If you’re in the market to buy a home, whether it’s your first time or last time, you are likely thinking about the mortgage interest rate. Unfortunately, The Board of Governors of the Federal Reserve System (also known as the fed) has made headlines almost constantly over the last couple of years.
As a home loan lender, I have had hundreds of conversations with clients since the interest rates plummet down to the 2’s just a couple of years ago. Since 2021, homebuyers seem outraged with how high interest rates have increased. However, the average 30-year mortgage rate from 1971-2022 is 7.76%. The average 30-year mortgage rate for 2022 as of this article is 5.30%. With a 51-year perspective, it’s not as relatively high as it seems.
One of the most confusing aspects of the rate market is the relationship between the fed rate and mortgage rates. It’s a common misunderstanding to assume that if the fed increases the federal funds rate (also known as the fed rate), then that means the mortgage rates will increase as well. That’s not necessarily the case. These are two different rates.
What is the Fed Rate?
The fed rate is the federal funds rate. This is the interest that banks in the United States pays each other to either borrow or loan money overnight. U.S. banks are required to always have a minimum amount of money in reserves. Some U.S. banks who have excess reserves have the opportunity to lend some of those reserves to banks that need additional money to meet that minimum amount of required reserves. The fed rate is the interest rate that these banks charge other banks to lend this money. When it gets more expensive for banks to borrower money, then it will get more expensive for consumers to borrow money. Because of this, consumers loans such as auto loans, credit cards, and unsecured (cash) loans will become more expensive to borrow. This is why auto loan and credit card interest rates increase when the fed rate increases. Not so much with mortgage rates.
What is a 10-year Treasury?
A treasury bond (T-bond) is a government debt security that is issued by the U.S. government that has a maturity range between 10 and 30 years. A Treasury yield refers to the annual interest rate the U.S. government pays on the money it borrowers in order to raise capital by selling Treasury bonds. These are also known as Treasury bills or Treasury notes, but the terminology will depend on the amount of time it takes for maturity.
High Yields on Treasuries Mean Higher Rates on Mortgages
What’s the Point
The whole motivating factor behind treasury yields is demand. If there is a high demand for treasury bonds, then that will result in a lower yield. If there is a low demand for treasury bonds, then that will result in a higher bond yield.
Investors pay close attention to bond yields. Here’s why: investors intend to maximize the return on their investments. Treasury bonds will not typically provide a greater return on investment than other investment options such as real estate or stocks. However, if investor demand in other options such as real estate or stocks is low, it’s because investors have lower confidence in those real estate or stock options.
When investors decide that their best option is Treasury bonds, it’s likely due to low confidence in the economic outlook, i.e. lower return on real estate and stock investments. When there is low demand for Treasury bonds, then Treasury yields will increase. The Treasury sells bonds at auction. With high demand, investors will pay more than the face value for the bond, which lessens the yield (return on investment). With low demand, investors will pay less than the face value, which increases the yield. High yields on treasuries mean higher mortgage rates.
The Point
Stop looking at the fed rate if you’re trying to get a more accurate understanding of which way mortgage rates are going. Start looking at the 10-year Treasury yields. If 10-year Treasury yields are trending up, then it is very likely that mortgage rates will begin (or already are) trending up as well. If inflation settles down over the next few months as industry professionals anticipate, we expect that that Fed Rate will hold steady, the 10-year Treasury Yield will begin to trend downward, and the 30-year fixed mortgage rate to begin trending down as well.
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the homebuying process across America.
Terry Roberts, USMC Veteran | Sr. Loan Officer NMLS 397987 | E Mortgage Capital
With a rich background spanning over a decade in the mortgage and real estate sectors, Terry Roberts has become a cornerstone in guiding over 10,000 clients through the complexities of the home purchasing journey in the United States. His expertise covers a broad spectrum of housing loans including conventional, FHA, VA, and cutting-edge new construction financing options.
Emerging from challenging early life circumstances, including teenage parenthood, dropping out of high school, and facing homelessness, Terry's determination led him to serve in the US Marine Corps. This decision was driven by a commitment to safeguarding freedom and securing a better future for his family. His active duty service in the US Marine Corps, marked by nearly a decade of dedication, instilled in him a profound desire to assist fellow Americans in achieving homeownership, a cornerstone of the American dream that he fiercely believes in.
Terry leverages his profound understanding of the real estate market to empower individuals in their pursuit of property ownership as a strategic investment for wealth generation. His journey from adversity to becoming a beacon of hope and guidance in the real estate domain is not just inspiring but a testament to his commitment to his clients' success.
Connect with Terry Roberts, a proud USMC Veteran and Senior Mortgage Broker (NMLS 397987), for expert guidance on your path to homeownership. Visit www.TerryRoberts.com at E Mortgage Capital, where every client's dream is approached with the respect and dedication it deserves.
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