If you’re in the market to buy a home, you’ve likely been closely monitoring mortgage rates. Over the past few years, they’ve experienced significant fluctuations, hitting record lows, surging, and now showing signs of dropping. But why does this happen? Mortgage rates are influenced by a variety of factors, and in this blog, we’ll explore two of the most impactful ones.
1. Inflation and the Federal Reserve
While the Federal Reserve (Fed) doesn’t directly determine mortgage rates, its actions can indirectly affect them. The Fed adjusts the Federal Funds Rate in response to various economic indicators, including inflation, employment rates, and the overall state of the economy. These adjustments can lead to changes in mortgage rates. Here’s how it works:
- High Inflation and Rate Hikes: When the Fed perceives rising inflation and anticipates further rate hikes, it can push mortgage rates higher. Investors respond to the potential for increased rates by demanding higher returns on their investments, including mortgage-backed securities, which can drive up mortgage rates.
- Rate Cuts and Decelerating Inflation: Conversely, if investors believe the Fed may reduce rates due to decreasing inflation, mortgage rates tend to trend downward. The Fed’s actions to combat inflation or stimulate the economy can indirectly impact mortgage rates.
In recent years, the Fed raised the Federal Fund Rate to address inflation concerns, causing mortgage rates to climb. Fortunately, experts anticipate a more favorable outlook for inflation and mortgage rates in the coming year. Danielle Hale, Chief Economist at Realtor.com, suggests that mortgage rates will continue to ease as inflation improves. Some even speculate that the Fed may consider cutting the Fed Funds Rate as inflation moderates, despite not yet reaching their ideal target.
2. The 10-Year Treasury Yield
Mortgage companies often look to the 10-Year Treasury Yield as a benchmark when determining the interest rates for home loans. If the yield on the 10-Year Treasury Bond increases, mortgage rates typically follow suit, and the reverse is also true. The correlation between the two is significant, and fluctuations in the treasury yield can impact mortgage rates. Investopedia explains:
“One frequently used government bond benchmark to which mortgage lenders often peg their interest rates is the 10-year Treasury bond yield.”
Historically, the spread between the 10-Year Treasury Yield and the 30-year fixed mortgage rate has been relatively consistent. However, recent deviations from this pattern suggest potential room for mortgage rates to decrease. Monitoring the direction of the treasury yield provides insights into potential changes in mortgage rates.
Bottom Line
As the Federal Reserve holds its meetings and makes decisions, experts in the industry closely watch for their potential impact on the economy, including mortgage rates. To navigate any fluctuations in mortgage rates and their implications for your homebuying plans, it’s advisable to have a team of real estate professionals by your side. Whether you’re buying or refinancing, staying informed about these influential factors can help you make informed decisions in the ever-evolving mortgage rate landscape.