If you’re in the market to buy a home, you’re likely keeping a close eye on mortgage rates, and you might have noticed the significant fluctuations they’ve experienced in recent years. Understanding why mortgage rates rise, fall, and then rise again involves delving into a complex web of economic factors. Here’s a breakdown of some of the most influential elements at play.

Inflation and the Federal Reserve

The Federal Reserve (Fed) plays a crucial role in shaping the trajectory of mortgage rates, indirectly. While the Fed doesn’t set mortgage rates, it does control the Federal Funds Rate, adjusting it in response to various economic indicators, including inflation, employment rates, and overall economic conditions.

When the Fed aims to combat inflation, it raises the federal funds rate. This can indirectly impact mortgage rates, causing them to rise. Conversely, if the Fed signals an intention to cut rates due to slowing inflation, mortgage rates are likely to trend downward. Over the past couple of years, the Fed raised the Federal Funds Rate in an effort to control inflation, leading to an increase in mortgage rates.

The outlook for 2024 is more optimistic, with experts predicting a favorable shift. Danielle Hale, Chief Economist at Realtor.com, suggests that mortgage rates are expected to ease as inflation improves. There’s even speculation that the Fed might consider cutting the Fed Funds Rate if inflation continues to cool, although it has not yet reached the ideal target.

The 10-Year Treasury Yield

Mortgage companies closely monitor the 10-Year Treasury Yield to determine the interest rates on home loans. The relationship is straightforward: when the 10-Year Treasury Yield rises, mortgage rates tend to follow suit, and when it drops, mortgage rates generally decrease. The 10-Year Treasury Yield serves as a benchmark for many mortgage lenders.

Historically, there has been a consistent spread between the 10-Year Treasury Yield and the 30-year fixed mortgage rate. However, recent times have seen deviations from this norm, suggesting the potential for mortgage rates to come down. Keeping an eye on the trends in the treasury yield provides valuable insights into the possible direction of mortgage rates.

The Bottom Line

As the Federal Reserve convenes, industry experts will be closely monitoring their decisions and anticipating the subsequent impact on the economy, including mortgage rates. To navigate the fluctuations in mortgage rates and their potential effects on your homebuying plans, it’s advisable to have a team of professionals, including financial advisors and real estate experts, guiding you through the process. In the dynamic landscape of mortgage rates, staying informed about the interplay of factors like inflation, Federal Reserve decisions, and the 10-Year Treasury Yield can empower homebuyers to make well-informed decisions, ensuring they are well-positioned in the ever-changing housing market.