Despite positive economic data on jobs and inflation, mortgage rates in the United States extended their decline for a second consecutive week, dropping nearly 0.25% over the past few weeks. This welcome news for potential homebuyers brings borrowing costs down further.
A combination of economic factors typically influences mortgage rates. For instance, the Federal Reserve may cut interest rates in response to a weak economy or concerns about a recession, which would lead to a cascading effect on mortgage rates. The state of the bond market is also important, as mortgage rates are linked to bond market performance. When the bond market is strong, mortgage rates typically fall. Moreover, housing market conditions play another crucial role since lenders may attract potential buyers through more tempting borrowing rates if available properties are oversupplied.
Mortgage rates in the US
According to Freddie Mac data issued on Thursday, the 30-year fixed-rate mortgage averaged 6.74% in the week ending March 14, down from 6.88% the week before. The average 30-year fixed rate was 6.60% one year ago. Although there will likely be fluctuations in rates over the coming months, buyers should not anticipate a significant decline.
As Sam Khater, Freddie Mac’s chief economist, claimed, mortgage rates are still high despite the recent decline because inflation is still putting pressure on the market. However, there is a good chance that rates will remain higher for an extended period in this scenario.
Mortgage rates have decreased during the last four months from their peak points of 7.79% in the previous year. Homebuyers who have been battling in one of the most expensive markets in decades can now buy their homes at more affordable prices thanks to this. But the economy appears to be operating hotter than analysts and economists would like, as evidenced by February’s strong inflation readings and unexpectedly high job numbers.
How does inflation impact mortgage rates in the United States?
The Federal Reserve, the US central bank, controls inflation by raising the federal funds rate, making borrowing more expensive for banks. This results in higher interest rates on loans, including mortgages. As high inflation affects the purchasing power of fixed-income investments such as bonds, investors frequently seek greater returns on bonds.
This interest for a greater return on bonds leads to raised interest rates on mortgage-backed securities and, consequently, to increased mortgage rates. However, if mortgage rates are falling despite an increase in inflation, there could be other factors influencing mortgage rates, such as:
- Bond market dynamics: Despite strong inflation, there may be a distinct pattern going on in the bond market. A sharp increase in the money supply in the bond market can drive down yields and thus lower mortgage rates.
- Housing market conditions: Even in an inflationary economy, a surplus of available homes may put pressure on lenders to attract buyers with more appealing borrowing rates.
The Federal Reserve rate-raising campaign
The Federal Reserve’s historic rate raise campaign has greatly decreased inflation over the last two years. However, Chair Jerome Powell feels that the central bank should wait for additional signs of inflation improvement before cutting interest rates.
As Fed rate decreases are not expected before the summer and may not occur until the fall, this could keep mortgage rates elevated. While the Fed’s activities do not directly determine mortgage rates, they do have an impact on them since mortgage rates reflect the yield on 10-year US Treasury notes. Therefore, a drop in inflation should eventually result in reduced mortgage rates.
More inventory is available but affordability issues remain
Homebuyers are thrilled with lower mortgage rates compared to last fall, which hovered around 8%. A lower trend in interest rates later this spring is expected to entice more buyers and sellers. However, rising property prices may reduce savings, which may cause some buyers to postpone their purchase in the hopes of receiving lower mortgage rates. Both options have drawbacks, as dropping rates are not assured and prices are projected to climb.
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