Welcome to today’s blog post: Understanding Mortgage Rates Explained for Metro Detroit! If you’re a homebuyer or seller, understanding mortgage rates can be your ticket to making savvy financial decisions. Stick around as we break down what you need to know in simple, easy-to-understand terms. Let’s dive in!

Understanding Mortgage Rates and Why They Are So High

Mortgage rates are on the minds of many homebuyers today in Metro Detroit. Whether you’re a first-time buyer or looking to sell your current home for one that better suits your needs, you might be pondering three key questions:

Why are mortgage rates so high?
When will rates drop again?
How to time the market and lock my mortgage rate?

This is an educational vlog post, and the graphs will change weekly. To keep up to date, visit the vlog post “Navigating Mortgage Rates ~ Empower your move.” I’m here to help unravel these questions and guide you on your home journey in Metro Detroit. Let’s dive in.

1. The Federal Reserve & Understanding Mortgage Rates

Did you know Mortgage Rates are not determined by the Federal Reserve’s increasing or decreasing interest rates?

As you can see by this graph, the Fed has raised interest rates ten times since March 2022. When I discuss mortgage rates, it’s based on the Federal Reserve and the Treasury Department’s policies.

Understanding Mortgage Rates: Follow the 10-Year Treasury Yield.

For the past 50 years, mortgage rates have 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. Your mortgage money does not come directly from the lender’s cash; it’s funded through the Fed’s underwriting system like Freddie Mac or Fannie Mae. Keep this in mind as we work through the layers.

Understanding Mortgage Rates: How Can You Find a Lower Rate?

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.

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.

2. Understanding Mortgage Rates: Follow the 10-year Treasury Yield Trends

The saying goes, “Where the Yield goes, mortgage rates follow”. If you want to be a pro at navigating mortgage Rates, then …Follow the Yield.

As you see by the 1-year graph, the 10-year treasury yield has steadily climbed up over the past year.

10-Year Treasury Yield High

On October 19^th of this year, the yield hit an alarming 23-year high and closed at 4.9880, pushing mortgage rates in the 8+% range. This event warned the Fed and the Treasury that we are heading for a recession if the bond rate keeps climbing. 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.

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 massive influence on mortgage Rates.

3. What are Mortgage-Back Securities, and Why Does it Affect Mortgage Rates

Next, we will dive into mortgage-backed securities, MBS for short. This is HUGE; it’s called the MBS gap 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’m going to teach you how to follow the gap.

This is where the process could make your eyes glaze over, but hanging in will make sense in the end. Let’s return to the graph, the 50-year trend where the mortgage rates and the yield moved in unison.

The Average MBS Gap Over the Past 50 Years

As you can see from this graph, there is a gap between the yield and the rate; on average, it was 1.72. The calculation for the gap takes the mortgage rate minus the yield, which equals the gap rate.

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, and they bundle investment packages made up 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.

The MBS Gap Starting in 2023

As you can see, the gap increased, causing mortgage rates to go up. Now, fast forward. 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 gap. The demand is low, and 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 out by accident when I was crunching numbers trying to figure out why mortgage rates were so high. Moving forward, we both can track where mortgage rates are heading.

4. Freddie Mac and Fannie Mae

Now, we need to review the last of the mortgage trends. 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. The Mortgage Rate results from the 10-year Treasury yield and MBS gap rate. Based on the last year, mortgage rates stayed high. Fewer buyers bought ~ fewer loans were sold ~ the gap increased~ and the Bond market went wild in October 2023. At one point, mortgage rates were in the 8% range.

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 in Metro Detroit. 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.

Understanding Mortgage Rates: Putting All the Moving Parts Together

First, I took an average of the 10-year Treasury yield for the week, and as of 11-9-2023, the yield average was 4.593.

The next part of the equation will be the Freddie Mac PMMS average for the week of 11-9-2023.

How the Gap Affects Mortgage Rates in Metro Detroit

This is where the magic happens; you can now access your crystal ball by tracking the gap. We may see changes in the mortgage rates and the 10-year treasury yield going down daily. We want to see the gap decrease under the rate of 2.705. This will be our first indication rates are going down and, more importantly, staying down in Metro Detroit.

Tracking the MBS Gap

Remember the MBS…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 reducing the demand for new home loans sold to investors. The gap jumped from 2.705, and I’ve seen the gap as high as 3.11. In November, the Feds and the Treasury came to a meeting of the minds with new policies due to the extremely high rate in the bond market signaling a recession. New policies were implemented, mortgage rates fell slightly, and the gap lowered to 2.907.

When Will Mortgage Rates Go Down and Stay Down?

Now you know what is causing mortgage rates to be so high. When will they go down and stay down? This is like asking what came first, the chicken or the egg. My crystal ball tells me we need significant changes in the following economic numbers.

What Needs to Change in Our Economy

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 3s. We’ve had a hot mess of the 10-year Treasury Yield numbers 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 high. 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 forecast the downward trend. You’ll know when the time is right for you to jump into the real estate market in Metro Detroit.

Key Update

New update changes between November 9th and November 15th, starting with the Feds not raising interest rates and the inflation numbers coming in at 3.2% by the second week of November; we’ve seen a significant improvement in the Yield rate and mortgage rate; they have both trended down. We’ll have to wait and see if the economy is finally settling down and buyers are ready to start purchasing again, which will also cause the MBS gap to go down as well. Keep track of the current trends by visiting my website blog post “Navigating Mortgage Rates – Empower your move updated every Friday…at least you’ll be the 1^st to know the new trends.