Mortgage rates have been steadily climbing since late September, impacting homebuyers across the United States. Initially dipping to a recent low near 6%, rates on a 30-year fixed mortgage surged above 7% in the week ending January 16, according to Freddie Mac data. This shift poses significant implications for both prospective homeowners and the broader housing market.
The current spread between mortgage rates and 10-year Treasury yields stands at approximately 2.4 percentage points, notably higher than the historical average of about 1.7 points from 1990 to 2019. This elevated spread has contributed to a rise in housing prices, with the typical homebuyer paying $406,100 for an existing home in November, marking a 5% increase from $387,800 a year earlier, as reported by the National Association of Realtors.
Mortgage rates are primarily influenced by the yield on 10-year U.S. Treasury bonds rather than the Federal Reserve's benchmark interest rate. Consequently, any fluctuations in Treasury yields directly affect mortgage rates. Experts warn that if mortgage rates exceed 7%, the Federal Reserve may choose to lower borrowing costs more gradually or potentially raise them again.
"Anything over 7%, the market is dead," stated Mark Zandi, chief economist at Moody's. "No one is going to buy."
To mitigate these challenges and stimulate the housing market, experts agree that mortgage rates need to fall closer to 6% or below. However, economists project that such a decline is unlikely until 2026.
The Federal Reserve's quantitative tightening policy, which involves reducing its holdings of Treasury bonds and mortgage securities, further complicates the landscape. Additionally, shifts in international investment patterns have emerged. Chinese investors have become more cautious in purchasing Treasurys, while Japanese investors show less interest as they can now achieve returns on their own bonds.
Lenders typically set mortgage rates at a premium over 10-year Treasury yields. The heightened premium exacerbates housing affordability challenges for consumers, as noted by Joe Seydl, senior markets economist at J.P. Morgan Private Bank.
"The higher premium is exacerbating the housing affordability challenge," according to Joe Seydl.
Despite these obstacles, savers can still secure a return ranging from approximately 4% to 5% through money market funds, high-yield bank savings accounts, or certificates of deposit. Nevertheless, the outlook for mortgage rates remains uncertain.
"Mortgage rates probably won't fall below 6% until 2026, assuming everything goes as expected," said Joe Seydl.
Homebuyers face tough decisions in this volatile environment. Lee Baker, a certified financial planner based in Atlanta and a member of CNBC's Financial Advisor Council, cautioned against risky market ventures.
"That's not something you should gamble with in the market," remarked Lee Baker. "You're taking a gamble."