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Over the last 18 months, interest rates have taken a hard hike higher evaporating the dreams of many. The question is asked, when will interest rates decline?  There are some indicators to give everyone some ideas.

Many consumers falsely believe that mortgage interest rates are tied to the Federal Reserve. They are not. The Federal Reserve has a direct impact in short term lending to banks, while long term interest rates are indirectly impacted from the Federal Reserve. 

There are times that the Fed’s interest rates are low, and mortgage rates are much higher, like we saw in the first part of 2022.  Other times, the Fed's interest rates are higher than the long term interest rates such as the beginning of the pandemic, when mortgage rates plunged below the Fed's rates for a period of time.

When will mortgage rates decline?

Obviously the Fed keeping short term rates high around 5.00% has an impact. However, the Fed also owns over $2 trillion in mortgages they purchased primarily during the pandemic that the Fed wants to sell.

This creates upward pressure on mortgage rates because there is an oversupply of mortgages being potentially sold on the market, and an insufficient number of buyers. What happens? Mortgage rates go higher in order to keep attracting more investors to purchase mortgages. Higher interest rates attracts more investors (buyers).

In addition, Congress and the Biden administration are running between $2 to $3 trillion dollars annually in the red. Where does that money come from? The U.S. Treasury issues government bonds to cover the shortfall.  It is like a line of credit for the U.S. Treasury. Unfortunately for homebuyers, those U.S. bonds compete with mortgages for investors. In order to attract the investors, all interest rates go higher because of the excessive supply and lack of demand from investors. It is basic supply and demand.

There are wars now that the U.S. government is funding hundreds of billions more annually. That adds additional pressure because the U.S. Treasury does not have the money.  It has to borrow for it. Which leads to higher interest rates for the foreseeable future. 

How long could this last? Good question. Mortgage rates could stay relatively high for a year or two settling somewhat in the high 6.00’s to 7.00’s as the economy slows down – slightly lower than the current levels. Nevertheless, the fact that interest rates are high because of the amount of debt being issued, means many homebuyers dreams will either have to pay an additional “tax” in higher interest rates, or postpone that dream as it gets pushed farther away.

The one good news? There is some hope. Home prices are starting to decline and we should see some more settling for the foreseeable future.    

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