Economist Peter Morici breaks down what the national debt is, why it has ballooned to more than $34 trillion, and what it means for Americans.
Home buyers in the United States Federal Reserve They are eagerly awaiting interest rate cuts that could bring relief from painfully high borrowing costs.
But there’s another factor that could keep mortgage rates high in the coming months and years: the U.S. national debt.
“With mortgage rates hovering near 7%, attention is focused on the timing of the Fed’s rate cut,” said Lisa Sturtevant, chief economist at Bright MLS. “But the Fed’s delay in cutting rates isn’t the only reason mortgage rates will remain high for so long. Record-high federal debt is also contributing to high mortgage rates.”
That’s because the federal government has to pay a lot of interest on its debt, which means the government has to issue more bonds, but it has to pay higher yields to attract investors, Sturtevant said. But mortgage-backed securities are competing for the same investors, so they have to offer higher yields.
Mortgage calculator: See how much rising interest rates will cost you
The U.S. Capitol in Washington, DC, January 17, 2024. (Photographer: Julia Nickinson/Bloomberg via Getty Images/Getty Images)
“As a result, the mortgages that are bundled together into mortgage-backed securities come with relatively high interest rates attached,” she said.
In its latest budget and economic outlook, the Congressional Budget Office projected that the nation’s public debt would soar from 99% of GDP at the end of 2024 to 122% of GDP by the end of 2034, the highest level on record.
“It continues to rise thereafter,” the report said.
Desmond Lachman, a senior fellow at the American Enterprise Institute, told Fox Business that if the US continues to increase its debt at such an unsustainable pace, there is a risk that foreign holders of Treasury bonds — including individual investors and central banks — will start selling them.
How much of your tax money goes towards paying down the U.S. national debt?
Foreigners currently own about 30 percent of all outstanding Treasury bonds, The Wall Street Journal reported, citing data from the Securities Industry and Financial Markets Association.
Homes for sale in San Jose, CA on 02/07/2024. (Lauren Elliott/Bloomberg via Getty Images/Getty Images)
If foreigners were to sell their bonds, the U.S. government would have a hard time raising funds to pay the rising interest on its debt. Federal Reserve Lachman said the Fed will most likely step in and print money, pushing up inflation and long-term interest rates.
US National Debt Tracker
“That would push long-term interest rates up. Regardless of what the Fed does with short-term rates, if there’s a dollar crisis and they sell off Treasuries, long-term interest rates could go very high,” he said. “That’s really the risk.”
Mortgage rates have surged in 2022 and 2023 as the Federal Reserve waged an aggressive campaign to tame high inflation. In just 16 months, the central bank has approved 11 interest rate hikes, the fastest pace of tightening since the 1980s.
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The federal funds rate is not paid directly by consumers, but it affects the costs of borrowing money, including mortgages and auto loans. credit card.
Rates on the popular 30-year fixed mortgage are currently hovering around 6.87%, down from a peak of 7.79% but still well above the pandemic-era low of just 3%, according to Freddie Mac.
Even small changes in mortgage interest rates can affect the amount a prospective homebuyer pays each month. Recent Research LendingTree compared the average monthly payment on a 30-year fixed-rate mortgage when interest rates were hovering around 3.79% in April 2022 to the payment a year later when rates had jumped to 5.25%. It found that rising rates could mean borrowers paying hundreds of dollars more each month, potentially up to $75,000 over the life of the 30-year loan.
