The Mortgage Rate Questions

November 14, 2023
The Mortgage Rate Questions
Why are rates so high, how long will they stay high, and when will they turn?


We will ask three mortgage questions this week. First, why are mortgage rates so high? We know why interest rates are high—the Federal Reserve has increased short-term rates to deal with stubborn inflation. But mortgage rates have risen far more than the rates on Treasuries. One reason? In addition to the Fed raising rates, they have also stopped purchasing mortgage instruments. This has created less demand for mortgages, increasing the spread between mortgages and Treasuries. Plus, the risk of a recession has increased with the Fed activity. Recessions can cause default rates on mortgages to rise – though we have seen no evidence of a recession thus far.

Second, how long will rates stay high? Because the economy has been so resilient, the Fed has coined the phrase “higher for longer.” Many had expected rates to fall at the end of this year and certainly by early 2024. Thus far it has not happened because the economy keeps expanding despite the Fed’s effort to cool things down. Thus, the Fed feels it must keep rates higher for a longer period of time. Plus, the federal budget deficits will continue to put upward pressure on rates as the Fed is flooding the markets with bond offerings to pay for this debt. Even if the economy slows, the Fed funding requirements will remain in the long-term.

Third, when will mortgage rates turn? Here is the good news. The Fed does not have to start lowering short-term rates for mortgage rates to fall. Just by softening their “higher for longer” rhetoric, the markets could move mortgage rates lower before any action by the Fed. Because of the wider spreads, the spreads between Treasuries and mortgage could narrow. No, we can’t predict when this will happen, but listening to statements by members of the Fed and looking for evidence of slower economic growth will give us all the clues we will need. We recently saw a drop in rates in reaction to the Fed keeping rates steady at their last meeting together with more moderate job growth in October. Could this be the turn? We shall see.