People considering getting a mortgage to buy or refinance a home are in shock about the costs associated with a mortgage transaction. It’s not as simple as inflation to explain why mortgage rates are so high. Here is some information that explains not only why mortgage rates are so high, but also the current market opportunities and what the future holds…

The main reason why 30-year mortgages are at 7% is that there is a shortage of buyers. The more buyers of mortgage-backed securities, the more mortgage rates fall. The shortage of mortgage-backed securities came from the fact that the Fed gave up buying mortgage-backed bonds. With other mortgage-backed securities buyers pulling out due to prepayment risk. The problem is compounded by the Bank of England, the British economic threat, the fall of the Japanese yen and the risks of a nuclear conflict between Russia and Ukraine. These concerns are causing the market to shed US currencies, including Treasuries and mortgage-backed securities, to raise funds for these countries. This only worsens the imbalance between supply and demand. The reason this is problematic is that it creates an economic market atmosphere that these long-term mortgages issued today will be refinanced. This phenomenon occurring has produced an inverted yield curve which is an indicator that long term rates will decline. In other words, the prepayments of those mortgages issued today will materialize.

It is estimated that interest rates could be below five at the end of the fourth quarter of 2023. This would then produce a mini refinancing boom of all mortgages issued today. Investors on Wall Street know this, and that’s why mortgages today have discount points associated with most interest rates, because prepayment risk is a very real concern. This means that the loan does not mature. The loan is repaid quickly, which creates an investment risk for the end buyer of the mortgage loan.

What does this mean for you as a consumer? This means buying a house today and substantially negotiating the house. This is the opportunity offered by this market. Know this: when rates eventually fall, competition will re-emerge and bidding wars will return, driving demand for real estate.

Scott Sheldon is a local mortgage lender; with a decade of experience helping consumers purchase and refinance primary residences, second homes and investment properties. Learn more about www.sonomacountymortgage.com.