Mortgage rates are sensitive to many market forces.
And their fluctuations in recent weeks, creeping closer to the 7% mark than the 6% mark, has potential homebuyers wondering why mortgage rates have been increasing lately.
There are a number of factors that influence mortgage rates and most, if not all of them, stem from the perceived health of the economy. The main, stubborn sticking point that threads all elements together is inflation — from the Fed to lenders to the average American consumer.
While the Fed does not set mortgage rates, its actions influence them.
With that in mind, it’s relatively easy to understand why mortgage rates have been on the increase. There is a domino effect at play.
To combat inflation, and do its best to preserve the buying power of the dollar, the Fed has made a number of interest rate increases over the past several months. And those increases, historically speaking, have been significant. Once those rate increases are implemented, the Fed has to watch and see how their effect ripples through the economy.
Indicators of the efficacy of an interest rate increase include employment numbers, consumer spending and prices on consumer products, among other data sets.
Despite a series of rate increases, U.S. unemployment remains at historically-low levels, consumer spending remains elevated when compared year-over-year, and the overall economy is growing more than analysts expected it would. All of those factors lead mortgage lenders to believe that the Fed may respond to the data it views as unfavorable by implementing additional rate increases.
The only way lenders are able to protect against potential inflationary changes is to anticipate increases and raise mortgage rates on their end, which is what happened in recent weeks.
Leading into early March, mortgage rates saw increases four weeks in a row, inching closer to the mortgage rate environment we experienced in late 2022. For perspective, mortgage rates were below 4% this time a year ago.
Mortgage rates are also influenced by Treasury yields, which experienced an increase recently, signaling investor optimism as it relates to the economy. However, lenders interpret that optimism as a red flag indicating the Fed may raise rates.
Despite what appears to be not the greatest news for homebuyers who entered 2023 with optimism amid a more favorable rate environment, there is a silver lining to that proverbial mortgage rate cloud.
Just as fear and pessimism affect the market, so too does optimism.
Before 2023 ever started, many analysts were eyeing the second half of the year as a period that would include lower mortgage rates as inflation continues to cool.
In fact, inflation has been cooling for several months, according to reports. The Fed would like it to cool more, but in comparison to where it was, data analysis has revealed that it is headed in the right direction. And if inflation continues to head in the right direction, it only stands to reason that mortgage rates will, too.
In fact, the current environment provides a unique opportunity for homebuyers who are able to look a bit deeper — beyond the face value of rates and list prices.
When interest rates are high, demand subsides, leaving would-be homebuyers on the sidelines as they wait for the market to adjust to their financial comfort zone. With fewer buyers on the market, sellers are more willing to make concessions, most notably by considering offers below their asking price and/or providing “concessions” – other financial incentives from seller to buyer.
Those who make a purchase at a time when rates are relatively higher are then afforded the opportunity to benefit when rates come back down, by refinancing and by “beating” the market by capturing a purchase price before property values and demand increase. Generally, even when calculating the cost of a refinance once rates drop, a buyer will still come out ahead thanks to the rate at which the property appreciated.
If you’re considering a move, the team at Halpern Residential is ready to help. We keep an eye on market trends so you don’t have to. Moving is an exciting time of transition, and we’re ready to help you with it. Contact us today so we can learn more about how we can support your needs.