Getting a mortgage in the
United States is expensive. I think that we're seeing
some strain in the system, but until mortgage rates
come down and supply increases, we're not going
to see prices come down. The average rate on the 30
year fixed mortgage today is

hovering around 7%. In 2021, rates were at all-time
lows. Consider how that affects
the financing for the typical American home. With 2021 rates, interest
payments would cost around $157,000 less than if it were
financed in 2024.

The cost jumps by a lot. Right now, we have high
prices and high mortgage rates, so it's a double
whammy. Housing feels especially unaffordable. Mortgage rates in the U.S. are determined by many
factors, including the

decisions made at the
Federal Reserve. We think that our policy was
appropriately restrictive. The place where the average
citizen felt the collateral damage the most painfully,
I think, has been in the housing market. The Fed is now cutting
interest rates, but that's

not making it easier to buy
a home. I think the best-case
scenario is we're going to continue to see mortgage
rates hover around six and a half to 7%. So, why are mortgages so
expensive even as the Fed

tries to ease economic
conditions? The Federal Reserve's
recent policies have had a dramatic effect on mortgage
rates. You had these record-low
mortgage rates during the pandemic that fueled all
this buying, which pushed home prices up.

The Fed then raised interest rates to stop inflation. We raise interest rates in order to cool the economy off, in order to reduce inflationary pressures. It's not something that people experience as pleasant. Well, the Fed implemented what some people have called

a rate shock. It has resulted in a market that really is just not functioning properly at the moment. This sudden jump in financing costs created a lock-in effect in housing. The lock-in effect itself came from the Fed raising

interest rates relatively rapidly in 2022. So, if you look at the interest rates that mortgage holders have out there in the market, over half of borrowers actually have an interest rate below 3.75% on their home. Folks are holding on tight there.

That means fewer homes coming onto the market as those folks hold on, which means less housing out there to buy. This leaves homebuyers with fewer options on the market and a high cost to finance any home that they find.

As a result, 26% of the homes sold in the United States were paid in full with cash in 2024, an all-time high. The remaining 74% of homebuyers relied on mortgage financing. Those new mortgage holders are, on average, paying over

35% of their income on housing. If you think about a 30-year mortgage, you're going to your bank, and you're entering into a financial obligation to make 360 payments, and then the mortgage is paid off.

It doesn't usually take 30 years for a mortgage to get paid off. In fact, the average effective mortgage maturity is only about eight years. That's how long folks typically hold them before they're either selling and moving to a new home, or

refinancing to reduce their interest rates. Many Americans are waiting for interest rates to fall. The Federal Reserve started a rate-cutting cycle late in 2024. The Fed's main tool, the federal funds rate, determines how money flows between banks.

Lower interest rates can make loans cheaper, but so far this has only had a limited effect on mortgage rates. The interest rates that they can set are much less effective than most people assume, since when they announced the first rate cut, the Treasury rates have

gone up. The mortgage interest rates have gone up. They're trying to persuade people to do things in the market. But the market has its own logic, its own intentions. It's not likely that home prices will come down.

Typically, it's a much better hope to find affordability from rates coming down, and that can certainly happen. But it is going to have to come as a result of weaker economic data, lower inflation, or

significantly less government borrowing. Mortgage rates are greatly influenced by the US economy. Bankers keep track of that by observing the yield or return on investment from loaning the government money for ten years.

Your Treasury investments are thought of as relatively risk-free. You're lending money to the federal government. You know they're good to pay you back. Some investors think the Treasury yield could rise from here. If folks start to feel like our spending is getting a

little bit out of whack, they start to question if US citizens can actually, you know, meet this tax bill further down the road. They may want higher compensation. New mortgage rates change over time, roughly in line

with the ten-year Treasury yield. But there is an additional fee baked into mortgage rates to account for the risk of taking on the investment. The amount of the additional fee is called the spread. Most of that spread is accounted for by risk.

When you look at mortgages, there are a couple of kinds of risks that are added there for that spread. One of them is credit risk. If I lend money to an existing mortgage holder to refinance their loan, or a potential homebuyer to buy

a new home, are they going to be able to pay me back over time? That additional fee baked into new mortgage rates on the market has increased since the Fed started to tighten the economy. As a result, people who take on

new mortgages are paying more than they otherwise would in normal economic conditions. But it's not as if a mortgage lender is looking at a ten-year Treasury yield and simply deciding what mortgage rates are going to be based on that.

In fact, there are an entirely different set of bonds called mortgage-backed securities. The demand for mortgage-backed securities can wax and wane, and it's the price of those mortgage-backed securities that directly dictates what a

mortgage lender can charge. Today's mortgage rates are also influenced by the Fed's response to past emergencies. The global financial crisis was, in large part, driven by a significant housing correction. And so, in order to try to stabilize the housing market,

not only did the Fed commit itself to buy U.S. Treasury debt, they also committed to buy agency mortgage-backed securities. And that had a distinct downward pressure effect on rates. In this process, the Fed buys huge amounts of debt to

alter demand in the bond market. It shifts the supply-demand equation out there, effectively reducing the interest rate on mortgages that's being offered. Mortgage rates fell through the decade as the strategy played out, which made financing a home cheaper.

The economy eventually recovered. The Fed returned to this technique in the pandemic. They were extra aggressive in 2021 with buying mortgage-backed securities. So, the QE, and that was ill-advised in hindsight. The Fed is now reducing the amount of mortgages that it

holds. Experts call this process quantitative tightening. Quantitative tightening is the exact opposite. They now have a portfolio on their books. They don't want that anymore, and they begin to slowly let that run off.

This is an experiment that's never been done before. I think that's one of the reasons the mortgage rates are still going in the wrong direction from the Federal Reserve's standpoint. And that's a problem. That's a political problem

as well as an economic problem. Bankers believe the Fed could complete its current cycle of quantitative tightening in 2025. When you look at the Fed's interaction in the mortgage market, I think, in a short synopsis, I think they would

prefer not to be there. They don't want to disrupt the market too quickly, but they do want to gradually exit that market. The Fed's best estimate suggests that mortgage rates could trend above 5.5% through 2025.

Other forecasts are higher. I wouldn't be surprised if we see mortgage rates maybe settle down in the low 7% range, say 7 to 7.5%. So, unfortunately, for those homeowners who are looking for a bit of a reprieve on the mortgage rate side, that

may not come to fruition. The decision to buy or keep renting is heavily influenced by prevailing mortgage rates. Renters are currently paying $1,000 a month less compared to owners with a mortgage.

That said, the 30-year fixed-rate mortgage is a unique benefit for Americans. Many other countries use adjustable-rate mortgages that respond more quickly to central bank decisions, for better or for worse. It makes for a lower payment than you might otherwise

find, and it makes for more certainty. Some would say that we end up paying more interest over time as a result, but others would say it's a luxury that helps us afford more home than we otherwise might want to buy. You don't ever want to assume

that rates are going to do something in the future, just because people are saying they will, or because you feel like they will. Rates are where they are today, and there's really no guarantee that they'll be there tomorrow, or that they

won't be higher. In an ideal environment, the Fed's not doing anything, but when the Fed is active, they absolutely do have an impact on what you're going to pay to buy a new home.

Why Fed Rate Cuts Aren’t Making Mortgages Cheaper

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Why Fed Rate Cuts Aren’t Making Mortgages Cheaper

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