Recently, the Federal Reserve hiked the Federal Funds Rate by another 0.75%. This was the fifth rate hike of the year and the Fed also projects raising it another 1.25% this year, which may mean another 0.75% hike in November and 0.5% in December.
Remember, the Fed Funds Rate is the overnight borrowing rate for banks, and it is not the same as mortgage rates.
But you may be wondering: How does this move in the Fed Funds Rate affect mortgage rates?
Inflation
Mortgage rates are primarily driven by inflation, which is at a 42-year high. When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation. If the Fed is successful in cooling inflation, mortgage rates should decline. History proves this during rate hike cycles for the past 50 years.
Unfortunately, inflation erodes the buying power of the fixed return that a mortgage holder receives. When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of their buying power.
But if the market doesn’t believe the Fed can get control of inflation, we could see more volatility in mortgage rates.
Mortgage Rates and Treasury Yields
Fixed mortgage rates and Treasury yields tend to move together because fixed-income investors compare the returns they can get on government and mortgage-backed securities.
Investors compare yields on long-term Treasuries to mortgage-backed securities and corporate bonds. All bond yields (including mortgage backed securities) are affected by Treasury yields, because they compete for the same type of investor.
Mortgages, in turn, offer a higher return for more risk. Investors purchase securities backed by the value of the home loans—so-called mortgage-backed securities. When Treasury yields rise, investors in mortgage-backed securities demand higher rates. They want compensation for the greater risk.
What Really Causes Rates to Rise and Fall?
Mortgage rates are determined by a complex interaction of economic factors, such as the level and direction of the bond market, including 10-year Treasury yields; the Federal Reserve’s current monetary policy, especially as it relates to funding government-backed mortgages; and competition between lenders and across loan types.
Because fluctuations can be caused by any number of these at once, it’s generally difficult to attribute the change to any one factor. Although in our current situation, inflation (and the Fed’s mismanagement of it) is the number one cause. When this is coupled with the large increase in government spending, you see a double dose of fear in the markets.
Moving Forward
There may come a point when mortgage rates drop back down and borrowers can enjoy some of the remarkably low rates they were available from mid-2020 through late 2021.
And throughout the remainder of 2022, we could have periods when rates dip to some degree.
But for the most part, borrowers may need to come to terms with the fact that the days of record-low borrowing are behind us. In the meantime, real estate is still a tremendous investment…and I’m advising my clients to Marry The House, But Date The Rate.
Would you like to find out more? Contact me to discuss your current situation and how you might be able to take advantage of today’s market. It would be my pleasure to help you!
