Speaker 1: Getting a mortgage in the United States is expensive.

Speaker 2: I think that we're seeing some strain in the system, but until mortgage rates come down and supply increases, we're not going to see prices come down.

Speaker 1: The average rate on the 30-year fixed mortgage today is hovering around 7 percent. In 2021, rates were at all-time lows. Consider how that affects the financing for the typical American home. With 2021's rates, interest payments would cost around $157,000. If it were financed in 2024, the cost jumps by a lot.

Speaker 3: Right now, we have high prices and high mortgage rates, so it's a double whammy. Housing feels especially unaffordable.

Speaker 1: Mortgage rates in the U.S. are determined by many factors, including the decisions made at the Federal Reserve.

Speaker 2: We think that our policy was appropriately restrictive.

Speaker 4: The place where the average citizen felt the collateral damage the most painfully, I think, has been in the housing market. The Fed is now cutting interest rates, but that's not making it

Speaker 5: easier to buy a home. I think the best case scenario is we're going to continue to see mortgage rates hover around 6.5 to 7 percent.

Speaker 1: So why are mortgages so expensive, even as the Fed tries to ease economic conditions? The Federal Reserve's recent policies have had a dramatic effect on mortgage rates.

Speaker 6: You had these record low mortgage rates during the pandemic that fueled all this buying, which pushed home prices up.

Speaker 1: The Fed then raised interest rates to stop inflation.

Speaker 2: We raise interest rates in order to cool the economy off, in order to reduce inflationary pressures. It's not something that people experience as pleasant.

Speaker 4: Well, the Fed implemented what some people have called a rate shock. It has resulted in a market that really is just not functioning properly at the moment.

Speaker 1: This sudden jump in financing costs created a lock-in effect in

Speaker 7: housing. The lock-in effect itself came from the Fed raising interest rates relatively rapidly in 2022. So if you look at the interest rates that mortgage holders have out there in the market, over half of borrowers actually have an interest rate below 3.75 percent on their home. Folks are holding on tight there. That means less homes coming onto the market as those folks hold on, which means less housing out there to buy.

Speaker 1: This leaves homebuyers with fewer options on the market and a high cost to finance any home that they find. As a result, 26 percent of the homes sold in the United States were paid in full with cash in 2024, an all-time high. The remaining 74 percent of homebuyers relied on mortgage financing. Those new mortgage holders are, on average, paying over 35 percent of their income on housing.

Speaker 5: If you think about a 30-year mortgage, you're going to your bank and you're entering into a financial obligation to make 360 payments and then the mortgage is paid off. It doesn't usually take 30 years for a mortgage to get paid off. In fact, the average effective mortgage maturity is only about eight

Speaker 7: years. That's how long folks typically hold them before they're either selling and moving to a new home or refinancing to reduce their interest

Speaker 1: rates. Many Americans are waiting for interest rates to fall. The Federal Reserve started a rate-cutting cycle late in 2024. The Fed's main tool, the federal funds rate, determines how money flows between banks. Lower interest rates can make loans cheaper. But so far, this has only had a limited effect on mortgage rates.

Speaker 4: The interest rates that they can set are much less effective than most people assume. Since when they announced the first rate cut, the Treasury rates have gone up, the mortgage interest rates have gone up. They're trying to persuade people to do things in the market, but the market has its own logic, its own intentions.

Speaker 3: It's not likely that home prices come down. Typically, it's a much better hope to find affordability from rates coming down. And that can certainly happen, but it is going to have to come as a result of weaker economic data, lower inflation or significantly less government borrowing.

Speaker 1: Mortgage rates are greatly influenced by the U.S. economy. Bankers keep track of that by observing the yield or return on investment from loaning the government money for 10 years.

Speaker 7: Your Treasury investments are thought of as relatively risk free. You're lending money to the federal government. You know they're good to pay you back.

Speaker 1: Some investors think the Treasury yield could rise from here.

Speaker 5: If folks start to feel like our spending is getting a little bit out of whack and they start to question if the U.S. citizen can actually meet this tax bill further on down the road, they may want higher compensation.

