 2022 or in early 2023 mortgage interest rates will decline.  During the final two weeks of July mortgage interest rates have moderated and have declined slightly and more importantly volatility in mortgage interest rates has decreased.  There is optimism that mortgage interest rates may have peaked due to the belief that the U.S. economy either has already entered a recession or will enter a recession in the second half of 2022.

If the employment picture begins to deteriorate it is likely that the Federal Reserve will be forced to modify/change policy in order to avoid a long-lasting recession.  A potential change in policy will lead to a change in future interest rate expectations for all types of interest rates and will lead to lower mortgage interest rates.

Stay tuned!

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BACKGROUND ON MORTGAGE INTEREST RATES

Who sets mortgage rates? Why do rates change? How often do rates change?  These are some of the questions that are often asked.  Like a lot of things in life, many people believe one thing when in fact something totally different is true.

When it comes to mortgage interest rates the public believes that the Federal Reserve, Congress, the Government, banks or some other entity or person sets mortgage interest rates.  While the actions of each of the parties mentioned can influence mortgage interest rates, none of these parties or entities “sets” mortgage interest rates.

The real answer is that mortgage interest rates, and the corresponding fees or points charged for various rates, are set by the prices of Mortgage Backed Securities (MBS).  MBS are pools, or groups, of mortgages packaged into securities for sale in the secondary market. These MBS are traded in a manner very similar to stocks and are sold to investors.  What investors pay a pool of MBS is what sets interest rates.  In other words, investors who invest in mortgages set mortgage interest rates

Wholesale and correspondent lenders purchase loans from brokers and banks that originate mortgages for homeowners, with the intent to resell those loans by packaging them into MBS and then selling to investors into the secondary market. The going price in the secondary market for mortgages at various interest rates influences the rates and prices a broker or bank will offer to the public.  The value of the mortgages and the price of MBS is constantly changing which is directly the reason mortgage interest rates offered to the public change daily.

The two factors that impact mortgage interest rates the most, and what investors are willing to pay for MBS pools, are economic growth and inflation. The faster the economy is growing, the more demand there will be for capital, leading to a higher cost for borrowing money. That is why good news about the economy is often good for stocks but is bad for mortgage interest rates.  In addition, growing economic activity adds to demand for all types of resources which leads to inflation. Inflation erodes the value of a dollar, so a lender will demand more dollars back later to compensate for the lost purchasing power.

Since mortgage rates are often fixed for the life of the loan, inflation over the years can seriously diminish an investment’s inflation adjusted return. At the time an investor purchases a MBS, the rate of inflation will be over the life of the loan must be predicted.  As a result, the investor will demand that the yield on the investment exceed the expected rate of inflation by enough to earn a reasonable return. Predicting what inflation will be for years in the future can be very difficult and being wrong can be very costly. This is why MBS prices are highly sensitive to anything that changes investors expectation of future inflation.

Any news which provides information about the current level and expected level of economic growth or inflation will influence prices.  Economic reports and data that measure the strength of the economy and the amount of inflation are released on a weekly basis. Some data and reports have more significance than others.

This is a brief explanation to answer the question of who sets mortgage interest rates, and outlines some of the factors that that cause mortgage interest rates to change on a daily basis.

The simple answer is that the Federal Reserve Bank (the “FED”) continues to modify and adjust its policy.

The reason for the change in FED policy was that the inflation that began in 2021, which originally was ignored and downplayed by the FED, has exploded in 2022.  The causes of current inflation include but are not limited to economic data in the US, massive government spending in 2020 and 2021, the ongoing pandemic that affected the price of other goods due to supply chain disruption, the increase in energy cost as a result of policy changes and made worse by the war in Ukraine that has affected the price of all commodities (oil, gas, copper, industrial materials, etc.…).  Controlling Inflation is one of the two primary policy goals of the FED and to this point its policies have failed to control inflation.

The expectation by the financial markets is for inflation to continue to grow which caused interest rates to rise in anticipation of future FED actions, including their state objective to increase the FED Funds Rate and to substantially reduce the purchases of Mortgage-Backed Securities.  It is noteworthy to note that during the first quarter of 2022, the FED has confirmed that the market is right to be afraid of its change in policy.

This sums up the big problem for mortgage interest rates so far in 2022 and the reason for the unprecedented increase in mortgage rates at the fastest pace, in a similar time frame, since 1994.

