What High Mortgage Rates Mean for Homebuyers and the Economy

When mortgage rates went above 7% earlier this year, it caused some concerns in the housing market. Let's break down what this means for you and the broader economy.

1. Mortgage Rates Going Up

Imagine you're buying a house, and you need a mortgage from a bank. The interest rate on that mortgage determines how much you'll pay over time. Earlier this year, these rates went past 7%.

2. The Securitization Market

The financial world takes these mortgages from many people and bundles them together into something called a "mortgage-backed security" or MBS. Investors buy these MBS as an investment.

3. Investor Worries

Investors who bought these MBS were worried. They thought that if the government (the Federal Reserve or "Fed") lowered interest rates, people with 7% mortgages might refinance to get lower rates. This could affect the value of these investments.

4. Swift Action

To tackle this problem, the market quickly, responded using buydowns to lower interest rates to keep consumers interested in obtaining mortgages. Thus, continuing home sales.

5. Rates Going Up Again

But now, mortgage rates have gone up even more, between 7.5% and 8%, causing similar worries about future refinancing.

6. Encouraging Investors

The big question is how to keep investors interested in buying these mortgage-backed securities, even though they know people might refinance when interest rates drop.

7. The Role of the Federal Reserve

The Federal Reserve plays a big part. They have a lot of these mortgage-backed securities, but they want to sell them off instead of buying more. This is part of their plan to manage the economy.

8. What to Expect

Experts predict that mortgage rates will eventually settle between 4.5% and 6%. They also think the Fed will start lowering interest rates by the end of 2024, and there might be a small economic slowdown, mainly because the housing market is really strong right now.

So, if you're in the market for a home or just curious about the economy, keep an eye on these mortgage rate changes. They can have a big impact on your financial plans and the broader financial landscape. The reality is when interest rate finally lower and stabilize, home prices are expected to rise. You CAN refi out of your interest rate. You CAN'T change the purchase price.