Understanding the Current Mortgage Market
Americans have shown resilience and unity throughout history in the face of adversity. Whether it was the financial crisis 2008 or the unprecedented challenges posed by the pandemic in 2020, we stood together to overcome these hurdles. Today, we find ourselves in a changing market, not as tumultuous as before, but one that has left many bewildered. Our task now is to bring clarity to consumers swiftly. So, let's delve into the most perplexing aspect: mortgage rates.
The Unraveling Mystery of Mortgage Rates:
Mortgage rates have long been a subject of speculation and uncertainty. Many have lost their careers trying to predict their trajectory. Rather than attempting to make projections, let's delve into the factors contributing to the current high rates.
The Untold Story of Spreads:
For over half a century, there has been a consistent pattern – the 10-year treasury yield acting as a benchmark, augmented by a spread set by the banking industry to form the mortgage rate. This spread, representing their share, historically averaged around 1.72%. However, in a startling departure from the norm, the spread has exceeded expectations since the beginning of this year. It started at one point above the average and has now escalated to over three percentage points higher, almost double the regular rate.
A Rare Phenomenon:
Such a significant deviation from the norm is exceedingly rare.
As George Ratiu, Chief Economist at KCM, asserts, “Spreads approaching or exceeding 300 basis points, equivalent to 3%, have only occurred during periods of high inflation or economic volatility, such as the early 1980s or the great financial crisis of 2008 and 2009. This current situation is undoubtedly a unique occurrence, one that demands our attention.”
The Gap Between the Mortgage Rate and 10-Year Treasury Yield is High
Today we find ourselves in one of those exceptional times. Consequently, mortgage rates have soared.
Odeta Kushi, Deputy Chief Economist of First American, suggests that “if the Federal Reserve eases its monetary tightening and gives investors more certainty, the spread and mortgage rates may recede in the latter half of the year. However, it is unlikely that the spread will return to its historical average of 170 basis points, as some risks are likely to persist.”
The Current Landscape:
The 10-year treasury yield currently stands at 3.65%, contributing to the higher mortgage rates. If the spread between the 10-year treasury yield and mortgagee rates remained at the average of 1.72%, mortgage rates would be at an enticing 5.35%. Such a favorable rate would undoubtedly flood the market with eager buyers, creating a surge in demand. However, the reality is different; mortgage rates hover around 7% and continue fluctuating. Even if the spread were to settle at a level slightly higher than the historical average, say 2.25%, we would still have mortgage rates below 6%, a threshold that would also trigger a market frenzy.
Conclusion:
In these uncertain times, understanding the mortgage market becomes paramount. The current high rates, a deviation from the norm, present a unique challenge. While we cannot predict the future, knowing the factors influencing mortgage rates and the potential impact on the housing market is crucial. As we navigate these uncharted waters, let us equip ourselves with knowledge and stay prepared for any market fluctuations that lie ahead.
When it comes to purchasing a property, we are always here to provide you with the knowledge and guidance you need. We understand that this decision is one of the most significant ones you'll make in your life, and we're committed to ensuring you make the right choice. Let us empower you with the information necessary to navigate the market and help you find your dream home.