Speaker 1: New mortgage rates change over time, roughly in line with the 10 year Treasury yield. But there's an additional fee baked into mortgage rates to account for the risk of taking on the investment. The amount of the additional fee is called the spread.

Speaker 7: Most of that spread is accounted for via risk. When you look at mortgages, there are a couple of kinds of risk that are added there for that spread. One of them is credit risk. If I lend money to an existing mortgage holder to refinance their loan or a potential homebuyer to buy a new home, are they going to be able to pay me back over time?

Speaker 1: That additional fee baked into new mortgage rates on the market has increased since the Fed started to tighten the economy. As a result, people who take on new mortgages are paying more than they otherwise would in normal economic conditions.

Speaker 3: But it's not as if a mortgage lender is looking at a 10 year Treasury yield and simply deciding what mortgage rates are going to be based on that. In fact, there are an entirely different set of bonds called mortgage-backed securities. The demand for mortgage-backed securities can wax and wane and is the price of those mortgage-backed securities that directly dictates what a mortgage lender can charge.

Speaker 1: Today's mortgage rates are also influenced by the Fed's response to past

Speaker 5: emergencies. Global financial crisis was in large part driven by a significant housing correction. And so in order to try to stabilize the housing market, not only the Fed committed itself to buy U.S. Treasury debt, they also committed to buy agency mortgage-backed securities. And that had a distinct downward pressure effect on rates.

Speaker 1: In this process, the Fed buys huge amounts of debt to alter demand in the

Speaker 7: bond market. It shifts the supply-demand equation out there, effectively reduces the interest rate on mortgages that's being offered out there.

Speaker 1: Mortgage rates fell through the decade as the strategy played out, which made financing a home cheaper. The economy eventually recovered. The Fed returned to this technique in the pandemic.

Speaker 3: They were extra aggressive in 2021 with buying mortgage-backed securities, so the QE, and that was ill-advised in hindsight.

Speaker 1: The Fed is now reducing the amount of mortgages that it holds. Experts call this process quantitative tightening.

Speaker 7: Quantitative tightening is the exact opposite. They now have a portfolio on their books. They don't want that anymore, and they begin to slowly let that run off.

Speaker 4: This is an experiment that's never been done before. I think that's one of the reasons the mortgage rates are still going in the wrong direction from the Federal Reserve standpoint. And that's a problem. That's a political problem as well as an economic

Speaker 1: problem. Bankers believe the Fed could complete its current cycle of quantitative tightening in 2025.

Speaker 7: When you look at the Fed's interaction in the mortgage market, I think in a short synopsis, I think they would prefer not to be there. They don't want to disrupt the market too quickly, but they do want to gradually exit that market.

Speaker 1: The Fed's best estimates suggest that mortgage rates could trend above 5.5 percent through 2025. Other forecasts are higher.

Speaker 5: I wouldn't be surprised if we see mortgage rate maybe settle down in the low 7 percent range, say 7 to 7.5 percent. So unfortunately for those homeowners who are looking for a bit of reprieve on the mortgage rate side, that may not come to fruition.

Speaker 1: The decision to buy or keep renting is heavily influenced by prevailing mortgage rates. Renters are currently paying $1,000 a month less compared to owners with a mortgage. That said, the 30-year fixed rate mortgage is a unique benefit for Americans. Many other countries use adjustable rate mortgages that respond more quickly to central bank decisions, for better or for worse.

Speaker 3: It makes for a lower payment than you might otherwise find and it makes for more certainty. Some would say that we end up paying more interest over time as a result, but others would say it's a luxury that helps us afford more home than we otherwise might want to buy. You don't ever want to assume that rates are going to do something in the future just because people are saying they will or because you feel like they will. Rates are where they are today and there's really no guarantee that they'll be there tomorrow or that they won't be higher.

Speaker 5: In an ideal environment, the Fed's not doing anything. When the Fed is active, they absolutely do have an impact on what you're going to pay to buy a new home.