106°F
weather icon Clear

Why are mortgage rates so high right now?

Interest rates are the highest they’ve been since before the Great Recession, but Las Vegas-based mortgage adviser Matt Hennessy said it’s important for people to understand specifically why monthly mortgage payments are where they are right now.

Hennessy said the Federal Funds Rate, which currently sits at 5.25 to 5.50 percent and sets the rate at which banks lend money to each other, is not the actual marker for mortgage rates and the story is a bit more complicated. The last time the rate was this high was back in 2007.

“When the Fed hikes rates this does not have a direct impact on mortgage rates,” Hennessy said. “Some of the misinformation out there is that in the event the Fed hikes rates by a certain percentage that mortgage rates will increase similarly. This couldn’t be further from the truth. However, when the Fed hikes rates it does have a direct impact on certain short-term rates like treasuries, car loans, credit cards or home equity lines of credit.”

The goal of hiking rates — interest rates bottomed out during the pandemic due to COVID lockdowns and global supply chain issues — said Hennessy, is to do one thing: curb inflation. The inflation rate hit 9.1 percent in June 2022, the highest it’s been since the early 1980s, after the U.S. administration injected $5 trillion into the economy to offset the impact of the pandemic. Hennessy said there is an easy way to define this.

“The simplest definition of inflation is too many dollars chasing too few of goods. When the Fed increases the Federal Funds Rate they are in essence trying to slow the demand side of the economy by making goods more expensive and less attractive.”

This, in turn, does impact mortgage rates, however not in the direct way many believe, he said.

“Inflation is the archenemy of mortgage rates since mortgage bonds pay investors a fixed rate of return over time. Inflation erodes the buying power of your future fixed return because the cost of goods and services has increased, meaning that fixed amount received will purchase less in the future.”

Currently, the average rate for a 30-year fixed-rate mortgage, the standard mortgage given to Americans for a single-family home, sits at 6.8 percent, and the last time it was this high was October of last year, and before that it was back in 2002.

Redfin Economics Research lead Chen Zhao said the latest Consumer Price Index report means mortgage will stay higher for longer as it now seems unlikely the Fed will cut interest rates in the next few months.

“Housing costs are likely to continue going up for the near future, but persistently high mortgage rates and rising supply could cool home-price growth by the end of the year, taking some pressure off costs.”

Hennessy said mortgage rates are not tied to the U.S. government’s 10-year treasury yields — which are paid by the government as interest for borrowing money via the selling of a bond — however they are linked. Hennessy said the best way to describe 10-year treasury yields is the amount of debt the government is borrowing to run a deficit.

“This is why mortgage professionals must follow the trading of mortgage bonds, which are also known as mortgage-backed securities, for accuracy. It’s important to keep in mind that mortgage rates don’t change weekly or daily but rather hourly as the markets take their direction from daily economic reports, data on inflation and statements surrounding the Federal Reserve’s monetary policy.”

The Federal Reserve has stated it’s intended goal with inflation, to get it down to 2 percent — it’s currently at 3.1 percent — and then lowering the funds rate. However Hennessy said it’s too early to tell if Americans can expect cuts to the funds rate this year, and the latest data does not look good.

“Inflation was hotter than expected in March, continuing a trend we’ve seen in recent months, as rising energy and shelter costs added to pricing pressure,” he said. “While annual inflation still remains well below the peaks seen in 2022, these stubbornly high inflation readings could delay the Fed’s timing for rate cuts this year.”

Contact Patrick Blennerhassett at pblennerhassett@reviewjournal.com.

Don't miss the big stories. Like us on Facebook.
THE LATEST