This regularly scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Arlington resident. Please submit your questions to him via email for response in future columns. Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist. Enjoy!
Question: Is there anything other than the increasing Fed Funds Rate that is driving mortgage rates higher?
Answer: This week we continue the effort to get educated on mortgage rates and products so you can be smarter, more informed consumers. Higher mortgage rates are being driven by the increases in the Fed Funds Rate, which is the storyline that commands news headlines, but that’s not the only thing driving your interest rate up.
To learn more about what’s happening beyond the headline news, I interviewed First Home Mortgage’s “market maker” James Baublitz (official title, VP of Capital Markets). Let’s jump right in….
ET: What is your role at First Home Mortgage?
JB: I work as Vice President of Capital Markets for First Home Mortgage Corporation. In this role I oversee the different loan programs we offer to borrowers, the mortgage rates we offer daily and the trading strategy we use to manage risk for the organization. This involves frequent communication with broker/dealers and monitoring market developments both intraday and throughout the year.
ET: Other than the highly covered Fed interest rate increases that have increased the cost of borrowing for everything, what else has caused actual mortgage rates to increase so much?
JB: The Federal Reserve lowered the Fed Funds Rate all the way to a range of 0.00%-0.25% to defend the economy in the wake of the COVID-19 pandemic. Since rates were effectively at 0.00% they couldn’t go lower, but the Fed wanted to stabilize the economy further given the unprecedented macroeconomic uncertainty the pandemic caused. So, the Fed reinstated the so-called Quantitative Easing program where the Fed began buying mortgage-backed securities, the bonds backed by the mortgages many of us hold.
Supply and demand — the Fed materially increased demand for mortgage assets so prices went higher which meant rates (which move inverse to price) went much lower. Fast forward to today, the Fed never intended to remain a buyer of MBS in perpetuity and earlier this year they announced they would stop their purchases. As a result, demand decreased significantly and the rates they helped drive dramatically lower increased.
ET: Do you expect the Fed to return to buying mortgages to help bring mortgage rates down and prevent a housing crisis?
JB: It’s important to note that the Fed views their purchases of mortgage assets as an extraordinary measure done in the wake of only the most concerning economic environments. The Fed seeks to implement policies that foster full employment in the economy and a modest rate of inflation – 2% – over the long haul. The Fed does not try to ensure mortgage rates are at a certain threshold, however.
It’s also worth noting that extraordinarily low mortgage rates contribute to inflation in the form of much higher home price appreciation — the general idea being that a buyer might be willing to stretch to pay more than asking prices if their financing costs are low enough. We all certainly saw that in the bidding wars in our local markets the past couple years!
With this in mind, Fed officials have previously pointed to very hot housing markets as a cause for concern and see more normalized housing markets as a good thing. Remember, their concern is price stability, not dramatic increases in home prices.
ET: Mortgage rates generally follow a predictable spread above the 10yr treasury bond, but we’ve seen this spread increase significantly over the last 6 months of rapidly increasing rates, why is that?
JB: Markets don’t like uncertainty, and mortgage markets especially don’t like volatility. Big picture, we’re phasing out of a paradigm where the Fed was the main buyer for mortgage assets to a situation where they are on the sideline. The traditional buyers of mortgage assets — commercial banks, money managers and foreign investors have big shoes to fill when it comes to replacing Federal Reserve buying activity.
The multi-billion-dollar question here is — why? There is no shortage of answers ranging from volatility resulting from the war in Ukraine, to leverage and margin concerns from US money managers, to currency fluctuations in markets like Japan. My two cents, however, is that big changes take time.
We’re moving from an environment where the Fed provided clear signals to market participants that rates were going lower. In the face of all this uncertainty following the Fed’s exit and the macroeconomic events I mentioned the traditional buyers of mortgage assets are being selective and waiting until they have more certainly to buy in bulk.