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For the week ending March 31, 2022, the average 30-year fixed mortgage interest rate, published by Freddie Mac, rose to 4.67% nationwide.  This rate was approximately 3% on January 1, 2022.  This is the highest level for interest rates since December 2018 and the sharpest increase in mortgage interest rates in such a short timeframe since 1994.

BACKGROUND ON FED POLICY

Fed policy involves setting the key overnight lending rate in the US (the Fed Funds Rate) as well as deciding when to buy and sell large amounts of various types of bonds.

The types of bonds purchased by the FED include US Treasuries and Mortgage-Backed-Securities (MBS).  The MBS market directly influences mortgage rates.  As a result, the Fed policy for purchasing MBS bonds has a direct and significant impact on mortgage rates.  If the Fed gives the market a reason to expect smaller MBS purchases, mortgage rates will rise.

Starting in November 2021, the Fed began reducing the size of its bond purchases that began at the start of the pandemic. This was bound to happen at some point, but November was a bit earlier than financial market experts had expected. As a result, MBS suffered, and mortgage interest rates began to rise.  30-year mortgage rates were as low as 2.5% in the fall of 2021, prior to this announcement.

In December 2021, the Fed announced it would decrease MBS purchases at a faster pace than previously announced in November.  At the beginning of January 2022 mortgage interest rates had risen to just above 3% following the December announcement.

On January 5th, 2022, the minutes from the December’s Fed meeting were published.  The minutes are closely reviewed because they often reveal additional details that didn’t make it into the official policy statement released immediately following the meeting (generally three weeks earlier).  When the minutes were released, it was learned that the Fed was discussing decreasing the purchase of MBS bonds at a faster pace than previously announced.  More concerning was that the FED had also been discussing a faster pace of rate hikes for the Fed Funds Rate.  While the Fed Funds Rate does not directly govern mortgage rates, if the market suddenly expects more/faster increases of the Fed Funds Rates, all types of interest rates will increase at a faster pace, including mortgage rates.

Following the January 5 meeting there was an immediate shift in rate hike expectations.  With the Fed Funds Rate in the 0.25-0.50 bracket at the beginning of November 2021, it will require EIGHT rate hikes in the standard 0.25% amount to hit the current 2022 year-end target of 2.5% to 2.75%.  There are only 6 Fed meetings remaining!  So at least 2 of those meetings will require a 0.50% hike.  It has been more than 20 years since the FED has increased the FED Funds Rate 0.50% following a meeting.

This rapid repricing of expectations is the cause of volatility in interest rates right now.   The decrease in MBS purchases by the FED is also a large factor in the increase in mortgage interest rates in 2022.

LOOKING AHEAD

There is hope on the horizon.  The higher rates go and the faster they get there, the sooner we will see a stable and predictable interest rate environment return.  This can happen even as the Fed continues to hike rates because the mortgage and Treasury markets anticipate interest rate changes based on future expectations and move in advance of the FED announcing any actions.  When the future plays out as expected, rates generally do not continue to increase and often will decline.

Any additional surprises will depend on incoming data and events–especially inflation related data and geopolitical events that greatly affect the outlook for growth or inflation.

Last Sunday the Federal Reserve announced they were cutting “Rates” to zero. Unfortunately, often borrowers assume that means mortgage interest rates will also go down. Many lenders have had borrowers calling saying that they heard “Rates” are at zero. This is unfortunate and causes lots of confusion for borrowers. The media reporting adds to the confusion.

Let’s start here. The Federal Reserve controls the Federal Funds Rate. This is the rate that applies to overnight loans (1 day) between the largest financial institutions in the U.S. The Federal Reserve does not dictate mortgage interest rates and their rate setting does not directly affect any mortgage rates except for home equity lines of credit.

At times, the Federal Funds rate and mortgage rates move in the same general direction and at times (like now) they do not. However, they are fundamentally different types of loans since one is for one day and the other is most often for 30 years. Lenders and investors have different priorities for a one-day loan versus a 30-year mortgage.

HOW ARE MORTGAGE RATES DETERMINED?

There is a market where mortgages are traded daily. The participants are institutional investors and financial professionals. It is called the Mortgage Backed Securities market and what is traded are mortgage bonds. This market is like the stock market and there are thousands of trades a day that involve mortgage bonds.

