If you’re in the market to purchase a home, you’ve likely been monitoring mortgage rates closely, especially considering their fluctuation in recent years, from reaching record lows to experiencing significant rises and now gradually decreasing again. But what exactly drives these shifts?
Understanding the dynamics behind mortgage rates is complex due to the multitude of factors influencing them. Here are a couple of the most significant contributors:
Inflation and Federal Reserve Policy
Although the Federal Reserve (Fed) doesn’t directly set mortgage rates, its decisions regarding the Federal Funds Rate, influenced by factors like inflation, economic conditions, and employment rates, can indirectly impact them. As the Fed adjusts the Federal Funds Rate in response to inflation, mortgage rates tend to follow suit. For instance, when the Fed raises rates to combat inflation, mortgage rates typically rise as well. Conversely, if there’s anticipation of rate cuts due to decreasing inflation, mortgage rates may trend downwards. Looking ahead, experts forecast a favorable outlook for both inflation and mortgage rates, with potential easing in 2024, reflecting improvements in inflation, as noted by Danielle Hale, Chief Economist at Realtor.com.
10-Year Treasury Yield
Mortgage lenders often reference the 10-Year Treasury Yield as a benchmark for setting interest rates on home loans. When the yield increases, mortgage rates usually follow suit, and vice versa. Historically, the spread between the 10-Year Treasury Yield and the 30-year fixed mortgage rate has remained consistent, but recent deviations suggest the possibility of mortgage rates declining. Therefore, monitoring the direction of the treasury yield provides valuable insight into potential movements in mortgage rates.
As the Fed convenes this week, industry experts will closely monitor its decisions and their potential impact on the economy. To navigate any changes in mortgage rates and their implications for your housing plans, it’s advisable to enlist the support of a knowledgeable team of professionals.