Why are mortgage rates so high? Here’s what the experts say

High mortgage rates have been the reality for homebuyers for some time now. Until July 19, 2023, Average mortgage rates 6.87% for a 15-year mortgage and 7.07% for a 30-year mortgage, respectively Bankrate. This is their highest this year.

How did we get here – and where can we expect rates to go going? We asked some experts for their take.

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Why are mortgage rates so high? Here’s what the experts say

The experts we spoke to pointed to three main reasons why mortgage rates are as high as they are today.

Inflation

Persistent inflation plagued some consumers last year and then. And in addition to raising prices and reducing the purchasing power of the dollar, it has driven mortgage rates to new highs. Inflation makes it more expensive for banks to lend money, so they raise mortgage rates to help recoup some of their costs.

“The reason mortgage rates are so high (and could get higher) is because of the increased inflation we’ve seen in the economy in recent years,” says Craig Toberman, CFA, CPA, CFP, founder of Toberman Wealth. “To fight inflation, the Federal Reserve must raise short-term interest rates to try to calm the economy. This increase in short-term rates, and the threat of interest rates staying higher for longer, also causes long-term rates, such as mortgages, to rise.”

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Mortgage Backed Security

“Mortgage rates, particularly 30-year fixed-rate mortgages, are directly affected by purchases of mortgage-backed securities (MBS),” said Darren Tully, senior loan officer at Cornerstone Financial Services.

He added, “MBS are traded in the bond market like stocks, and like stocks, prices rise or fall throughout the trading day as they are bought or sold. As more MBS are bought, the price rises, and as the price rises Mortgage rates will go down.”

MBS are secured by a pool of mortgages purchased from the bank that issued them. When the housing market is down, these securities become less attractive.

“Mortgage rates are currently so high because investor demand for mortgage-backed bonds is currently low. Investors are afraid to invest in mortgage-backed bonds because of fears of a recession,” said Alvin Carlos, CFP, CFA, financial planner and managing partner of District Capital Management.

Treasury yields

The last big piece of the puzzle is Treasury yields, or the annual return investors stand to earn if they buy Treasury securities (debt obligations issued by the U.S. government).

“Mortgage rates are heavily influenced by the 10-year Treasury yield,” says Carlos. “The higher the 10-year Treasury yield, the higher the mortgage rate. The 10-year Treasury yield rose from 0.54% in July 2020 to around 3.8% today.”

While “the spread between the 10-year Treasury yield and the 30-year fixed mortgage rate has historically averaged about 1.70%,” Carlos said, “the spread is currently higher than that because the Federal Reserve remains adamant about fighting inflation, driving rates up.”

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Bottom line

Where are mortgage rates going? Experts we spoke to recently Agree that we have probably reached the peak. Although rates may be slightly higher in the near future, there is a good chance that they will start to come down in the second half of 2023 and early 2024.

“On the bright side, we saw inflation continue to cool last week as the June CPI report showed the rate fell by a quarter,” said Peter Idziak, senior associate at Polunsky Beitel Green. “If inflation continues to cool in the second half of the year – or at least hold steady – then we expect the Fed’s rate hikes to fall to a range between 5% and 6% over the next 12 months, and we expect the spread between 10-year Treasuries and mortgage bonds. The reading returned to its historical average.”

And while rates are high, there are some What prospective home buyers can doBut including making a big down payment and buying now Consider a refinance later. Also, be sure to do your research and compare multiple mortgage products Get the best rate possible In today’s rate environment.