You hear it all the time:

“Interest rates are too high right now.”
“I’m waiting for rates to drop before I buy.”

But here’s the truth: most people don’t really understand what causes mortgage rates to rise and fall. And I don’t blame them—because it’s rarely explained clearly.

So let’s fix that. Whether you’re a buyer, a seller, or a realtor partner, I want you to walk away from this post with a real understanding of how rates work. And no—it’s not as complicated as you think.

🔍 First: Mortgage Rates Are NOT Set by the Fed

Let’s clear this up right away: The Federal Reserve doesn’t directly control mortgage rates.

Yes, the Fed sets the Federal Funds Rate, which affects short-term borrowing like credit cards and home equity lines. But when it comes to 30-year fixed mortgage rates, there’s a different driver:
the 10-Year U.S. Treasury Bond.

Why? Because most mortgage loans are bundled into something called mortgage-backed securities (MBS)—and those are traded on the bond market. Investors treat MBS somewhat like 10-Year Treasuries, so mortgage rates tend to move in sync with the yield on the 10-Year Treasury.

📈 Why MBS Yields Track Treasuries—But Not Exactly

Here’s something most people don’t know: MBS must offer a higher return than Treasuries to attract investors.

Treasuries are backed by the U.S. government and come with a major perk:
➡️ The interest is exempt from state and local income taxes.

Mortgage-backed securities?

  • They’re taxable at every level
  • They carry more risk (because they’re tied to thousands of individual mortgage borrowers)
  • And they’re slightly less liquid

To make MBS worth the risk, they’re priced to offer a higher yield—typically 1.5% to 2% above the 10-Year Treasury.

📊 But that spread isn’t fixed. It can grow or shrink depending on how investors feel about the market—especially if there’s uncertainty about inflation, interest rate movements, or economic stability.

So while mortgage rates track the 10-Year Treasury, they don’t match it exactly. That spread tells us a lot about how the bond market is feeling.

📉 Why Rates Dropped During the Pandemic (2020–2021)

When COVID hit, here’s what happened:

  • The economy slowed down overnight
  • Fear took over global markets
  • The Fed dropped short-term rates to near zero
  • And they started buying up billions in bonds—including MBS—to stabilize the markets

At the same time, investors were rushing to safety and buying up U.S. Treasuries. That increased demand drove bond prices up and yields down—because in the bond market, prices and interest rates move in opposite directions.

📉 Higher bond prices = lower yields = lower mortgage rates.

That’s why rates plummeted to record lows—some even under 3%.

🔺 Why Rates Spiked in 2022–2023

By mid-2021, inflation was rising fast—driven by:

  • Supply chain issues
  • Labor shortages
  • Trillions in stimulus money circulating

The Fed responded by:

  • Raising interest rates rapidly
  • Stopping their bond-buying program
  • Letting billions of MBS and Treasuries roll off their balance sheet

That meant less demand for bonds and more supply in the market—and when demand falls, yields rise. As Treasury yields jumped, so did mortgage rates.

🌍 Why Rates Stayed High in 2024–2025

Now here’s the part most people miss:

Foreign governments like China and Japan buy a lot of U.S. bonds.

But when political tensions rise—like tariff threats or economic sanctions—those countries stop buying. That means:

  • Less demand for our debt
  • Higher yields needed to attract buyers
  • And yes, higher mortgage rates for consumers

So even when inflation improved, global uncertainty and reduced foreign investment kept mortgage rates elevated.

♻️ Stocks vs. Bonds: The Balancing Act

Another key factor:

  • When the stock market is hot, investors move money out of bonds (less demand = higher yields = higher mortgage rates)
  • When the market cools off or crashes, money flows back into bonds (more demand = lower yields = lower rates)

It’s all connected.

💬 So What Does This Mean for You?

Here’s my take—and it hasn’t changed in 40+ years of doing this:

🏡 The best time to buy a home is when it’s right for you—not when rates are perfect.

If the payment fits your budget and you love the home, don’t overthink it. You can always refinance later. But you can’t go back in time and buy a house someone else already bought.

✅ Final Word: Simpler Than You Think

Once you understand the relationships—between inflation, investor demand, Treasury yields, and MBS—it all starts to make sense.

It’s not magic. It’s just money moving through the system.

If you’re working with a mortgage advisor who actually understands these forces, you’ll be better positioned to make smart decisions—in any market.

📲 Text me directly at 561-363-8174
🌐 Or visit MortgageSimplified.net

Let’s simplify the path to your next home—together.

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