On the Future of Mortgage Rates

The 30-year mortgage rate in the chart above is considered to be the average rate issued to borrowers of the highest credit quality, and the US high yield BB effective yield is considered to be the highest-grade junk bonds issued by US corporations.

Should the highest-rated individuals be considered as high risk as what are considered junk bonds? Historically the answer is no. A consumer may not buy a mattress in a recession, but they will continue to pay their mortgage, meaning the mattress company may not be able to pay its debt, but the consumer will.

I believe there are fundamentally three things that are making mortgage rates balloon.

1. Excess savings has kept demand up - there are excess dollars in the system so people still have the buying power to go out and try to buy a house, meaning demand for mortgages and houses is still in the market.

2. Banks are preparing for a recession -Banks are required to keep a certain number of deposits in reserves, on news of a pending recession banks aren’t lending as much. So that means there are still a high number of buyers and now a low number of lenders.

3. The output in the function of interest rates has changed - When the base rate goes from 0% to 3% the final interest rate must rise by at least 3%, unless there are negative premiums associated with the function, which is unlikely to occur.

Mortgage rates will fall as more lenders see attraction in lending at higher rates and buyers spend down excess savings with the boost of the Federal Reserve pausing hiking or starting to cut rates.