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Today’s discussion is a real head-scratcher for many: We will unravel the answer to the 3 key questions home buyers and sellers are asking today.
- Why are mortgage rates so high?
- When will rates drop again?
- How do I time the market and lock in a lower mortgage rate?
This is an educational video regarding the complexities of mortgage rates, and the graphs I’m using are for educational purposes. For Updated graphs and trends regarding current mortgage rates, please visit my website and the vlog post [scene 1 navigating mortgage rates ~ ] “Navigating Mortgage Rates and Empower your move updated every Friday by 4.
Scene #2 YouTube Intro
[talking head only] “Hello ~ Thank you for joining in…I’m Pam Sawyer, your real estate guide through the ever-changing world of real estate right here in Metro Detroit. On this channel and vlog post, we dive into the complexities of the real estate housing market, especially home prices and mortgage rates. If you’re curious about buying or selling a home in Michigan and want to understand more about what’s happening in real estate, you’re in the right place. Feel free to subscribe and get notified about our latest educational videos. Let’s now dive into the crucial details of mortgage rates.
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[scene 3a Feds Interest Rates] First Up: Mortgage Rates are not determined by the Federal Reserve’s increasing or decreasing interest rates. As you can see by this graph, the Feds Raised interest rates 10 times since March 2022, and we know mortgage rates have increased steadily since Mid-2022. When I discuss mortgage rates, it’s based on the policies the Federal Reserve set along with the Treasury. [scene 3b Mortgage Rates and the Yield] For the past 50 years, Mortgage Rates followed the 10-year Treasury Yield. As you can see by this graph, the rate and the yield moved in unison. Most loans are funded through the Feds underwriting system to free up capital for lenders. [scene 3c bank vault] Your mortgage money is not directly from the lender’s cash; it’s funded through the Feds Underwriting System like Freddie Mac or Fannie Mae. [ talking head] Keep this in mind as we work through the layers.
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One question I get asked a lot…Is there a way to get a lower mortgage rate without going through the Feds? The answer is yes…. One way is to find independent banks using their cash stockpile to lend money or find independent mortgage investors. They can set their own policy and rates because they are not funneling loans through the Feds underwriting system. They can compete for your business and allow you to negotiate. Remember, you marry the house and date the rate.
Important Tip: Don’t give out your SS# when shopping around for a lender until you are ready for a hard pull on your credit report. Know your FICA score before you shop. Also, you’ll need to ask what they charge to pay down the rate and all fees. Banks will camouflage the numbers with different labels, so ask for ALL FEES. Building on our discussion of mortgage rates, let’s delve into the 10-year Treasury yield, a vital factor in the mortgage market.
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[Talking head] Now that you know, the Feds don’t set mortgage rates, and for the past 50 years, mortgage rates and the 10-year treasury yield moved in unison. [5 a 10-year treasury yield 1-year graph] Let’s dive deeper into the 10-year Treasury Yield trends.
As you see by the 1-year graph, the 10-year treasury yield has steadily climbed up over the past year. [Scene 5 b 1 month Treasury Yield] On October 19th of this year, the yield hit an alarming 23-year high and closed at 4.9880, pushing mortgage rates in the 8+ percent range. This event warned the Feds and The Treasury that we are heading for a recession if the bond rate keeps climbing higher. The yield rate stayed high for the rest of October, and so did mortgage rates. Fortunately, the Feds were also alarmed by the dramatic trend. At the November meeting, the Treasury Department and The Federal Reserve had a meeting of the minds; they held off increasing the interest rates and made a slight shift in policy. The { updated 1-month graph here] As you can see by this graph, in the past month, we went from a high of 4.9880 on 10-19-2023 to a low of 4.549 on 11-15-2023. That’s why mortgage rates dropped so quickly. Unfortunately, other factors influence the mortgage rate as well…Next, I’ll explain mortgage-backed securities and their huge influence on mortgage Rates.
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[talking head] This is HUG; I will explain the importance of the Mortgage-Backed Securities Gap rate between the 10-year Treasury and the Actual Mortgage Rate…This is how you know mortgage rates are going down and, more importantly, staying down. This is your crystal ball, knowing where mortgage rates are heading. I will teach you how to calculate the gap and follow the gap trends.
So now you know the gap exists. What are Mortgage-Backed Securities, MBS for short anyway?
MBS follows the rules of Supply and Demand regarding home loans. They are created by companies like Freddie Mac and Fannie Mae, which bundle investment packages of home loans and sell to investors like bonds. Now, this is where it gets wonky. The key here is Supply and Demand. This graph represents the gap from January 2023 to the end of May. { 2023 gap graph] As you can see, the gap increased, causing mortgage rates to go up. So, what caused the MBS – Gap to increase so high in 2023? Now that we’ve raised the question about the factors leading to an increase in the MBS gap let’s delve into the answer to understand the dynamics at play.
