Mortgage interest rates are staying higher than initially anticipated, due to the staying power of inflation today.
Inflation is a terrible thing for prosperous, economic growth…and it significantly impacts mortgage rates for the worst.
Today, we are seeing the impact of stubbornly sticky inflation in the mortgage marketplace – and relief doesn’t appear to be coming in the near term.
The most recent inflation data showed prices rising by 3.5% year-over-year in March, which exceeds the Federal Reserve’s 2% target.
Why Does This Happen?
Rising inflation shrinks buying power as prices of goods and services increase. Higher prices can then influence the Federal Reserve’s interest rate policy, affecting the cost of borrowing for lending products like mortgages.
inflation erodes the purchasing power of money over time. As the cost of living rises, the value of each dollar decreases, leading to a decline in the real value of mortgage payments. Hence, mortgage lenders must charge more in interest to make the same profit.
Then, as inflation cools, mortgage interest rates can be expected to ease as well.
The Federal Reserve and the 10-Year Treasury Note
When inflation rises, the Federal Reserve banks has respond by tightening monetary policy to control inflationary pressures. This involves raising the federal funds rates to reduce borrowing and spending, thereby slowing down economic growth and inflation.
At this point, this strategy hasn’t worked nearly as well as expected.
More importantly, the Federal Reserve does not set mortgage rates. Instead, the central bank sets the federal funds rate target, the interest rate that banks lend money to one another overnight. A Fed increase in this short-term interest rate often pushes up long-term interest rates for U.S. Treasuries.
Fixed-rate mortgages are tied to the yield on 10-year U.S. Treasury notes, which are government-issued bonds that mature in a decade. When the 10-year Treasury yield increases, the 30-year mortgage rate tends to do the same.
You can read more about that here…
Short Term Outlook
The average mortgage rate for a 30-year fixed is 7.12%, nearly double its 3.22% level in early 2022.
“There is some optimism for rate cuts, however, we were forecasting three to four rate cuts in 2024 at the beginning of the year, and it now is unlikely. People are now adjusting those expectations down to two,” says Ali Nassirian, vice president of consumer & home lending at Travis Credit Union.
“Looking at the current data, there’s roughly a 50% chance we’ll see a rate cut in June,” Nassirian adds.
As little as two weeks ago, there was generally a greater optimism that the Fed would start rate cuts in June. However, that now seems to many like a hopeful start date.
There’s also a good chance that mortgage rates will remain relatively unchanged for the remainder of 2024.
“I don’t see a rate cut at the next Fed meeting. I think June would be the soonest cut we see. Even if they cut rates two or three times this year, I don’t think we will see many moves in the mortgage market from those,” says Brian Durham, vice president of risk management and managing broker at Realty Group LLC.
“The things that will have a bigger impact on the mortgage markets will be things like the Fed’s quantitative tightening policy, job numbers, and other inflationary or deflationary variables like the cost of oil,” Durham adds.
You can find out more here from Jake Safane at MoneyWatch…
In Conclusion
Mortgage rate forecasts vary depending on the expert you ask, but the overall consensus seems to be that there won’t be significant decreases in the near future. With that said, conditions can change, as recent expectations of rate cuts so far in 2024 have not come to to pass.
It’s actually possible that we’ll even see mortgage interest rates rise if inflation persists.
So, some buyers might prefer to act now, rather than waiting for however long it might take for mortgage rates to become more favorable, if at all.
Please do reach out to me to discuss how to make the best mortgage and purchasing decisions in today’s environment.
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