The prices of mortgage bonds are determined by the buyers and sellers. When buyers have better investment alternatives, they will demand lower prices in order to invest in mortgage bonds, which results in the investor receiving a higher interest rate for their investment. When the investor receives a higher rate to purchase mortgage bonds, that means mortgage interest rates to the consumer will go up. Conversely, when investors are looking for less risky and more predictable assets the demand for mortgage bonds will increase and the price/interest rate offered will go down since there are many buyers and mortgage bonds are in high demand. When the investor receives a lower rate to purchase mortgage bonds, that means mortgage interest rates to the borrower decrease.

Because mortgage bonds trade on a daily basis, mortgage interest rates can and do change on a daily basis (sometimes many times a day). By contrast, (except in emergencies) the Federal Reserve meets 8 times a year and may or may not adjust the Federal Funds rate.

Additionally, mortgage interest rates can be influenced by the broader bond market. The 1-year, 10-year and 30-year Treasury bonds often move in the same direction. However, what is generally true is not always true since the treasury bond market tends to be more stable in times of stress. Additionally, there are other factors that also influence the mortgage bond market that could cause mortgage interest rates to be disconnected from the treasury bond market.

WHERE ARE WE NOW

By some accounts the last two weeks have been the most volatile in the history of the mortgage bond market. Seven or eight days ago, 30-year mortgage rates for the most credit-worthy borrowers were in the low 3% range. The past week closed with the lowest rates being offered at close to 4%. Don’t believe the advertisements on the internet and on the radio. The mortgage bond market has been very fluid and has been very volatile, so getting accurate pricing is not possible when rates are changing 5 or 6 times a day. The internet and radio ads cannot keep up.

Unlike 2008, which was the last time the mortgage markets were this chaotic, the reasons for the volatility have nothing to do with the banking or mortgage industries. First, the reaction to the Coronavirus has created an unprecedented situation and general uncertainty for the economy, at least in the short term. When there is uncertainty, investors want liquidity (cash), which means they sell their assets. In the past two weeks, investors have been selling all asset classes, which includes stocks, treasuries, corporate bonds, and mortgage bonds. The selling of these assets results in mortgage bond prices going down, which increases the mortgage interest rate to consumers.

The other factor weighing on the mortgage bond market is the fact that prior to the current situation, a large volume of mortgage bonds was issued in the first 2 months of 2020 due to the volume of refinancing that has taken place as interest rates declined. There simply are not enough buyers for all the new mortgage debt generated in the past two months. The problem is now amplified by investors wanting to hold cash. This depresses the price of mortgage bonds and causes mortgage interest rates to the consumer to rise.

To summarize, mortgage interest rates are not currently at zero and will never be at zero since no investor would ever invest in a mortgage bond with an interest rate of zero.

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While mortgage interest rates have increased over the past 7 or 8 days, there is strong belief when things calm down, that mortgage interest rates will back closer to where they had been. There is no way to know if they will get as low or what the time frame for that is.

I am advising my clients that if they are looking to refinance at a certain rate and we are above that rate then we should get prepared and have everything ready to go so that when rates fall to their desired level that we can be opportunistic and lock right away. Often when rates fall, they may only stay low for a few hours or a few days.

Even with very little economic news to warrant it, mortgage interest rates declined this week.  Overall, mortgage rates are very near where they were at the beginning of October.

Next week the following events will occur and economic data will be released that could impact mortgage interest rates:

  1. The ISM National Services Index and the JOLTS report will be released on Tuesday; and
  2. There will be Treasury auctions on Wednesday and Thursday.

This week there was very little economic data released or news that had an impact on mortgage interest rates.  As a result, rates were largely unchanged from last week.

Next week the following events will occur and economic data will be released that could impact mortgage interest rates:

  1. The Third quarter GDP report will be released on Wednesday;
  2. The Federal Reserve will meet on Wednesday where a .25% rate reduction in the discount rate is expected;
  3. The Core PCE Index will be released on Thursday; and
  4. The Employment Report will come out on Friday.

On Wednesday the Federal Reserve cut the federal funds rate by one-quarter point which was expected.  However, the announcement did not directly impact mortgage interest rates at all.  The other economic data that was released during the week was mixed and mortgage interest rates ended the week slightly lower than last week.

Next week the following economic events will occur and economic data will be released which could impact mortgage interest rates:

  1. The New Home Sales report will be released on Wednesday;
  2. The Pending Home Sales report will come out on Thursday; and
  3. The Durable Orders report will be released on Friday.

Mortgage interest rates moved higher this week due to a number of factors.  Primarily due to stronger than expected economic data being released and also a reduction in trade tensions (although likely temporary).   Additionally, there continue to be mixed messages from the Central banks in the U.S. and Europe regarding interest rate policy.  All of these factors were negative for interest rates this week and mortgage interest rates ended the week noticeably higher than last week.