It’s the same as any of us when we think about investing personally: the wider the range of potential outcomes, the more potential that our return will vary, the higher overall return we will require. In the mortgage market that means rates need to be higher. They have big shoes to fill — depending how you define it; the Fed was buying something on the order of 30-40% of newly issued mortgages. The Fed exiting the mortgage-purchasing business is a big change and like I said, big changes take time.
ET: Major organizations like the Mortgage Bankers Association, Freddie/Fannie, and National Association of Realtors have recently issues revised interest rate forecasts that vary widely. How should consumers look at these forecasts and use them for planning purposes?
JB: Each of these groups put a great deal of time into the projections, but they are just that, projections. My advice to prospective borrowers is to use these projections as loose inputs in your planning process, but remember to focus on the house and make sure you’re comfortable with the major decision that is homeownership as a whole.
It’s no secret rates are higher today than they have been in the past few years but they remain low by nearly any historical standard. If rates decline, refinancing is certainly easier today it has been in years past. If rates remain the same or move higher in the future, today’s rates will naturally look better. Either way, take the time to find the right home for you and your family.
ET: Thank you very much for your time and thoughtful answers James. We appreciate the expertise you and First Home Mortgage have provided today!
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460
Good Wednesday evening, Arlington. Let’s take a look back at today’s stories and a look forward to tomorrow’s event calendar. 🕗 News recap The following articles were published earlier today…
After a 2-year search for new digs, Arlington Independent Media is on the cusp of moving from its long-time headquarters in Clarendon.
Former Arlington Commonwealth’s Attorney Theo Stamos is taking a top job in the Virginia Attorney General’s Office. Stamos lost her reelection bid in 2019, defeated in the Democratic primary by…
Sometime next year, three residential streets in Arlington without sidewalks could get upgrades to allow for safer pedestrian and cyclist use. To help address demonstrated safety and access issues on…
About Latinas Leading Tomorrow (LLT): Latinas Leading Tomorrow is a dynamic 501(c)(3) nonprofit organization dedicated to empowering young Latina women through education, mentorship, and leadership development. We are committed to fostering a community of future leaders who will make a significant impact to the community.
Job Description: We are seeking a passionate and dedicated Part-time Executive Director to lead our organization into its next phase of growth and impact. The ideal candidate will be a visionary leader who can oversee day-to-day operations, drive fundraising efforts, and cultivate relationships with stakeholders. This is a 1099 position; Remote position with ability to attend DMV events; 8-10 hours a week; $35-40/per hour.
Oversee program operations, including educational and community initiatives.
Ensure compliance with legal and regulatory requirements, maintaining trust and accountability.
Develop and execute a strategic vision aligned with our mission and values.
Lead fundraising efforts in partnership with the Board Members.
Cultivate relationships with community partners, schools, educators, and donors.
Demonstrate strong leadership skills, fostering a positive organizational culture.
Communicate effectively with diverse stakeholders and make compelling public presentations.
Promote inclusivity and collaboration throughout the organization.
Children’s Weekday Program (CWP) is a non-profit preschool rooted in a play-based philosophy. We focus on developing a love of learning and exploration, cooperation, empathy, and independence.
Our caring and experienced educators create opportunities for children 16 months to 5 years old to play, learn, and grow in a nurturing environment of child-centered and developmentally appropriate experiences.
Initially established more than 50 years ago in South Arlington, CWP continues to be a lauded program in the Northern Virginia area. We are extremely proud to have been recognized as a Best Preschool in Northern Virginia Magazine for the last 4 years.
Located now in North Arlington at 2666 Military Road, CWP offers a part-time parents day out and preschool program with options to extend care both before and after school. We offer a supportive and inclusive school community for children and parents alike and welcome all families to join our school!
Holiday Art Show featuring artists: Peter Fitzgerald, Claire Plante, Alanna Rivera, and Suzy Scollon. At the Barcroft Community House, 800 South Buchanan St., Arlington, VA. Dec. 8 from, 2 PM to 8 PM and Dec. 9 from 10 AM to