The Main Reason Mortgage Rates Are So High in Palm Beach County

For homebuyers in Palm Beach County, mortgage rates are a significant consideration in the current real estate market. If you’re planning to buy your first home or sell your existing house to upgrade, you may be wondering why mortgage rates are currently high and when they will go back down. Here’s the context you need to understand:

1. Why Are Mortgage Rates So High?

The 30-year fixed-rate mortgage is influenced by the supply and demand for mortgage-backed securities (MBS). Mortgage-backed securities are investment products that consist of bundles of home loans and other real estate debt. Investors who purchase these securities essentially lend money to homebuyers. The demand for MBS plays a role in determining the spread between the 10-Year Treasury Yield and the 30-year fixed mortgage rate.

Historically, the average spread between these two rates is around 1.72%. However, the spread is currently much higher.

Last Friday morning, the mortgage rate was 6.85%, with a spread of 3.2%. If the spread was at its historical average, mortgage rates would be around 5.37%.

This large spread is unusual, and it typically occurs during periods of high inflation or economic volatility, such as the early 1980s or the Great Financial Crisis of 2008-09. The graph below illustrates the few times the spread has increased to 300 basis points or more:

The good news is that the spread has historically come down after each peak, indicating that there’s room for mortgage rates to improve.

So, what’s causing the larger spread and high mortgage rates today in Palm Beach County?

The demand for MBS is heavily influenced by the risks associated with investing in them. Currently, market conditions like inflation, fear of a potential recession, the Federal Reserve’s interest rate hikes to combat inflation, negative narratives about home prices, and more contribute to the perceived risks of investing in MBS. When there’s less risk, demand for MBS is high, and mortgage rates are lower. Conversely, when there’s more risk, demand for MBS decreases, resulting in higher mortgage rates. Currently, the demand for MBS is low, leading to higher mortgage rates.

2. When Will Rates Go Back Down?

According to Odeta Kushi, Deputy Chief Economist at First American, it’s reasonable to assume that the spread and mortgage rates will retreat in the second half of the year if the Federal Reserve eases monetary tightening measures and provides investors with more certainty. However, it’s unlikely that the spread will return to its historical average of 170 basis points, as some risks are likely to persist.

Bottom Line

As the fear investors feel eases, the spread between the 10-Year Treasury Yield and mortgage rates will shrink. This means we should expect mortgage rates to moderate as the year progresses in Palm Beach County. However, predicting mortgage rates precisely is challenging, and uncertainties in the market can impact their trajectory. It’s essential to stay informed and work with a knowledgeable mortgage professional who can provide guidance based on current market conditions.