How the US national debt is keeping mortgage rates elevated
Economist Peter Morici breaks down what the national debt is, why it ballooned to more than $34 trillion and what it means for Americans.
Prospective homebuyers in the U.S. are keeping a close eye on the Federal Reserve as they eagerly await interest rate cuts that could offer relief from painfully high borrowing costs.
But there is another factor that could keep mortgage rates elevated in the coming months and years: the U.S. national debt.
«As mortgage rates remain near 7%, a lot of attention is being paid to the timing of Federal Reserve interest rate cuts,» said Lisa Sturtevant, Bright MLS chief economist. «But a delay in Fed rate cuts is not the only reason mortgage rates will remain higher for longer. A record-high federal debt is also contributing to persistently high mortgage rates.»
That's because the federal government has to pay a massive amount of interest on the debt that it owes. To do so, the government will issue more Treasury bonds – which it needs to pay out a good return to attract investors – to raise capital, Sturtevant said. But mortgage-backed securities are competing for the same investors and also need to offer a high rate of return.
MORTGAGE CALCULATOR: SEE HOW MUCH HIGHER RATES COULD COST YOU
The U.S. Capitol in Washington, D.C., on Jan. 17, 2024. (Photographer: Julia Nikhinson/Bloomberg via Getty Images / Getty Images)
«Consequently, the mortgage loans bundled up to form those mortgage-backed securities must have a relatively high interest rate attached to them,» she said.
In its latest budget and economic outlook, the Congressional Budget Office projected that the nation's publicly held debt will surge from 99% of GDP at the end of 2024 to 122% of GDP by the end of 2034, the highest
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