Why Are Mortgage Rates High?

This past Sunday's Chicago Tribune business section had an article called "Stubborn mortgage rates defy conventional wisdom".

The article states that the Federal Reserve has aggressively cut interest rates, and houses are sitting around unsold - so mortgage rates should fall as lenders compete for the smaller pool of home buyers.

But, instead, 30-year fixed rate mortgages have remained above 6% for months and experts think the rates will increase in the near future.

Will 6% plus mortgage rates slow the recovery of the real estate market?

Some experts say no - instead people will be spurred to buy before rates go up. Also, from a historical perspective, 6.5% mortgage rates are still low.

The only trouble-spot is jumbo loans (amounts greater than $417,000). The housing bubble increased prices to the point where a lot of houses are now at jumbo loan levels, and the spread between jumbos and conventional 30-year fixed loans have recently doubled.

In the Chicago area last week, most lenders were charging slightly above 6% for conforming 30-year fixed loans, but 7 - 7.5% for jumbo loans.


Here are the factors keeping rates high, and pushing them higher:

1. The bursting of the subprime-lending bubble caused many large mortgage brokers to go out of business. This reduced the pool of mortgage lenders.


2. The surviving lenders are now gun-shy and conservative - they want to be better compensated for risk.


3. Most importantly, speculators think that the U.S. has narrowly avoided a recession and inflation is now a bigger threat to the economy. The view is that the Federal Reserve is not likely to lower interest rates anymore, and may start raising them in October.

As a result, prices for the 10 year Treasury note have declined - thus pushing up their yield (the benchmark for mortgage rates).