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Why have mortgage rates been falling?

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Today we are talking about two rates. The first is the federal funds target rate set by the Federal Reserve and Jay Powell. That rate has been rising steadily since March, and now he’s between 3.75% and 4%. All signs point to the Fed raising rates again next week to keep inflation in check.

The second rate is the average 30-year fixed-rate mortgage rate, which typically fluctuates in line with Fed policy. The key word is “normal”. That’s because last month that rate dropped from 7.16% to 6.4%. According to the Mortgage Bankers Association.

So what do you get?

If the Fed raises rates, What will be the interest rate on the mortgage It depends on the type.

“It depends on what the market’s outlook is for the future of the economy as a whole,” said Karan Kaul, who studies housing finance at the Urban Institute.

The “market” he is referring to is not the market for buying and selling homes, but the market for buying and selling mortgages.

“Most mortgages made in the U.S. are ultimately bundled and securitized into investment products—bonds that are ultimately sold to investors around the world,” he said.

When inflation beat expectations last month, hedge funds, bond funds and banks around the world said the Federal Reserve may slow rate hikes now. So they bought a lot of mortgages while interest rates were still fairly high, and thought, “Let’s start while homebuyers are still paying that sweet 7%.”

But if investor demand for mortgage bonds surges, “prices will rise and interest rates will fall, which will become visible to homeowners,” said Bank of America’s Gina Curro. Stated.

And suddenly the sweet 7% drops.

If the mere mention of mortgage-backed securities sets the mood for the Great Recession, Curro said, this should be very different. “Right now, lending standards are very strict.”

Whether there will be enough investor demand to lower mortgage rates is an open question. One large buyer withdraws from the market entirely.

“The Fed has been the largest and only buyer of securities in the last two years or so,” said Joel Kang, an economist at the Mortgage Bankers Association.

After the pandemic hit, the Fed initially stepped up its mortgage-buying program. In an attempt to bring down inflation, including housing prices, it has stalled this year.

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