The laws of gravity suggest that what goes up must—eventually—come down. This universal principle doesn’t just apply to objects hurled into space, but it can also be true in terms of economic trends. If gas prices rise, if the cost of food and necessities rise, the hope is that they will come down again. And with the onset of inflation in late 2021, concerns over prices become a hot topic. And how do these economic swings affect mortgage rates?
The answer may surprise you. If you’re purchasing a home or are considering doing so in the near future, here is what you should know.
Let’s dive into the specifics.
The Mortgage Interest Rates & Their Impact On Individual Borrowers
The goal of most homeowners is to lock in as low an interest rate as possible. This, of course, is because that number will have a profound impact on the overall long-term cost of your home through financing. A one percent difference might not seem like a lot, but it can translate to thousands of dollars of the life of a loan.
There are two major factors that impact the interest rate of your loan:
- External factors of the economy, including inflation, recessions, and treasury bonds
- The borrower’s credit report, debt, and financial history
This article focuses on the first one.
External Factors that Directly & Indirectly Impact Mortgage Rates
Another universal principle relevant to the world of economics is the law of supply and demand. Although we often speak of the economy as a single entity, it is actually an all-encompassing leviathan that is affected and defined by several factors.
These factors include:
A quick browse through financial news will confirm that inflation is on the rise. In November 2021, the New York Times reported that consumer prices had surged at the fastest rate in more than three decades. According to the report, prices rose 6.2% over the past twelve months and inflation jumped to .9 percent.
These rising prices are seen across various sectors including food, fuel, and other necessities. The rising price of oil is another hot topic in the fall of 2021 as the nation moves towards the colder months. In the Fall, oil prices rose to three-year highs.
So what happens when prices of these types of commodities go up?
The purchasing power of an average consumer will go down. As purchasing power goes down, it means that the dollar no longer buys what it once did— that is, its buying power has decreased. In other words, too many people chasing too few goods will translate into inflated prices. So this affects the real return on a loan and the profit margins for lenders.
The Federal Reserve Policy
The Fed does not directly set the mortgage rates, but its dealings indirectly affect these rates in a myriad of ways. The Fed reacts to shifts in the economy and can alter policy that impacts the rates.
- The Fed can use the federal funds rate to try and stabilize imbalances in the economy. The federal funds rate refers to the short-term interest rates that U.S. banks and other financial institutions lend money overnight to maintain reserves.
- The Fed can buy and sell treasury bonds to impact the federal funds rate as well.
The Housing Market
The inner happenings of the housing market also have an impact on the mortgage rates. In late 2021, the housing market is facing its fair share of challenges related to supply chain backlogs. If the labor supply issues indicate there is a shortage of materials and skilled labor that means homes are not built at the same rate. A deficiency in materials means higher prices, which means fewer people can afford a home, which means inflation. A lower inventory of homes with a high demand will have an impact on the rates.
Late 2021 Shows Mortgage Rates Plunging Below 3%
Since the start of the pandemic, the housing market has been somewhat difficult to predict. It surprised everybody when high demand for homes created seller’s markets across the country despite shutdowns and massive layoffs. And still today, despite rising inflation and an increase in oil prices, the demand for homes is strong. In November of 2021, the rates went below 3%, a good indicator that it’s still a good time to buy for many people.
Ready to Look Into a Mortgage? Talk with a Trusted Lender About Your Options
If you are purchasing a home or looking to do so in the near future, establishing communication with an established and trusted lender can put you ahead of the game. We can advise you on some of the trends we’ve been seeing and provide some solid numbers about what you might be looking at in terms of rates. At the same time, once we know more about your individual goals and financial situation, we can provide tips on down payments, building equity, refinancing, and more.
Want to learn more about mortgage rates? Call Rocky Mountain Mortgage today and speak to one of our experts!