Here’s why mortgage rates have been falling
It’s a tale of two rates today. The first is the federal funds target rate, which is the rate the Federal Reserve and Jay Powell set. That rate has been on a steady climb since March and is now between 3.75% and 4%. All signs point to the Fed raising that rate again next week to cool inflation.
The second rate is the average interest rate on a 30-year fixed-rate mortgage, which typically moves in tandem with what the Fed is doing. The key word there is “typically,” because over the last month, that rate has dropped from 7.16% to 6.4%, according to the Mortgage Bankers Association.
So, what gives?
If the Fed raises interest rates, what mortgage rates will do kind of depends.
“It depends on what the market outlook for the future of the economy at large is,” said Karan Kaul, who researches housing finance at the Urban Institute.
The “market” he’s talking about isn’t the market for buying and selling houses — it’s the market for buying and selling mortgages.
“Most mortgages made in the U.S. end up being bundled and securitized into investment products, bonds that are eventually sold to investors across the world,” he said.
When last month’s inflation numbers came in better than expected, hedge funds, bond funds and banks across the world said, “Huh, maybe the Fed will slow down its rate hikes now.” So they bought a bunch of mortgages while rates were still pretty high, thinking, “Let’s get in while homebuyers are still paying that sweet 7%.”
But when there’s a big surge in investor demand for mortgage bonds, “the price goes up, the rate goes down, and that trickles through to what the homeowners will see,” said Jeana Curro at Bank of America.
And all of a sudden that sweet 7% drops.
If the mere mention of mortgage-backed securities is giving you Great Recession vibes, Curro said this time really should be different. “Now, lending standards have really, really tightened.”
It’s an open question whether there’ll enough investor demand to keep mortgage rates down — especially because one big buyer is out of the market entirely.
“The Fed has been the largest and really the only buyer of securities the past two years or so,” said Joel Kan, an economist with the Mortgage Bankers Association.
The Fed originally boosted its mortgage buying program after the pandemic hit. It stopped this year, trying to bring down inflation — including home prices.
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