Harbaugh Real Estate

Mortgage Rates Hold Steady for the Week of February 8, 2023

The 30-year mortgage rate has stayed near 6.6% since December 21.

Mortgage rates for the week of February 8, 2023

This week's rate news from GSE giant Freddie Mac is more good news/bad news for the housing market. For the eighth consecutive week, the average 30-year rate has hung around the 6.6% range. The 15-year rate continues to hover around 5.9%.

The good news is that rates haven't been going up any more, so things really aren't getting any worse for homebuyers. On the other hand, mortgage rates are still elevated compared with the past 15+ years, and that feels stifling to many potential buyers. If home prices had come down over the last couple of years, buyers might be able to better stomach the mid-6% rates since their mortgage payments likely wouldn't have changed if they moved from their existing homes. But, with elevated rates and elevated home prices, would-be buyers are staying put in their existing homes. And would-be first time homebuyers are largely just being left out of the market altogether because it is simply too cost prohibitive to get into a new home for them.

Mortgage Rate Details

To be specific, the 30-year fixed rate mortgage came in at 6.64% this week. That is up one basis point from last week when the 30-year rate came in at 6.63%. The 15-year rate was actually a tad lower than last week when it closed at 5.9% compared with 5.94% a week ago.

Freddie Mac Chief Economist Sam Khater says, "The economy and labor market remain strong with wage growth outpacing inflation, which is keeping consumer spending robust. Meanwhile, affordability in the housing market is an ongoing issue due to continued high home prices, elevated mortgage rates and low supply of homes on the market, particularly for first-time and low-income homebuyers."

In other words, everything related to the housing market seems to be in a state of stasis at the moment. Rates are holding steady, but so are home prices. With supply remaining low, buyers continue to struggle to find a place to live.

30-Year Rate and 10-Year Treasury Spread

30 year mortgage and 10 year treasury spread

There is an interesting phenomenon pointed out by economist Mark Dotzour that I thought I would present here.

First, a quick reminder of how mortgage rates work. The Federal Reserve actually does not directly set mortgage rates. When the Fed sets its target Fed Funds Rate, other interest rates tend to follow for various reasons related to how the bond markets work. The rate that mortgages are based on is largely the 10-year treasury rate because it is considered the risk free rate. If an investor is going to invest in a 30-year mortgage, they are going to want more compensation than what they can get from a 10-year treasury since they are taking on added risk with the mortgage.

One interesting data point to follow is the difference between the 30-year mortgage rate and the 10-year treasury yield. This difference is known as spread. For most of the past 20+ years, the spread between the two has stayed somewhere around 1.5 - 2.0%. Starting in March of 2022, however, the spread moved above 2%. To be sure, this has happened before, but it has never stayed above 2% for this long. AND, the spread has continued to widen over the last two years.

Currently, the 30-year mortgage/10-year treasury spread sits at around 2.58%. It has even approached 3% in the last several months. Now, the question is, what does this mean?

Dr. Dotzour says he isn't certain of the meaning or why this has occurred. What is interesting to me is that the spread started widening as soon as the Fed started raising rates in 2022. It's almost as if bond investors said, "Hey, 10-year treasuries are going to pay us more now than they have in a number of years, so if you want us to invest in mortgage bonds, you're going to have to pay an even higher premium."

Or, perhaps a more likely explanation has to do with how the Fed has gone about raising the Fed funds rate. When the Fed started raising rates, part of what they did to enact that plan was they started selling off lots of the mortgage backed securities they had purchased as part of their QE programs. Any time more securities are being sold than bought, the price of the security goes down. In the bond world, when the price of a bond goes down, its yield (or rate) has to go up. My thinking is that this enormous spread we've seen for the past couple of years could be the result of the Fed unloading so much of their mortgage backed securities on the open market, thus driving the prices of those securities lower and their yields higher.

If this is the case, it could mean that when the Fed stops selling so many of these securities, mortgage rates might get a little extra bump lower, and this would be GREAT news for homebuyers. The question, of course, is when might this happen. And, the answer is there is no way of knowing. Theoretically, if the Fed does lower rates a little this year, it might mean that they stop selling so many of their mortgage backed securities. But, the truth is, no one outside of the Fed has any real insight into the mechanics of what they are going to be selling and buying in the future. Because so much of their portfolio is made up of mortgage securities, they might be selling them en masse for many years to come. We simply don't know.

Conclusion

Now that we've taken a little jaunt through the technicalities of the Fed and mortgage rates, let's sum up where we are. The 30-year rate ended this week at 6.64%, which is about where it has been for the past eight weeks. Barring any sudden unexpected news, most economists and mortgage experts expect rates to stay where they are for the next several weeks. The Fed is set to meet in March to discuss the possibility of a rate decrease, but most experts don't see them lowering rates that soon given the recent news of an unexpectedly strong economy. If you are a potential homebuyer waiting for lower interest rates, it seems you're going to have to wait even longer. One thing is almost certain: Home prices are not going to go any lower. Waiting at this point to buy a home when mortgage rates come down might not actually save you any money long term.