Mortgage interest rates just keep moving higher. They have risen nearly 1.5% points since January 3rd… and it seems like almost every day rates move up again.
The outlook for lower rates isn’t great right now, thanks mostly to the Federal Reserve’s handling of the money supply and out-of-control inflation.
How will the Fed’s recently announced quarter point hike to the Fed Funds Rate affect mortgage interest rates? The answer may surprise you.
The Federal Reserve
The Fed Funds Rate is not the same as a mortgage rate because it can change from one day to another, while mortgage rates can be in effect for 30 years. More on that here….
Mortgage rates are primarily driven by inflation, which 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.
You probably know that inflation has been rising significantly of late, and as a result, so have mortgage rates. Inflation is pushing 9%, the highest level we’ve seen in over 40 years. This has moved mortgage rates into the mid 4% range this week.
Essentially, The Federal Reserve has bungled their management of inflation and now have to make severe changes to offset the damage. This brings market instability and increased mortgage rates.
When the Fed hikes rates, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will decline. History proves this during rate hike cycles for the past 50 years. Unfortunately, this isn’t an overnight fix.
However, the Fed may also reduce its holdings of Mortgage Bonds, which can cause some interest rate volatility. And if inflation continue to surge, the Fed might not be able to do much to help. The situation isn’t great at this moment.
30-year fixed mortgage rates
The average 30-year fixed-refinance rate is 4.53 percent, up 20 basis points over the last week. A month ago, the average rate on a 30-year fixed refinance was lower, at 4.17 percent.
At the current average rate, you’ll pay $503.13 per month in principal and interest for every $100,000 you borrow. That’s $7.08 higher compared with last week.
Mortgage Rates and Treasury Yields – a great barometer
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.
You can dig deeper by reading Kimberly Amadeo’s article here…
You can see the rise in the 10-year treasury yield here…and mortgage rates have been following a nearly identical course over the last 3 months.
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.
In today’s case, the Federal Reserve has been buying billions of dollars of bonds in response to the pandemic’s economic pressures, and continues to do so. This bond-buying policy (and not the more publicized federal funds rate) is a major influencer on mortgage rates.
On March 16, the Fed announced that it expects to begin reducing its balance sheet in May, meaning it will start reducing the overall amount of bonds it owns. This will be on top of its existing move to reduce new bond purchases by an increment every month, the so-called taper, which began in November.
Most experts agree that this “taper” will also move treasury yields and mortgage rates higher.
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 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.
With that said, it’s important to put today’s rates into perspective. Compared to the rates we saw from mid-2020 through the end of 2021, the rates above look high. But historically speaking, locking in a 30-year mortgage anywhere in the 4% range is not a bad deal at all.
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!