For Buyers and Sellers
What Are Mortgage Rates Doing?
Oregon First, Realtors® & Washington First Properties
The rate on a 30-year fixed-rate mortgage is averaging 5.10% this week. That’s decrease of 0.2 percentage points in two weeks. This decrease is the biggest drop in rates since April 2020, towards the very beginning of the pandemic.
This rate represents roughly the rate a borrower with strong credit and a 20% down payment can expect to see when applying for a mortgage right now. Most borrowers with lower credit scores will generally be offered higher rates.
The Federal Reserve has been scaling back its stimulus activities at a quicker pace than previously expected given the high rate of inflation, announcing that it will reduce its purchases of mortgage-backed securities at a faster rate than previously expected.
Those purchases pumped a lot of liquidity into the mortgage market, which allowed mortgage lenders to lower interest rates amid the pandemic and sparked a major refinance wave. Without those purchases, banks will need to take the opposite approach and increase rates.
“The Fed has been in there buying every single day, multiple times a day, with respect to the MBS market,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. He added that over the past couple years the Fed purchased essentially “all of the new production” of these securities.
Other investors are expected to fill in the gap left by the Fed, but it’s unlikely that the market for these securities will see the same consistency.
“There are going to be other buyers, but there’s just no other buyer that acts like that,” Fratantoni said. “Some days they’ll be excited to buy MBS, and some days they won’t. That’s what leads to our expectation that we’re going to have a more volatile mortgage rate environment than we’ve had the past couple of years.”
The Fed is also planning to hike the federal funds interest rate three times next year. The federal funds rate doesn’t have a direct effect on mortgage rates, which are instead more likely to be influenced by movements in long-term bond yields including the 10-year Treasury note. Still, expectations of interest-rate hikes from the Fed are can affect investor behavior and have an indirect effect on the direction of mortgage rates.
Higher interest rates have already drastically cut into the volume of refinancing applications, and that trend is expected to continue into the New Year. In 2021, the Mortgage Bankers Association estimates that lenders will have doled out $2.32 trillion in refinance loans. Next year, they predict that the volume of refinances will drop to just $860 billion.
Consequently, lenders will need to shift their attention toward the so-called purchase market, meaning mortgage applicants who need a loan to buy a home.
“Lenders are thirsty for volume as refinancing traffic wanes and the investors that buy mortgage debt are still very much in a ‘risk-on’ mode,” said Greg McBride, chief financial analyst at Bankrate. “Until either of those changes, there isn’t an obvious catalyst for a tightening of mortgage credit.”
Indeed, the opposite outcome is more likely, according to economic and housing experts. Most expect that lenders will aim to make it easier to qualify for a home loan in order to compete for home buyers’ attention.
This would represent a major turnaround from the start of the pandemic, when lenders made it harder to get a mortgage. At that point, in light of the sudden recession, lenders implemented stricter standards for prospective borrowers to meet, including higher credit scores and income requirements. The large volume of refinance applications made this feasible, because they weren’t short on demand.
In 2022, it’s likely that lenders will resume offering low-down payment loan options and adding flexibility to underwriting standards, Fratantoni said. This could make it easier for many borrowers to qualify for a loan, including people who are self-employed or work in the gig economy.
“The regulatory constraints are still pretty tight, so the ability-to-repay and qualified-mortgage standards really limit the extent to which credit could loosen,” he said.
Of course, the competitive housing market means that some home buyers will still be out of luck. While rising interest rates are expected to slow the rate of home-price growth, it will still be more expensive to buy a home in 2022 than it was this year. For families struggling to save up for a down payment, even more relaxed credit standards won’t make it feasible to become homeowners.
To put current rates in perspective, the 30 year fixed rate in 2010 was 4.69% and ten years before that, it was 8.05%. If we go all the way back to 1981, the rate was a whopping 16.63%! Be aware, however, that the exact rate you pay will be a function of where the property is, how much it is, how much you're putting down, what your credit score is, and the type of loan you're getting.
But what causes rates to move up or down? The short answer is that it depends on what other things investors might choose to buy with their money are doing. Mortgages are not usually held by lenders for the life of the loan. They are usually bundled together and sold to investors in what are often called "mortgage backed securities." Sellers of these investments have not had to offer super high returns in order to find buyers for those securities, as they tend to be pretty secure. Those returns to the investors come from the interest home loan borrowers are paying. When mortgage based investments are in high demand, interest rates tend to go down. When investors are wary of mortgage based investments, the rates borrowers have to pay need to go up to compete with other investments and attract money into the home loan sector.
Note that how home loans as investments are perceived don't operate in a vacuum. Investors might not be too confident in people's ability to keep paying their home loans, but if they're even less confident in the ability of businesses to stay strong, mortgage backed securities will still look safer than corporate stocks (a share in a company) or bonds (a group loan to a company).
The most secure investment in the world is the United States of America 10 year treasury bond. Mortgage rates often track these 10 year notes because they are similar investments to mortgage backed securities. They're both longer term and low risk. Mortgages are not as low risk, of course, so they have to return more to the investor. The interest rate borrowers pay on their home loans generally runs about 2 percentage points higher than whatever the return is on 10 year treasury bonds.
In times of economic uncertainty such as now, mortgage interest rates, like 10 year treasury bond returns (or "yields") tend to go down because investors are looking for security so sellers of these investments don't have to compete as much for their dollars.
This is a very simplified discussion of what causes home loan rates to go up or down. We didn't, for example, get into the role of Fannie Mae or the Federal Reserve, and it's important to understand that lenders charge higher or lower interest rates to borrowers based on their own considerations. Right now there is a lot of demand for refinance loans so lenders have been charging a bit more than they might otherwise if they were having to compete more for loan customers. It's a balancing act: on one side lenders want to entice people to take out their loans, and they're competing with other lenders so they have an incentive to keep their rates as low as possible while still making a profit; on the other side they want to be collecting enough interest from their borrowers that when they go to sell these loans they can find buyers.
We hope you found this interesting! Our agents have great contacts in the industry so when you get ready to buy, they can give you names of lenders our other clients have had good experiences with. A good lender is responsive and conscientious, making sure there are no last minute surprises.