April 27th, 2023 3:01 PM by Sam Kader
Mortgage rates have been volatile in the last few weeks. Will it go down to 2020 – 2021 level again? Most likely not in near foreseeable future. On the bright side - they are less competition and things are gradually shifting in favor of homebuyers now. With current elevated mortgage rates and existing home sales downed more than 14% from last year - some potential homebuyers are sitting on the sidelines waiting for either mortgage rates or home prices or both to decline while sellers are hoping that the market picks up again so they can get higher price.
Don't count on mortgage rates falling to those pandemic lows again. They were results of extraordinary market manipulation from the Federal Reserve System (Fed) and unless the Fed makes it a regular feature of monetary policy, don't hold your breath that mortgage rates going back to 2020/2021 pandemic level again.
The real estate prices increased 30% between March 2020 and December 2021 due to many people moved during the pandemic and due to rates were at historic low in Spring of 2021.
In the Spring of 2020, early on during the pandemic, the Fed was desperate to avoid economic collapse so it reverted to its 2008-recission playbook. It cut Fed Funds rate to zero and brought back Quantitative Easing (QE) policy - buying long-dated government bonds/treasury securities and Mortgage-Backed Securities (MBS). Most of our mortgages (about 75%) are securitized by Fannie or Freddie Mac (2 - Government Sponsored Entities or GSE) and resold in the secondary market in what is known in the industry as Mortgage-Backed Securities.
In 2020, the mortgage-backed security was in trouble and the Fed was even more aggressive than it was in 2008. In order to support the housing sector, it effectively became the only ultimate buyer of mortgage-backed securities. It's holding of MBS portfolio grew by $1.3 trillion between 2020 and 2022 while the market for agency mortgage-backed securities grew by $1.5 trillion. The Federal Reserve now holds more than 40% of the total outstanding amount of MBS or nearly 50% of the market. These actions were one big reason rates fell so low in 2020 to early 2022 timeframe.
Mortgage rate is based on a rate of 10-year US treasury rate + a Yield Spread Premium (YSP) for the extra risk involved as determined by the market. The YSP spiked at the start of the pandemic and it fell to nearly zero as the Fed kept buying MBS. The YSP started rising again in June and it rose further in the Fall of 2021 when the Fed started to taper its QE policy before stopping in early 2022. The YSP is currently higher than it was before the pandemic. The Fed would like to shrink the size of its MBS portfolio by not reinvesting all the securities as mortgages are paid off. However, higher rates mean fewer people will refinance or move. Thus, the mortgage portfolio won't shrink as fast as the Fed anticipates. Another way for the Fed to shrink is MBS portfolio is to sell-off its mortgage-backed securities. If and when that happens, expects the MBS spread with 10-Year bond will grow even larger and most likely our mortgage rates will rise as well.
A 2.6% fixed rate on a 30-Year fixed never made much sense. It suggests that something is off in the market either through some manipulation or mis-pricing of risk. The Fed created major distortions in a market where many Americans have most of their wealth and the impact may be felt for decades. If you refinanced or bought a house in 2020 and 2021 time-frame - well done. If you haven't - investing in real estate is still an excellent investment option to build generational wealth in America. Furthermore, they are less homebuyers to compete with you now.
Mortgage rates change daily - please send your customized rate quote here. Please do not wait for 2020 and 2021 rate level and to start your loan application now.