Interest rates in the twos and threes are fake news. Hey, it's Andy Mandel with the Mandel Team at Re/Max. And there's a lot of people waiting for those rates to return, but they don't really understand what makes interest rates go that low in the first place.Wait, Andy, I have a 2.75% rate on my home mortgage. They can't be fake. Well since 2009, the federal reserve has been heavily manipulating market rates trying to boost the US economy. Let me explain.

When banks loan you money and they give you a mortgage for your home, after you close, they sell your mortgage so they can get their money back to keep on lending it. On a high level without getting two technical, mortgage-backed securities are giant bundles of mortgages on people's homes from across the country that are packaged together into one giant investment like a bond, that pays interest monthly when the underlying homeowners make their mortgage payments. After the great recession that started around 2008 when the housing bubble popped, the fed started buying mortgage backed-securities as a way to artificially lower the rate that's offered on those mortgages. If banks are guaranteed to be able to resell those loans to the federal reserve, they can make those loans at a lower interest rate to you, the home buyer.

Between February, 2009 and July, 2010, the fed purchased more than $1 trillion in mortgage-backed securities to stabilize the housing market. The amount that they purchased has gone up and down slightly ever since. When COVID hit and tons of businesses closed, it caused a recession at the beginning of the pandemic. To prop up the economy, the federal reserve increased their buying of mortgage-backed securities on a massive scale. This is known as quantitative easing and the last two years have been the largest quantitative easing we've seen in history.

On March 11th, 2020, the fed was holding 1.37 trillion in mortgage-backed securities and today they hold more than 2.73 trillion worth of mortgage-backed securities. This is why rates dropped to the unrealistic lows that we saw. They were artificially pushed low to boost the housing market because the housing market makes up over 15% of the total GDP of the United States. This boom in housing helped bring an end to the recession we were in for the time being. The rise in interest rates we've seen in 2022 has been the fastest increase in rates in 28 years. And it's because the feds stopped buying these mortgage-backed securities and they're set to begin quantitative tightening where they begin to sell mortgage-backed securities rather than purchase them. Some of this may be already priced into the market because investors know interest rates are going up. But don't be surprised if we see mortgage rates tick higher as this period of quantitative tightening begins.

In summary, we can't be stuck on the fact that we missed interest rate lows because those lows were artificially created to end the recession. In a future recession, the fed is likely to again lower rates and purchase mortgage-backed securities and we could see these crazy low mortgage rates return. When the housing market was going up and up, everyone was complaining about how difficult and terrible it was to buy a house. The only way to slow it down is to raise rates. You just can't have it both ways. But let's not forget that historically, the housing market has rates between 4.5 to the 6% range on average. That's where we predict things to settle once the current volatility subsides. So that's why those interest rates are fake. If you have any questions on what these interest rates mean for you, give us a call, shoot us a text, or send us an email.

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