What is Happening to Mortgage Rates?

Mortgage interest rates can have a direct impact on the long-term cost of purchasing a home, and mortgage borrowers will seek the lowest possible mortgage interest rates at the most reasonable cost to close. The lowest mortgage interest rates (conventional financing) are only available to those borrowers with sufficient ability (income), assets (property and cash), and credit (credit scores and history).

There are several factors that influence mortgage rates (and costs), and all of them relate to the rules of supply and demand. Being aware of these factors will help you to understand the fluctuations in mortgage market pricing and assist you in predicting the future trend of interest rates and the best time to make a rate lock commitment on your specific financing request.

Mortgage rates are tied to the basic rules of supply and demand. Factors such as inflation, economic growth, the Fed’s (Federal Reserve) monetary policy, and the state of the bond and housing markets all come into play. Of course, a borrower’s financial health will also affect the interest rate they receive, so do your best to keep your financial profile as healthy as possible.

Federal Reserve Bank Monetary Policy

The monetary policies that are implemented by the Federal Reserve Bank (America’s Central Bank) is one of the most important factors influencing not only the economy in general but interest rates, including mortgage interest rates.

The Federal Reserve Bank (The Fed) has a direct effect on interest rates by;

1. Raising and lowering the Fed Funds Rate, which the interest rate at which The Fed suggests commercial banks borrow and lend their excess reserves to each other overnight.
2. Raising and lowering the Discount Rate, which is the interest rate charged to commercial banks and financial institutions for short-term loans taken from the Federal Reserve Bank.
3. By operations of the Federal Open Market Committee which simply put, manages the nation’s money supply by engaging in the direct buying and selling of Treasury and Mortgage-Backed Securities. Adjusting the money supply up or down has a direct impact on rates available to the borrowing public. Generally, increases in the money supply put downward pressure on rates while tightening the money supply pushes rates higher.

Inflation

Inflation is one of the Federal Reserve Bank’s top priorities along with unemployment. Inflation reduces the value of the US dollar, and therefore the Fed closely watches the inflation levels of the economy to maintain an acceptable level of inflation (2.00%). If inflation percentage rises too high, the Fed will move aggressively to reduce it by raising interest rates, reducing the money supply and other monetary policies. Raising rates will have the effect of reducing demand, to bring the supply demand ratio back in balance.

The Bond Market

Banks and investment firms market mortgage-backed securities (MBS) as investment products. The yields available from these debt securities must be sufficiently high to attract buyers.

Government bonds and corporate bonds offer competing long-term fixed-income investments to mortgage backed securities, and the yield you can obtain on these competing investment products affects the yields on offer for mortgage backed securities (MBS). The overall condition of the larger bond market indirectly affects how lenders price most of their mortgage products. If bond yields (rate of return) go up, so do mortgage rates and prices.

One frequently used government-bond benchmark to which mortgage lenders peg their interest rates are the fluctuations, (by the minute), of the 10-Year Treasury bond yield. The 10-Year government bond can be seen on financial websites such as Bloomberg.com and Marketwatch.com.

Housing Market Conditions

Trends and conditions in the housing market may also affect mortgage rates. When fewer homes are being built or offered for resale, the supply is decreased leading to an imbalance of supply and demand.

More demand and less supply translates to more buyers competing for fewer properties and the price goes up. More supply (homes on the market) and less demand will lead to prices falling.

The very accommodative monetary policy by the Federal Reserve over the past 2 years has lead to the lowest interest rates in the past 50 years, making financing a home easier than ever. Couple this policy with new home builders lowering their production of new homes, people moving to the suburbs to setup preferred home office locations, and a reduction of available listings in the marketplace and you have the perfect storm for higher home prices.

As home prices in the near term have increased to levels not seen before, ever, and the recent acceleration of mortgage interest rates since the beginning of 2022, we do expect to see a leveling, if not an outright decline in home prices nationwide. After all, that is what mortgage rate increase do, they sap demand from the marketplace.