In the spirit of continuing to give you information so you can be “BE WISE”, it is very clear in my conversations with buyers and sellers, that people are really not sure what impacts mortgage rates, positively or negatively.
Last week, mortgage rates increased, and home buyers and sellers often ask why. Blame can be put on a still pretty healthy U.S. economy and higher inflation. Yes, a healthy economy can have a negative impact on mortgage rates, and yes, inflation can be high at the same time the economy is healthy.
March inflation figures were poor negatively affecting mortgage rates. Last week, the U.S. Labor Department said the inflation rate rose 3.5% from a year ago. This is higher than the long term average of 3.28% and the Federal Reserve’s stated goal of 2%. The U.S. Inflation Rate is the percentage at which a chosen basket of goods and services purchased in the U.S. increases in price over a year.
Mortgage rates are, actually, not set directly by the Federal Reserve. Generally, rates move in relation to investor appetite, particularly for 10-year Treasury bonds, the leading indicator for fixed mortgage rates. Like anything dictated by investor appetite, dramatic mortgage rate swings can occur as those bond rates climb. And, what causes those bond rates to rise is the hint that the Fed might tighten monetary policy by raising interest rates (not mortgage rates) in response to an increase in inflation. Similarly, mortgage rates can go down in anticipation of an interest rate cut.
Unfortunately, even with a slight rise in inflation, the Fed keeps delaying a cut in interest rates largely because the U.S. economy remains surprisingly strong. Unemployment is just 3.9%, and economic growth was high at 3.3% in the fourth quarter of 2023. It’s obviously somewhat confusing as mortgage rates are impacted by a mixture of positive or negative inflation and the economy, along with Fed’s decision making based on that information.
Home prices have remained on the high side as I have previously let you know, but, according to the Mortgage Bankers Association, loan applications rose 3.3% this week. People are realizing they need to act if they want to buy a home despite what mortgage rates are doing. Many forecasters still expect mortgage rates to fall below 7% again this year, but for now, those strong inflation numbers are keeping rates higher than we hoped they would be. Earlier in the year, most experts forecasted rates to fall below 5.75% by late 2024, however, the new reality is likely in the range between 6.25 to 6.5% by the end of the year.
