In an analysis by Wolf Richter, Fannie Mae’s CEO Priscilla Almodovar highlighted that current mortgage rates are reflective of historical trends and that the exceptionally low rates witnessed during the COVID-19 pandemic are not likely to return. Almodovar pointed out that the average 30-year fixed mortgage rate has hovered around 6% since 1990, and the unprecedented low mortgage rates below 5% emerged only after the Federal Reserve started purchasing mortgage-backed securities (MBS) in 2009. The commentary anchors on the significant influence that economic policies and fiscal responses to market downturns have had on the housing market, shaping dynamics that both consumers and investors need to understand in attempting to navigate this altered mortgage landscape.
Historically, mortgage rates were consistently above 6% until notable interventions by the Federal Reserve began in the early 2000s. As the Fed aimed to stimulate the economy following the burst of the tech bubble, mortgage rates experienced dramatic fluctuations, peaking above 6% again by 2005. The culmination of efforts like quantitative easing saw rates dip significantly below 3% from mid-2020 to late 2021, coinciding with aggressive MBS purchases aimed at cushioning the economic blow of the pandemic. This trend aided an unprecedented surge in home prices, which became burdensome in the market as heightened prices restrained home sales significantly.
In the aftermath of the low rates, the Federal Reserve discontinued its purchase of MBS in September 2022 and initiated a process of quantitative tightening (QT), leading to soaring mortgage rates after a prolonged period of historic lows. By October 2022, mortgage rates consistently exceeded 6%, marking a return to what Almodovar termed “historical norms.” The ongoing high rates have resulted in a significant slowdown in existing home sales as potential buyers grapple with inflated price points amidst rising financing costs.
Almodovar elaborated on why mortgage rates are presently elevated and projected to remain so, emphasizing that they are closely tied to the yields of 10-year Treasury securities. However, these rates experience an additional risk premium due to factors such as prepayment risk, where mortgages are paid off early due to refinancing or selling. The dynamics of these mortgage rates also hinge on the spread—the difference between mortgage rates and Treasury yields—which is influenced by broader monetary policies including the Fed’s past QE measures. During periods of QE, the Fed’s purchasing of Treasuries and MBS pressured down yields, also tightening the spread.
As the Fed engages in QT by reducing its balance sheet, which has nearly dropped by $2 trillion, the relationship between mortgage rates and Treasury yields remains impacted, with the spread now standing at 2.48 percentage points. This spread, having expanded due to the absence of Fed support in the current financial landscape, is anticipated to stay at historically wider levels, contributing pressure on mortgage rates and ultimately elevating borrowing costs for consumers. In this environment, potential home buyers and investors are advised to recalibrate their expectations based on the impending macroeconomic factors that are reshaping the mortgage industry.
In essence, the broader picture of the mortgage market signifies a transitional phase where both policy shifts and economic realities are forging a new path. With Fannie Mae’s 2025 forecast aligning with historical averages, stakeholders must come to terms with elevated rates that challenge previous assumptions about housing affordability. Awareness of these market dynamics will be crucial for consumers as they navigate financing options while considering long-term investment strategies in real estate, underscoring a need for adaptive strategies that respond to a less accommodating monetary landscape.