I get that the fed funds rate influences mortgages: it goes up so do mortgage rates. But can anyone explain why there is such a high difference between fed funds (I believe it’s 1% now) vs mortgages (5-6%)? I know also that banks apply all sorts of premiums (default, market risk…) but why are they that high?
As a comparison, mortgage rates in the EU are still sub-2% with ECB rates at zero.
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So far some very wrong answers, and some sort of half right answers.
First off, the fed funds rate and mortgage rates are not comparable. It is more accurate to compare the 10-30 year bond rates to mortgage rates. In that case you have a 3% vs 5% difference. Fed funds rate is a rate at which banks loan to each other, and is more closely anchored to the rates of the repo/reverse repo market, which is what banks and the fed pay to lend to each other. There is a lot of complexity in all of that so I wont go into it.
**The reason mortgage rates have gone vertical lately**, and greatly outpaced the rise in fed funds rates is simple. The fed spent the last 2 years buying a shitload of mortgage backed securities. They are now approaching a time where they are going to start unloading a lot of those as a way to put the breaks on the crazy housing market. They will be unloading way more than the market will be able to reasonably absorb under normal conditions. So basically the supply of Mortgage Back securities is going to be more than the demand, as such their prices will have to come down(which makes the rates go up), to find buyers. The market is preemptively pricing this in.
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