Since the mortgage rates are so high, there is less demand for new mortgages, and fewer home loans are sold to investors, causing a wider MBS – gap. When the demand is low for new loans, the gap is higher. When more homes are purchased and new mortgages are sold to investors, the gap is lower…supply and demand. Tracking the gap rate is significant when determining the future of mortgage rates. I found this little unknown fact by accident when I was crunching numbers to figure out why mortgage rates were so high. Building on our discussion of mortgage rate trends, we now transition to a closer look at Freddie Mac Mortgage Rates.
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Understanding Freddie Mac’s rates becomes an essential piece of the puzzle. I’ll use the graphs from Freddie Mac PMMS as most loans go through the Feds underwriting system. I follow the PMMS version as it averages the rate for the week. With the extreme yield movement, I find the data more accurate. Remember that the Mortgage Rate is the end result of the 10-year Treasury yield and MBS gap rate. As you can see from this graph, the 1-year Mortgage rates from Freddie Mac stayed high. Fewer buyers bought ~ fewer loans were sold to MBS investors~ the gap rate increased ~ and the Bond market went wild in October 2023, causing Freddie Mac’s rates to skyrocket into the 8+% range.
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Now, let’s look back over the past 40 years. The highest peak for Mortgage rates was in 1981 at 18.27%. As a first-time homebuyer back then, my mortgage rate was 17.5%. If we fast forward to 2000, during the last housing boom, mortgage rates were 8.62%. Even before and during the Crash 08, the peak was 6.69%. What we experienced in 2020 – mid-2022 was a fluke created by the Feds to keep the economy moving; I refer to this period as the Unicorn Years. Once the Feds stopped propping up the economy, reality kicked in, welcoming inflation, and the bond markets trended up month over month due to treasury policies and debt. Having examined the high Freddie Mac mortgage rates, let’s now piece together the puzzle to forecast when these rates might drop.
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[use 5b 1-month treasury yield] Puzzle piece number 1 is the 10-year Treasury yield for the week, and as of 11-15-2023, the yield average was 4.5424.
The next part of the equation will be the Freddie Mac PMMS average for the week closed at XXX on 11-15-2023.
This is where the magic happens; you can now access my crystal ball by tracking the gap.
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Remember the MBS and the gap rate…back 50 years ago, there was a significant demand from investors to buy new home loans by investors, and the gap was 1.72. In 2023, the mortgage rates kept increasing, keeping buyers out of the home-buying process and less demand for new home loans sold to investors. The gap jumped to 2.705 in January of 2023, and I’ve seen the gap as high as 3.11. Now, let’s review the MBS – Gap to Mortgage Rates Graph.
On the far left, we have our current 10-year treasury average rate for the week of 4.577. When we add the gap from the past 50 years, the Mortgage rate would have been 6.297%. It’s not great, but it’s much better than our actual rate today.
Now let’s look at the graph on the far right…the same 4.577 40-year treasury yield rate average for the week, add in the MBS gap rate at the beginning of 2023, and the Mortgage rate would be 7.282%.
Now let’s look at the graph in the middle; we know the 10-year treasury rate add and subtract the current Freddie Mac Mortgage Rate of XXX, and now you have the MBS gap rate. Like magic, you can now predict where mortgage rates will be heading up or down. The first positive sign will be once the gap rate gets below 2.705 and drops week over week.
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[talking head] Now you know what is causing mortgage rates to be so high? Everyone wants to know when the mortgage rate will drop weekly and plateau at a much lower rate. This is like asking what came first, the chicken or the egg. My crystal ball tells me we need to see significant changes in the following economic numbers: Number 1 ~ believe it or not, we need a weaker job market. Unemployment numbers are lower than our GDP growth of 4.9%, which includes the housing market. Two… inflation ~ Inflation ~ Inflation. We are just stuck in the 3’s. This is a Biggy… We need to get our federal debt under control as it’s causing a hot mess with the 10-year Treasury Yield numbers going up since mid-2022 and now the prospects of a recession. Watching all the data points will be essential. The gap won’t change until the demand for more home loans improves so that the gap will remain higher than the 50-year average of 1.72. The economy is whacked on many levels, which goes against the norm. We may not be able to predict how high they will go, but we will be able to track and predict the downward trends.
11 Outro
[Talking head] Well, that was a lot to unpack. Is your head spinning? I do this every day, and mine is. Now you know why the mortgage rates are so high and, more importantly, how to track the numbers to know when mortgage rates are trending down. I’m here to guide you through this dynamic housing market, always keeping an eye on the latest trends for your benefit. The key here is to stay informed. If you are looking for details, I’ve got you covered in the blog post, and the link is below.
If you’re curious to learn more, we aim to provide you with the key information and clear insights you need to confidently navigate your real estate path. We prioritize your needs, ensuring your decisions reflect your best interests. My website was built as an educational tool for you.
To keep up to date, the links are in the description, or visit my website and social media at Team Tag It Sold, or better yet, Subscribe to my YouTube Channel. “Thanks for watching. I’ll catch you next time as we Navigate Mortgage Rates with current graphs and trends updated every Friday by 4 pm! Your journey to the perfect home begins here.
