Why Do Mortgage Rates Change?
Mortgages have been around for a long time. Mortgages Rates have been around for a long time as well. However, mortgage interest rates have only been recorded since 1971. Looking back at over 40 years of data, we have seen rates peak at over 18% in the early 1980’s and go under the 4% mark earlier in this decade. That is a change of almost 15% in 40+ years of tracking mortgage rates.
In simple terms, when the economy is doing well mortgage rates do better. When the economy suffers then mortgage rates tend to be higher. Below are a few factors that can cause interest rates to move.
• High Inflation. During the 1970’s we saw periods of high inflation that lead to very high interest rates.
• Economic Growth. When the economy is good, and unemployment is low, it can lead to more people buying homes. This causes mortgage rates to go up simply because the market is strong enough to withstand higher rates. Today we see these conditions and we see interest rates beginning to go up.
• Federal Reserve. The Federal Reserve sets the Fed Fund Rate and controls money supply and depending on policy their actions could affect interest rates.
Mortgage rates and the Treasury Bond market are also closely tied together. When the yield on Treasury Bonds go up so do interest rates on mortgages. Investors buy bonds specifically Treasury Bonds because they are backed by the federal government and are considered a very safe investment. Whereas investing in mortgage back securities will produce a higher yield there is much more risk.
Where are Mortgage Rates Headed?
As interest rates rise this can affect the housing market. A higher interest rate means a higher payment. This decreases what a home buyer can afford. The difference in payment between an interest rate of 5% and a 7% rate on a 200k mortgage is a little less than $200 a month. This can affect what future home buyers will be able to qualify for. This usually has a negative effect on houses as it can lead to values decreasing over time.
Our economy continues to pick up steam and get stronger. Inflation seems to be in check and from every indicators interest rates will go up. We do not expect to see large jumps but a gradual process over several months and years. They will probably over time be in the high 5% range or low 6%. Even at these numbers those rates are historically low when compared to the history we have of tracking mortgage rates.