Next week the following economic events will occur and economic data will be released that could impact mortgage interest rates;

  1. The Housing Starts report will be released on Wednesday;
  2. The Federal Reserve will meet on Wednesday where a 1/4 point reduction in the discount rate is expected to be announced; and
  3. The Existing Home Sales report will come out on Friday

The economic data released this week was mixed following the release of the employment report on Friday.  Additionally, the ongoing trade issues with China continue to impact the global equity and bond markets.  Mortgage interest rates were largely unchanged from last week.

Next week the the following economic events will occur and economic data will be released which may impact mortgage interest rates:

  1.  The Consumer Price Index will be released on Thursday; and
  2.  The European Central Bank will hold its next meeting on Thursday.

There were increasing concerns about a global slow down in economic activity which led to steep decline in equity markets around the world this week.  Continuing negotiations between the U.S. and China on a trade deal seemed more positive this week.  These two factors largely offset each other and mortgage interest rates ended the week only slightly lower.

Next week the following events will occur and economic data will be released which could impact mortgage interest rates:

  1.  The Existing Home Sales report will come out on Wednesday;
  2. The minutes of the July 31 Federal Reserve meeting will be released on Wednesday; and
  3. The New Home Sales report will be released on Friday

Trade tensions with China continued this week and overshadowed other economic news this week.  Mortgage interest rates fell to their lowest level in three years early in the week but rose later in the week.  Overall mortgage interest rates ended the week slightly lower than last week.

Next week the following economic data will be released and events will occur:

  1. The Consumer Price Index will come out on Wednesday;
  2. The Retail Sales report will be released on Thursday; and
  3. The Housing Starts report will come out on Friday.

This week there was stronger than expected economic data that was released.  However, at the same time there were increased expectations that the Federal Reserve and the European Central Bank may both lower interest rates in the second half of the year and as a result mortgage interest rates ended the week slightly lower.

Next week the following economic events will occur and economic data will be released which could impact mortgage interest rates:

  1. The Existing Home Sales report will be released on Tuesday;
  2. The New Home Sales report will be released on Wednesday;
  3. The European Central Bank will meet on Thursday; and
  4. The Gross Domestic Product report will come out on Friday.

 

This week the inflation report (Core Consumer Price Index) was released and the results showed inflation rising at a higher rate than anticipated.  As a reaction to this report mortgage interest rates rose late in the week and are higher than they were last week.

Next week the following economic events will occur and economic data will be released:

  1. The Retail Sales report and the Industrial Production report will both be released on Tuesday; and
  2. The Housing Starts report will be released on Wednesday.

The week ended on a volatile note which is common for a holiday week.  While a decline in bond yields worldwide were positive for mortgage rates better than expected jobs data on Friday caused mortgage rates to rise to close the week.

Next week the following economic events will occur and economic data will be released:

  1. 1.  The JOLTS report will be released on Tuesday
  2. 2.  The minutes of the June 19 Federal Reserve meeting will be released on Wednesday; and
  3. 3.  The Consumer Price Index will be released on Thursday.

Mortgage interest rates were volatile this week due to news regarding the ongoing trade negotiations between the U.S. and China, comment from Federal Reserve and mixed economic data that was released.  Overall mortgage interest rates were largely unchanged at the end of the week compared to last week.

Next week the following event will occur and economic data will be released that may impact mortgage interest rates:

  1. The ISM National Manufacturing Index will be released on Monday;
  2. The ISM National Services Index will be released on Wednesday;
  3. The Employment report will be released on Friday; and
  4. The ongoing trade negotiations and the G20 meeting should be watched closely as well.

The economic data that was released this week was stronger than expected however, an announcement by the European Central Bank that it may provide additional stimulus measures led to a decline in global bond yields, including mortgage interest rates in the U.S.  As a result, mortgage interest rates end the week at their lowest levels in over 2 years.

Next week the following events will occur and economic data will be released that may impact mortgage interest rates:

  1. The New Home Sales report will be released on Tuesday;
  2. The Durable Orders report will come out on Wednesday; and
  3. The Core PCE Index will be released on Friday

Trade news related to Mexico and the economic data released during the week caused come volatility in mortgage interest rates, especially early in the week.  As a result, rates were slightly higher at the end of the week compared to the end of last week.

