Mortgage rates are settling down from thei highs

Have Mortgage Rates Turned a Corner?

Casey Fleming

Mortgage rates hit new highs in the third week of October, but have been settling down since then. What happened, and what does it mean for the future?

As I’ve said before, the three most important factors in mortgage rates are inflation, inflation and inflation. More accurately, it is the perception of where inflation is headed in the next ten years or so. The folks with the most important opinion on this are institutional investors, such as pension funds and insurance companies, who want to place some portion of their portfolio in investments that are relatively safe, but that will outperform inflation for at least the foreseeable future.

We have heard lots of complaints about inflation over the past two years, and sure, no one likes to see prices going up. However, recent economic data indicate that inflation is cooling rapidly. You may not see it because prices have not come back down to where they were before the pandemic, but institutional investors aren’t looking at the price of eggs. They know that if prices stay high where they are now, that equals 0% inflation moving forward. All they have to do is beat inflation moving forward, not in arrears. When they bid on mortgage pools, they are only looking to out-earn inflation.

Mortgage rates are settling down from thei highs
Compare T-Bills with the mortgage rates you pay

Let’s take a look at the chart above. The blue line is the current yield on 10-year U.S. Treasury Bills, another very safe investment that institutional investors will consider.

The orange line is the yield that Fannie Mae and Freddie Mac (The Agencies) publish daily. Via this yield they offer to buy individual mortgages from mortgage lenders. They then package mortgages into pools and sell them off in pieces to institutional investors. (Note: This is a slight oversimplification, but it is essentially true.) The Agencies’ yield requirements are driven by the yield demanded by those investors. Investors want to earn more on a mortgage pool than for a 10-year T-Bill because T-Bills are considered the safest investment possible. Investing in mortgage pools is slightly more risky, but the repayment patterns are similar so mortgage rates tend to follow T-Bills fairly closely. (Although investing in mortgages will always yield a higher return than T-Bills.)

The green line is the average interest rate quoted by lenders responding to a broad survey every day conducted by Freddie Mac. You’ll notice they all track fairly well. You might also see that the 30-year fixed mortgage rate hit over 8% on October 19th, but it didn’t stay there. With more favorable inflation news, rates have been unsteadily settling down since then. As of this writing (November 15, 2023) the average quote for a 30-year conforming fixed-rate mortgage has dropped by over 0.5% from the peak.

Lenders margins have been pretty steady lately
How much does the lender add to your mortgage rate?

Now let’s take a look at the margin lenders add on to the Fannie Mae 60-day yield. The blue line represents the difference between the Fannie Mae 60-Day Yield and the retail mortgage rate lenders quote. While the daily margin shows noticeable fluctuations, if we smooth out the curve with a 30-day moving average we can see that the margin varies a little more than 0.1% from its high-to-low peaks these days. This does not contribute significantly to interest rate changes at present.

Where do Mortgage Rates go From Here?

From backwards-looking data, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI) it appears inflation is slowing. The folks who “set” mortgage rates are more concerned about forward-looking data, such as consumer sentiment, wage growth, job openings, and many more. While most of the forward-looking data is still strong, they aren’t as strong as they were. This is helping to moderate expectations of future inflation and therefore mortgage rates.

Where Should Mortgage Rates be?

Looking back in history, in “normal” times the 30-year fixed mortgage rates for prime borrowers on conforming loans run about 2 to 3% above inflation. Since the Fed is targeting an ongoing inflation rate of 2%, we can infer that 30-Year fixed rate conforming mortgages should eventually settle in between 4% and 5%.

If the current inflation rate is about 3.5%, why is the mortgage rate at about 7.5%? Well, these are not normal times. We are coming off a period of high inflation, many folks aren’t sure that they are going to go all the way down to 2% and stay there, and, despite an extraordinarily strong real estate market, there is some worry that the real estate market may soften, increasing the risk of mortgage lending. Institutional investors are still looking for a higher margin above inflation, because putting money out for 30 years is a bit risky.

So, When Will Mortgage Rates Fall?

At this point the best guess is that rates will begin to fall towards the end of 2024. Of course, no one has a crystal ball, and until then expect to see fluctuations, most likely between 7% and 8%. If it falls below 7% before then, consider that an opportunity.

I Want to Buy a Home; Should I wait?

As hard as it is for first-time homebuyers to imagine, home prices are almost certainly going to rise more. You can wait a year, sure, but you’ll pay 5% to 10% more for the home you could buy today, and pay rent along the way. It’s impossible to time the real estate market. The time to buy is when life moves you to do so.  Getting married? Is your family expanding? Is it time for you to move up in size or to a better location? Is it time to downsize? All these and more life events create pressure to buy your own home. Mortgage rates will go down, but not before home prices go up.

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Resources used in this article:

Consumer Price Index Falls to 3.2% – CNN

Producer Price Index Unexpectedly Falls – Reuters

Applications for Jobless Claims Rise, Labor Market Cooling – AP


Casey Fleming, Mortgage Advisor and Author of The Loan Guide (2014) and Buying and Financing Your New Home (2023)

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About Casey Fleming: Casey Fleming is a veteran mortgage advisor (NMLS 344375) and Author of The Loan Guide and Buying and Financing Your New Home writes extensively about real estate finance, the real estate market, and the relationship between economics and finance. He advises clients throughout California, and is based in the heart of Silicon Valley.  He writes articles regularly for several online publications, is a subject-matter expert for two prominent finance-related sites, and is regularly quoted in articles for many other publications.

This article represents the opinions of Casey Fleming, and not necessarily those of any company or organization cited or mentioned in this web site.  This analysis was prepared with the best information available at the time it was written.  We do not have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source.  No warranty is made that the outcome will reflect the projections in this article, and neither the author nor are responsible for decisions that you make regarding your choices about your real estate or mortgage or those of your clients.

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