Mortgage rates are flirting with 7.5%, their highest levels in roughly 20 years, and naturally everyone has a political explanation for why.
Instead, there’s something unusual happening in the bond market right now, and you can see it in the gap between what banks pay for money and what they’re charging homebuyers.
That spread has gotten much wider than normal…
The culprit is one almost nobody would think to blame: the AI boom.
Some of the biggest technology companies in the world are raising hundreds of billions of dollars, and the way they’re borrowing that money has put them into direct competition with ordinary Americans looking for 30-year mortgages.
That sounds like bad news. But the same forces pushing mortgage rates higher today also tell me this pressure could begin reversing over the next few months — just in time for the spring home-buying season.
In today’s Moneyball Economics, I’ll show you how AI managed to reach all the way from the data center into the mortgage market, and why the distortion it created may be much more temporary than the headlines suggest.
Click the video below for the full story:
Video Transcript:
It’s Moneyball Economics time. I’m your host, Andrew Zatlin.
You may or may not be aware of this, but mortgage rates recently spiked to 20-year highs. They’re flirting with seven and a half percent.
Naturally, this being a political season, this is being weaponized. You’re getting a lot of finger pointing, a lot of blame placing. This is yet another sign that the economy’s out of control and blah, blah, blah, blah. Well, the truth is stranger than fiction here.
And the clue that something special is going on has to do with the spread between what the Fed lends money out at and what these lenders are charging. See, banks, insurance companies, whoever it is, they’re in the business of making money. And one way they do that is to borrow low and sell relatively high.
So if you’re doing a 30-year mortgage, traditionally you’re paying what the Fed charges to these banks plus about a one to 1.5% premium.
So in this case, if the rates are at 5%, you would expect mortgages to be about six, 6.5% depending on the competition for those loans. Because again, they’re in the business of lending money. There’s not a lot of borrowers out there, they’ll charge a little bit less of a premium. Well, six and six and a half percent is a far cry from seven and a half percent.
What is driving up that spread? Why is there a premium? And the answer is AI.
That’s right folks. Data centers are making mortgages more expensive. And guess what? The reasons that they’re making them more expensive are exactly the same reasons why mortgage rates are set to come down pretty quickly.
It all has to do with this year and the way these companies out there, Oracle, Microsoft, you name it, they’re raising $600 billion and they’re raising it in a way that is directly competing with mortgages.
So let’s put this in context. $600 billion is a lot of money to borrow all at once. Typically, companies are responsible for maybe 1% of global bond issuing in a year, 1%. This 600 billion is 10%. So all of a sudden you’ve got these companies demanding loans and they’re turning to insurance companies, pension funds, you name it, whoever’s going to lend them that money.
Not just that…
Usually, usually companies would borrow a 10-year type of loan. Now they’re going after 30 years, which again puts them into direct competition with mortgages. So if you are looking at say a pension fund that’s going to lend and they’ve got a choice to lend to Oracle or to you, you’ve got different risk profiles, but suffice it to say that Oracle’s actually paying a little bit more than what used to be happening on a 30-year loan. So as a result, you got to entice these lenders in.
You’re competing with the big boys now, so you got to throw a little bit more money out there. Fortunately, all of this borrowing is starting to wind down as well as there’s some new lenders entering the picture. The supply demand curve is shifting.
As a result, over the next few months, all the demand for borrowing will slow down coming out of the companies. You’ll have less competition for say the consumer market. And so you’ll see rates come down, which is a good thing because we’re standing here in October. It’s not home buying season yet.
We don’t really care what’s going on with mortgage rates right now, but we do care when we get to February and March and people are out trying to buy homes, take out loans and so on and so forth. That’s five months away, six months away.
Mortgage rates are going to come back down away from that premium, but they’re going to still stay high because let’s face it, Fed is still charging about 5% to borrow from them.
So yeah, they come down from 7.5 to 6.5%. That’s still a hard pill to swallow if you’re borrowing, especially when we used to see two and a half and 3% in the COVID glory days.
Nevertheless, watch this issue to go away. It’s just crazy how AI is affecting all of us even when we don’t expect it.
We’re in it to win it folks,
Zatlin out.
