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The Main Reason Mortgage Rates Are So High for People Looking to Buy in Los Angeles and Beverly Hills, CA

The Main Reason Mortgage Rates Are So High for People Looking to Buy in Los Angeles and Beverly Hills, CA

By Christophe Choo Posted Jun 07, 2023 Beverly Hills, client recommendations, In The Press, Latest Updates, Real Estate Articles, What I'm Reading

The Main Reason Mortgage Rates Are So High for People Looking to Buy in Los Angeles and Beverly Hills, CA | Christophe Choo at Coldwell Banker Global Luxury is Your Local Real Estate Expert

Today’s mortgage rates are top-of-mind for many homebuyers in Los Angeles and Beverly Hills, CA. If you’re thinking about buying a home for the first time or selling your current house to find one that better fits your needs, you may have some questions regarding mortgage rates. Let's dive into the two most common questions:

  1. Why Are Mortgage Rates So High? Mortgage rates, particularly the 30-year fixed-rate mortgage, are influenced by the supply and demand for mortgage-backed securities (MBS). Mortgage-backed securities are investment products similar to bonds, consisting of bundles of home loans and other real estate debt purchased from banks. When investors buy MBS, they essentially lend money to homebuyers.

The demand for MBS plays a significant role in determining the spread between the 10-Year Treasury Yield and the 30-year fixed mortgage rate. Historically, the average spread between these two rates is 1.72. However, in recent times, the spread has been larger than usual. For example, last Friday morning, the mortgage rate was 6.85%, indicating a spread of 3.2%. If the spread was at its historical average, mortgage rates would be around 5.37%.

This unusually large spread is a result of various factors. According to George Ratiu, Chief Economist at Keeping Current Matters (KCM), the spread approaching or exceeding 300 basis points is rare and typically occurs during periods of high inflation or economic volatility, such as the early 1980s or the Great Financial Crisis of 2008-09.

The demand for MBS is heavily influenced by the risks associated with investing in them. Currently, risks like inflation, fear of a potential recession, the Federal Reserve's interest rate hikes to combat inflation, negative narratives about home prices, and broader market conditions impact the risk associated with MBS investments. When there's less risk, the demand for MBS increases, leading to lower mortgage rates. Conversely, higher risk results in reduced demand and higher mortgage rates. Presently, low demand for MBS has contributed to the high mortgage rates we are experiencing.

  1. When Will Rates Go Back Down? Odeta Kushi, Deputy Chief Economist at First American, provides some insight into when mortgage rates might decrease. In a recent blog post, she suggests that if the Federal Reserve eases its monetary tightening measures and provides investors with more certainty, it's reasonable to assume that the spread and mortgage rates will retreat in the second half of the year. However, it is unlikely that the spread will return to its historical average of 170 basis points, as some risks are expected to persist.

In conclusion, as investor fears ease, the spread between the 10-Year Treasury Yield and mortgage rates will shrink. This should result in more moderate mortgage rates as the year progresses. However, it's important to note that predicting mortgage rates with certainty is challenging, and future developments may impact rates differently than anticipated.

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