Next week the following economic data will be released and events will occur:

  1. 1.  The Housing Starts report will be released on Tuesday;
  2. 2.  On Wednesday the Federal Reserve will meet and provide guidance on future interest rate increases; and
  3. 3.  The Existing Home Sales report will be released on Friday.

With weaker than  expected economic data being released and comments from the Federal Reserve indicating a willingness to lower interest rates, mortgage interest rates fell this week to their lowest level in almost two years.

Next week the following economic data will be released and events will occur that could impact mortgage interest rates:

  1. 1. The Consumer Price Index will be released on Wednesday;
  2. 2. The Retail Sales report will be released on Friday; and
  3. 3. There will be Treasury Auctions on Wednesday and Thursday.

The economic data that was released during the week was mostly neutral for mortgage interest rates and took a back seat to the ongoing impact of trade negotiations with China and new trade tension with Mexico.  These factors caused steep declines in the stock market this week leading to a significant drop in mortgage interest rates.

Next week the following economic data will be released and events will occur which may impact mortgage interest rates:

  1. The ISM National Manufacturing Index will be released on Monday;
  2. The ISM National Services Index will be released on Wednesday;
  3. The European Central Bank will meet on Thursday; and
  4. The monthly Employment Report will be released on Friday.

The stock market continued to struggle this week due to ongoing trade tensions between the US and China.  With little other economic news this week mortgage interest rates declined due to the volatility in the stock market.

Next week the following economic data will be released and events will occur which could impact mortgage interest rates:

  1. Pending Home Sales and first Quarter GDP will be released on Thursday;
  2. The Core PCE Price Index will be released on Friday; and
  3. The mortgage markets will be closed on Monday in observance of Memorial Day.

The economic data released this week was weaker than expected and mortgage interest rates declined during the week.  Additionally, ongoing trade negotiations between the U.S. and China added to the volatility in the markets.

Next week the following economic data will be released and events will occur that may impact mortgage interest rates:

  1. The Existing Home Sales report will be released on Tuesday;
  2. The minutes from the May 1 Federal Reserve meeting will be released on Wednesday;
  3. The New Home Sales report will come out on Thursday; and
  4. The Durable Orders report will be released on Friday.

This week there was a significant amount of economic data and news released.  Mortgage interest rates were very volatile during the week although the news was and data was mostly mixed with some being positive and some being negative.  As a result, by the end of the week interest rates were largely unchanged from last week.

Next week the following events will occur and economic data will be released that could impact mortgage interest rates:

  1. The JOLTS report which measures job openings and labor turnover will be released on Tuesday;
  2. The Consumer Price Index report that measures inflation will come out on Wednesday;
  3. There will be Treasury auctions on Wednesday and Thursday; and
  4. There will be continued focus on the ongoing trade negotiations between the US and China as the deadline approaches.

On Friday the first quarter GDP report was released which was favorable for mortgage interest rates due to continued low inflation and slower growth in consumer spending.  Late in the week mortgage rates fell and ended the week lower than last week.

Next week the following economic data will be released and economic events will occur:

  1. The core PCE report will be released on Monday;
  2. The ISM Manufacturing Index will be released and the next Federal Reserve meeting will occur.  Both on Wednesday;
  3. The Employment report and the ISM National Services Index will be come out on Friday.

There was very little economic news this week with Retail Sales report being the most significant economic data released.  However, the report had little to no impact on markets and mortgage interest rates were unchanged during the week.

Next week the following economic data will be released and economic events will occur:

  1. The Existing Home Sales report will come out on Monday;
  2. The New Home Sales report will be released on Tuesday;
  3. The Durable Orders report will be released on Thursday; and
  4. First Quarter GDP will be released on Friday.

With most investors expecting US economic growth to continue at a moderate pace and very little other economic news mortgage interest rates rose slightly this week although overall the economic news was mixed.

Next week the following economic events will occur and economic data will be released:

  1. The Retail Sales report will come out on Thursday;
  2. The Housing Starts report will be released on Friday; and
  3. The mortgage markets will close early on Thursday and be closed all day Friday in observance of Good Friday.

After recently falling to the lowest levels in over a year mortgage interest rates rose slightly this week.  The economic reports that came out during the week were mixed but overall the US economy continues to show strength.

Next week the following events will occur and data will be released which may impact mortgage interest rates:

  1. Next week Wednesday the European Central Bank meeting will take place, the Consumer Price Index will be released and the minutes from the most recent Federal Reserve meeting will be released.