Guide to Mortgage Rates

Mortgage rates are determined by the supply and demand for mortgage bonds in the bond market. Why Mortgage Bonds? When you get a mortgage in the US, your mortgage company is getting the money from Fannie Mae, Freddie Mac or other "securitizers". These "securitizers" get their money by issuing bonds to bond market investors. These bonds are called "mortgage bonds" or "mortgage backed securities". Therefore, the mortgage rate you pay is really determined by the supply and demand for mortgage bonds in the bond market. The Role of the Federal Reserve As you can see from the chart, the Fed owned zero ($0) mortgage bonds prior to 2008. Once the financial crisis happened, the Fed decided to start buying mortgage bonds in order to drive down interest rates and stimulate the economy. This is called "quantitative easing" or "QE", and we've had several rounds of QE so far. Currently, the Fed owns a whopping $1.77 TRILLION in mortgage bonds! In fact, the Fed has been the biggest buyer of mortgage bonds in recent years, and is currently absorbing over half the supply of new mortgage bonds being issued in the market. If the Fed stops buying mortgage bonds, mortgage rates could increase. The Fed has indicated that they will reduce their purchases of mortgage bonds by 25% every three months starting sometime this fall. The market will be watching very closely to see how this process unfolds, and whether private investors will absorb the extra supply of bonds in the market. Mortgage rates are also impacted by the bond market's reaction to various news items. Here are three economic trends to watch in the coming months: Inflation: bond investors and the Fed watch the inflation reports (CPI and PCE) to determine whether they should buy, sell or hold mortgage bonds. Jobs: bond investors and the Fed watch the jobs report and unemployment numbers very closely to determine if the economy is improving and whether they should buy, sell or hold mortgage bonds. Changing Supply and Demand Dynamics in the Bond Market: this is influenced by economic reports, political events, and other news. Conclusion: we anticipate continued volatility in mortgage rates over the next several months as bond investors and the Fed decipher the economic trends that we've outlined above. Please contact me for more info on which economic reports may impact mortgage rates this week.