Housing Market Has a New Problem: Surging Mortgage Rates

Added: 2026-05-20

[00:00:00]In today's video, let's cover the housing markets. Mortgage interest rates have been shooting up. So, why is this happening? What are the consequences on the housing markets and when will interest rates come down?

[00:00:12]Now, I want to show you this on the chart how rapidly mortgage interest rates have been rising. So, this is the average interest rate on the 30-year fixed for the past 12 months, and it's plotted and updated on a weekly basis.

[00:00:25]So, listen. What you see here is the tail end of last week where the national average was at 6.36% for a 30-year fixed mortgage. But right now, over the past few days, it's now risen to 6.75%.

[00:00:42]So again, this is where we were last week. But if we extend the graph ourselves, and this graph is coming straight from the Federal Reserve's websites. So then this is what we're going to see when they update it spiking it to this level in just one week's time. Now I just want you to take into consideration that we were below 6% in March. So that rise to 6.75% was rapid.

[00:01:05]So that's not normal for mortgage interest rates. And just think about all the progress that we made bringing down mortgage interest rates over the past year to see it all undone in about two and a half months time. So it was a grind. I mean just take a look at the chart. It was a grind bringing it down below 6% and then boom all of a sudden that progress was just gone and just undone. Okay. Now I want to show you why mortgage interest rates have been shooting up higher. And to begin you have to understand this. This is very important. So mortgage interest rates are correlated to the interest rate on government debt. So that means that if interest rates on government debts goes up then interest rates on mortgages are going to fall. they're going to go up as well. If interest rates on government debts goes down, then mortgage interest rates are going to go down as well. So, they're correlated.

[00:01:57]Okay? So, to see the correlation, if you look at the gold line, that's the average interest rates on mortgages, and you can see the interest rate like how much it is on the right side of the graph. And the lighter bluish line is the interest rate on the 10-year Treasury notes. And you can see the interest rate on the left side of the graph like exactly how much it is. So this is basically what it costs the US government, the federal government to borrow money for a 10-year duration. So anyways, as you can see, they're correlated. And listen, I just want you to know that it's not just the 10-year yield that's been spiking up. It's the 30-year yield that's been spiking up as well. Okay? So why are interest rates on government debt shooting up and consequently causing mortgage interest rates to shoot up as well?

[00:02:44]So I'd say that it's for a variety of reasons, but I want to give you the main ones. So first I want to explain to you the system that we currently live in. So it's called the petro dollar system.

[00:02:56]So the deal is that oil trades globally for the majority of trade in US dollars.

[00:03:03]So you have all these countries in the Gulf selling their oil in dollars and which is great. Okay. So they they sell their oil, they receive the dollars, but now what do they do with their dollars that they received?

[00:03:16]Okay, so generally this is what happens.

[00:03:18]They take their dollars, at least a sizable chunk of it, and they buy US treasuries with those dollars. So essentially, they take their dollars, they lend it back to the US government, and the US government pays those Gulf countries interest income.

[00:03:35]Okay? But now depending on what country that you're talking about, less or none of that oil that they're producing over there is getting exported out.

[00:03:43]Okay? So that's going to mean that they have those Gulf countries, they have less or fewer dollars that they're receiving, right? Which means that they have fewer or no dollars to buy US treasuries, which means that interest rates on US treasuries are going to go up. But you know what? If you want me to explain to you as simply as possible, their oil that they're producing, it's not getting out. So, they're not making money. And if they're not making money in US dollars, then well, they have no money to lend to the US government to buy US treasuries. That's simply what's happening. And then you have the situation where other countries need oil and in order to buy oil in US dollars, they need dollars, right? So, what do they do? They sell their treasuries to receive dollars in order to buy oil.

[00:04:32]Okay? But when they sell their treasuries, that causes the price of government bonds, you know, US treasuries to fall. And interest rates on those government bonds on those US treasuries are going to increase. So that's why we're seeing interest rates go up. And another reason why interest rates are going up is because the supply of oil has been disrupted, right? The straight of hormuz.

[00:04:53]And if the price of energy goes up, then the price of almost everything is going to go up as well because energy is a major input cost for just about everything, right? So if the supply of energy is disrupted and prices are expected to go up, then inflation expectations are going to go up as well.

[00:05:10]And if inflation expectations increase, then bond investors are going to want to be compensated at higher interest rates for lending money to the US government.

[00:05:19]So that makes sense, right?

[00:05:22]So let's just say that you were okay with lending money to the US governments for an interest rate of let's just say 4%. But now with all this going on, you think that the rate of inflation is going to be running at 5%.

