In 2020 and 2021, housing boomed and rates plummeted at a pace that many considered to be unsustainable. 2022's role is to take things back in the other direction.
In other words, things are "normalizing" after a period of frenzied movement. The normalization process can seem scary in cases where the thing being normalized was exceptionally big, different, and fast. It's safe to say that housing demand, home prices and rates were all moving in a manner that could easily be described as big, different, and fast.
As we watch the normalization process unfold, it's fair to wonder if it's a sign of more dire developments. After all, mortgage rates skyrocketed well into the 6% range last week as markets braced for impact from the Fed's policy announcement. At the time, we were hopeful that we'd just seen the highest rates of the year. This week only added to those hopes.
If you happened to see other news this week that suggested HIGHER mortgage rates, rest assured, that news is dated. Even if it had a release date as recent as June 23rd, it almost certainly draws on Freddie Mac's weekly mortgage rate survey which tends to capture rate movement at the beginning of the week only to report it on Thursday morning.
When we examine actual daily averages, we can see that Tuesday's rates weren't very different from last Friday's, but the following two days saw huge improvements before pulling back just slightly on Friday.
The larger-than-normal size of the improvements has to do with the way mortgage rates are determined. This is a complex topic, so feel free to skip the next two paragraphs if you don't care about the "WHY."
Mortgages essentially turn into bonds, and those bonds dictate the rates lenders can offer. Mortgages can only be placed into certain bonds, depending on the rates of the underlying loans. One of these bonds, for instance, can take loans with rates of 5.25% to 6.125%. That means the value of a 6.25% loan would be determined by the next higher bond. If investors place a premium on the lower bond (as they might in an environment where there's some hope that rates have topped out), a lender can actually make more money selling a 6.125% loan than a 6.25% loan.
