Interest rates may not be fully controllable, but some entities have a say in how they fluctuate and react to the economy! The government does not set mortgage interest rates, but their actions certainly impact them. Allow us to further explain this connection, starting with some basics and economic history! For a brief refresher, we need to start with these 3 details:
- The vast majority of mortgages are purchased after closing by Fannie Mae and Freddie Mac
- Those entities fund their organizations by selling Mortgage Backed Securities (MBS), which are like bonds, to Wall Street
- The more desire investors have for MBS, the lower the rates will be for the borrower
Soon after the Great Recession of the late 2000’s, investors were not buying MBS, bonds or stocks. The economy was struggling and the lack of investment was creating an even greater drain. The lack of demand for MBS was pushing rates up for consumers. The Federal Government stepped in with several approaches to get the economy moving again, including:
- Spending trillions of dollars in various projects across the country to create a job market and get investors confident in the economy
- Offering low-interest loans to banks so they could turn around and lend in their communities
- Buying trillions of dollars’ worth of MBS over several years
It’s that last one which drove the biggest impact on mortgage rates. Buying so many mortgage-backed securities kept the demand high and remember, the higher the demand, the lower the rates are for borrowers. If this practice, known as Quantitative Easing (not important you know the term, but it’s tossed about in the media) had not existed, it’s quite possible interest rates would have continued to skyrocket higher and higher. That would have made home buying less attractive and therefore, continued the real estate drag on the economy.
Well, analysts are now saying our economy is growing stronger (at least at the moment), so the purchasing of MBS by the government has stopped. Interest rates are now reacting to actual market forces without the influence of government intervention. As investors saw more profits to be made in the stock market because of a growing economy, they purchased fewer MBS and more stocks. This lower demand for MBS move the mortgage rates back up again.
Now, remember the government has trillions of dollars of bonds they need to unload, so they have been selling them back into the market. Hmmm… So, now we have:
- An increased supply of MBS
- Idle or low demand for MBS
- A perfect storm for rates to rise
Mortgage rates ebb and flow in the same way stock prices do. We won’t likely see rates move up constantly– they will hit peaks and fall back a bit again. We are likely, however, to see rates rising consistently for a while. This will mean the peaks get higher and the fall back won’t be quite as low.
All of this can change with economic events, but for now, that’s why interest rates have been rising so quickly! To learn more or to start your own home buying journey, contact the Heath Team today!