Investment Opportunities in theEra of Rising Mortgage Rates

Today, interest rates are on the rise, offering smart investors an opportunity in first trust deed lending. This newsletter will break down the current interest rate situation, explaining why rates have gone up, how long they might stay that way, and why it is a good opportunity to invest now. 

Mortgage Rates Running at a 22-Year High

Home buyers face an average rate of 7.63% on 30-year fixed-rate mortgages, which is the most popular home loan in the United States, as reported by Freddie Mac on October 19th, 2023. This rate is the highest since December 2000 when Americans had to pay an average of 7.54% on their mortgages. Refer to the "30-Year Fixed Rate Mortgage" chart for details concerning the development of mortgage rates since 1999.

The surge in rates has reduced the demand for homes, resulting in a decline in sales of existing homes compared to the previous year. Furthermore, sellers who locked in low rates during the pandemic are now hesitant to list their homes on the market out of fear that they won't be able to secure a comparable rate when they become buyers. Despite high mortgage rates, housing prices have remained resilient, as discussed in our September newsletter, “American Home Prices Still on the Rise.”

Mortgage rates are influenced by a number of factors, most beyond our control as consumers and investors. The biggest driver is the bond market, along with other economic forces. 
 

What Influences Mortgage Rates

Mortgage rates, like many other long-term loans, often follow the rate, or yield, on the 10-year Treasury note, considered one of the safest investments due to its backing by the U.S. government. For many types of loans, lenders typically begin with this rate, often referred to as the risk-free rate, and then adjust it to account for the greater risk of not being repaid by borrowers, such as home buyers.

The yield on the 10-year T-note recently reached its highest point since 2007, peaking at 5.02% on October 23, 2023, marking the highest yield in 16 years. To put this in perspective, in June of 2007 the rate was 5.00%. See chart “10-Year U.S. Treasury Note” for a detailed evolution of the yield since 2007. This surge reflects the Federal Reserve's determined efforts to combat inflation by raising borrowing costs. The Fed's influence extends to short-term interest rates, which, in turn, have a substantial impact on long-term bond yields.

In times of high inflation, the Fed raises short-term rates to slow the economy and ease pressure on prices. However, higher interest rates make it costlier for banks to borrow, leading them to raise interest rates on consumer loans, including mortgages, to compensate. This has been happening for over a year, with the Fed's federal funds rate rising from near zero to above 5 percent, with mortgage rates following suit.

Yields haven't been this high since the period preceding the Fed's experimentation with unconventional policies, including near-zero benchmark rates and quantitative easing, which aimed to stabilize an economy shaken by the sub-prime mortgage crisis and the collapse of Lehman Brothers. These policies were implemented intermittently for 15 years until the pandemic and the surge of government spending forced policymakers to raise rates closer to the levels seen in prior decades.

A strong economy also influences mortgage rates in other ways. A robust job market provides households with more disposable income, increasing the demand for mortgages and driving rates higher.

Lenders often aggregate their mortgages into a portfolio, which they sell to investors to raise funds. These mortgage-backed securities are similar to bonds. To remain competitive with the 10-year T-note, lenders must raise the yields on their mortgage-backed securities, resulting in higher rates for home loans.

The gap between the yield on the 10-year T-note and mortgage-backed securities, known as the spread, is typically around two percentage points. Currently, this difference is closer to three percentage points, significantly affecting the housing market by driving up mortgage rates, according to Lawrence Yun, the chief economist at the National Association of Realtors.

Some attribute the surge in the term premium to simple supply and demand. The U.S. Treasury has been aggressively borrowing funds, raising a substantial $1.7 trillion, which is equivalent to 7.5% of GDP, from markets between January and September 2023 alone, based on data from the U.S. Department of the Treasury. This amount is up by almost 80% compared to the same period in 2022. This increased borrowing can be partly attributed to recently falling tax revenues which, in the absence of any spending discipline, compelled the government to seek additional debt financing. At the same time, the Fed has been reducing its holdings of long-dated Treasuries. This process, referred to as "quantitative tightening," involves the Fed selling some of the bonds it holds. By selling these bonds, the Fed effectively reduces the amount of bonds available in the market. When there are fewer bonds available, investors may demand higher yields, or interest rates, on the remaining bonds because of the decreased supply.

How Long Will Rates Stay High?

Economists predict that mortgage rates will remain elevated for at least a few more months. And even when they start to come down, they are expected to settle well above the 3% rates that home buyers enjoyed during the early stages of the pandemic.

The Mortgage Bankers Association, a real estate finance industry group, recently forecast that the average 30-year mortgage rate would fall to 5 percent by the fourth quarter of next year. 

In its latest U.S. Economic Outlook, Wells Fargo’s forecasting group predicts that 30-year fixed mortgage rates will fall below 6% in the third quarter of 2024, with the Fed keeping monetary policy tight until it's confident that inflation is back to the 2% annual target.

The elevated interest rate environment will begin to ease when inflation tapers off. Therefore, investors should think about how to take advantage of the current situation. 

What Does it Mean for Investors?

Higher mortgage interest rates mean better returns for first trust deed lenders at more conservative LTVs. Safeguard is facilitating some of the lowest-risk, highest-yielding loans to date because when interest rates rise our lenders win. Now is a great time to be a a first deed trustee lender!

At Safeguard, we understand the importance of preserving and growing your investments. We offer first trust deed note options secured by actual, physical assets, with conservative average loan-to-value (LTV) ratios of 65%. Our rates start at 10%, outpacing inflation and most conservative investment options. With our team's two decades of experience in assisting our clients, we are here to help you make the most of your investment opportunities. Call or email Safeguard today at 877-280-5771 and put your money to work for you!