Prospective homebuyers across the United States are currently fixated on the Federal Reserve, eagerly anticipating any signs of interest rate cuts that may provide some much-needed relief from the oppressive borrowing costs they face. However, there’s an additional, potentially more enduring factor that could keep mortgage rates elevated for the foreseeable future: the U.S. national debt. According to Lisa Sturtevant, chief economist at Bright MLS, while the timing of the Federal Reserve’s interest rate cuts garners significant attention, a sky-high federal debt is also contributing to persistently high mortgage rates.
As mortgage rates hover near 7%, the Federal Reserve’s potential rate cuts are not the sole factor in this complex equation. Mortgage-backed securities (MBS), which are essentially bundles of mortgage loans sold to investors, need to offer a high rate of return to attract buyers. This means the individual mortgages that make up these securities must themselves have high interest rates. The competition for investors between MBS and other financial instruments is fierce, and the growing national debt only exacerbates this issue. The higher the debt, the more the U.S. government needs to offer in return to entice investors to buy Treasury bonds rather than other, potentially more lucrative, investment opportunities.
Desmond Lachman, a senior fellow at the American Enterprise Institute, highlights the risk of the U.S. continuing to expand its debt at an unsustainable rate. Foreign investors, including central banks, could start offloading their holdings of Treasury bonds, leading to a spike in long-term interest rates. This scenario would be catastrophic, as it would send mortgage rates soaring irrespective of the Federal Reserve’s actions at the short end of the interest rate spectrum. A situation like this could result in a “dollar crisis,” where the value of the U.S. dollar plummets, further exacerbating the issue.
Mortgage rates saw a dramatic increase in 2022 and 2023 as the Federal Reserve aggressively aimed to combat high inflation. Currently, rates on the popular 30-year fixed mortgage stand around 6.87%, according to Freddie Mac. Although this figure has dipped slightly from a peak of 7.79%, it is still a far cry from the pandemic-era lows of about 3%. Even small changes in mortgage rates can have a substantial impact on monthly payments, influencing affordability and overall market dynamics.
A recent study by LendingTree compared the average monthly payments on 30-year fixed-rate mortgages in April 2022, when rates were approximately 3.79%, to one year later, when rates surged to 5.25%. The results were staggering: higher rates cost borrowers hundreds more each month and could potentially add as much as $75,000 over the lifetime of a 30-year loan. This sobering reality underscores the direct financial impact that elevated mortgage rates have on potential homebuyers, making it even more critical to monitor both Federal Reserve policies and the trajectory of the national debt.
In summary, while the immediate focus may be on the Federal Reserve’s potential interest rate cuts, the looming shadow of the national debt is an equally important factor that could influence mortgage rates in the coming years. Prospective homebuyers must remain vigilant and consider these multifaceted financial dynamics as they navigate the turbulent waters of the housing market.