[00:05:36]Then in that situation, you don't want to lend money to the US government for 4% because if you think that inflation is going to be 5%, then you don't want to be compensated 4%. Otherwise, you're going to be underperforming inflation and you're going to be losing money in terms of real purchasing power. So, you want your compensation to be higher than the rate of inflation in order for you to truly come out ahead, right? So, inflation expectations are going up.

[00:06:03]Therefore, interest rates on government debts are repricing. Okay? So, I just told you what is happening. Mortgage interest rates are going up. And I just explained why it's happening. It's because interest rates on government debts is going up and those two are correlated and I just drilled down into why that's happening. Why interest rates on government debts is going up.

[00:06:26]Okay. Now, I want you to know the consequences of higher mortgage interest rates in the housing market. So, here are the biggest points that I want you to take away. Higher mortgage interest rates will further reduce affordability.

[00:06:38]Of course, it's going to slow down sales. It's going to lead to fewer buyers as fewer buyers will be qualified. It's going to cause increased inventories and this is going to be a headwind for home prices. So, I mean, I've said this before, it doesn't necessarily mean that home prices are going to go down. It just means that if home prices are still going up, like if they're still on an upward trajectory, they're just not going to go up as high as they would have with lower interest rates. And if home prices are going down, you know, if they're on a downward trajectory, then they're going to go down more than they would compared to if we were in an environments with lower interest rates. But I just want you to know that these higher mortgage interest rates will put downward pressure on home prices, but it's not going to collapse the housing market in terms of price.

[00:07:29]So, we're in the middle of May right now, and the most recent housing market data out there is currently April. For the month of April, home prices in the US nationally rose by 0.2% month overmonth. And home prices rose by 2.1% year-over-year.

[00:07:46]So, home prices are not crashing. As a matter of fact, they're still going up.

[00:07:50]I mean, I don't think that you can deny that home prices are still expensive.

[00:07:54]You know, home prices have not crashed nationally to a point where people are saying, "Oh my goodness, homes are, you know, so affordable right now. Homes are so cheap right now." you know, I I haven't been hearing that. And I just want to give you some context about our situation. So, this is the average interest rate on a 30-year fixed mortgage, and this is coming from the Federal Reserve. So, we're currently at 6.75% right now, and this is a chart for the past 5 years.

[00:08:19]Yes, 6.75% is high, relatively speaking.

[00:08:23]You know, there's no doubt about that, especially compared to the 3% or sub 3% that many people still have right now on their mortgage.

[00:08:32]However, we've been here at 6.75% before and it was not enough to crash the housing markets. I mean, we even got closer to 8% back in 2023. So, I'm sure that it slowed down the market, but as you know, it didn't crash home prices.

[00:08:49]So, again, this is definitely going to be a headwind for us in terms of home prices, but leading to a crash just on this data point alone, like I would say that's a stretch. And another thing that I want to address is that we just got word a few days ago that mortgage delinquencies are increasing. However, this was expected. We actually covered this thoroughly in previous videos, but I just want to give you a highle summary. Yes, higher mortgage interest rates will make it more difficult for new borrowers to keep up with their payments, right? But in terms of delinquency and foreclosure activity, we're starting from a much smaller base compared to the previous housing market crash.

[00:09:28]So yes, although delinquencies are increasing, it's off a much lower starting point. So therefore, at this point in time, like if you look at the data, I don't see the need to panic. So if it's going to if the delinquency rate is going to keep on growing and increasing for another, you know, 2 3 years, then yeah, then it's going to be a a cause for a bigger alarm. But I just don't see it at this point in time. Now, in terms of when mortgage interest rates will come down, my honest answer is that it's really going to depend on the war, you know, if there's going to be deescalation, if there's going to be escalation, or if this is just going to drag out. It's the war that's of course driven it up. Mortgage interest rates.

[00:10:11]If the war continues, if there's more trouble with the petro dollar, if there's liquidity problems, if there's higher inflation expectations, then yes, mortgage interest rates are going to go even higher than where we're currently at. If the war deescalates, then mortgage interest rates, you know, you can expect them to come down.

[00:10:30]If the Federal Reserve gets involved, they can actually buy Treasury notes and Treasury bonds and bring down mortgage interest rates. However, if they do that, then they're going to spike inflation and that's going to cause home prices to go up. Anyways, that's all for today. I hope that helps. Please subscribe. Thank you for the support and I wish you a very nice day. Take care.