WASHINGTON—Fannie Mae’s Economic & Strategic Research (ESR) Group is “pulling back the curtain” on key factors affecting the 30-year mortgage rate—and its somewhat unpredictable movements late this year.
“When the Federal Reserve cut the federal funds rate in September, many market observers expected mortgage rates would also decline. Instead, the average rate on a 30-year mortgage rose from 6.09% on Sept. 19, the day after the Fed’s first rate cut, to as high as 6.84% on Nov. 21, before dipping slightly again in recent weeks,” Fannie Mae said.
“This has caused potential homebuyers, mortgage lenders, and other market observers to ask us — why have mortgage rates risen despite the Fed cutting rates? The short answer is this: the federal funds rate is used to benchmark short-term interest rates, while the rate on a 30-year mortgage is a long-duration loan — with a rate that is determined in the bond market,” Fannie Mae explained.
A new Housing Insights piece explains how the 30-year mortgage rate is constructed, what factors influence it, and how mortgage rates have changed since the onset of the pandemic.
Among the takeaways:
- The 30-year mortgage rate is benchmarked to the rate of the 10-year Treasury note. As the rate on the 10-year Treasury note moves, mortgage rates follow suit
- The rate on the 10-year Treasury note is determined by investors’ expectations for shorter-term interest rates in the economy over the duration of the bond plus a term premium, which compensates investors for the risks associated with holding a longer-duration bond
- Mortgage rates are determined by adding a spread to the benchmark 10-year Treasury note. The spread, or difference, between the rate offered on a 30-year mortgage and the 10-year Treasury note is composed of the primary-secondary mortgage spread (reflecting industry costs of originating a mortgage and lender margins) and the secondary mortgage spread (reflecting additional risk present in mortgage-backed securities relative to the 10-year Treasury note)
- Since the Federal Reserve cut interest rates in September, the market has digested positive economic data releases, stickier-than-expected inflation data, and the outcome of the 2024 election. These have pushed the rate on the 10-year Treasury note upward, and thus mortgage rates have risen