The Hidden Force Pushing Mortgage Rates Down
Banks and the Federal Reserve have purchased fewer mortgages since the Fed began increasing interest rates to curb inflation.
NEW YORK – Data from Freddie Mac show that the 30-year mortgage rate fell more than one percentage point to 6.62%, shrinking the spread between the rate and the 10-year Treasury yield. Those yields also fell sharply, but the spread is now larger than the historic average, even though it has shrunk for eight straight weeks. However, it is now at its lowest since March.
The lower mortgage rates could enable buyers to re-enter the market after being sidelined by higher borrowing costs. Investors who purchase the bonds based on mortgage loans are demanding greater yield than Treasurys because holding those bonds is risky, especially if rates fall and more borrowers refinance their loans at lower rates, reducing investors' income.
Banks and the Federal Reserve have purchased fewer mortgages since the Fed began increasing interest rates to curb inflation. The central bank's forecast that rate cuts are on the horizon has led to higher investor demand for mortgages, pushing down the spread.
“The people who are really holding these financial instruments seem a lot less worried about this market,” said Wendy Edelberg, a senior fellow in economic studies at the Brookings Institution.
If the spread returns to historic levels, demand for new mortgages could increase, but Thuan Nguyen, who owns Loan Factory, said, “It's not low enough to induce more consumers to buy more houses. We aren't out of the woods yet.”
Source: Wall Street Journal (01/04/24) Eisen, Ben
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