Factors that Influence Mortgage Rates
June 27, 2024
Market factors are some of the most significant influences on mortgage rates. The Federal Reserve(the Fed), bond market, Secured Overnight Finance Rate, Constant Maturity Treasury, the health of the economy, inflation, and market demand all affect mortgage rates.
Many people assume the Fed sets mortgage rates. They don’t, but they do influence rates. The Fed controls short-term interest rates by increasing or decreasing them based on the state of the economy. These are not the rates given to consumers but the rates at which banks can borrow money to lend to consumers.
Mortgage rates are tied to the bond market. Mortgage-backed securities, or mortgage bonds, are bundles of mortgages sold in the bond market. Bonds affect mortgage rates depending on their demand. When the price of mortgage bonds is high, mortgage rates decrease, and mortgage rates increase when the price is low.
The Secured Overnight Financing Rate (SOFR) is an interest rate set based on the cost of overnight borrowing for banks. Lenders often use it to determine a mortgage’s base interest rate.
Mortgage rates vary based on the economy’s current state and outlook. When the economy is healthy, mortgage rates increase. When the economy isn’t doing as well, when unemployment rates are high and the demand for oil is low, mortgage rates fall.
Mortgage rates and inflation go hand-in-hand. When inflation increases, interest rates rise to keep up with the value of the dollar. If inflation decreases, mortgage rates drop.
Demand for mortgages can also affect rates, pushing them higher as available capital for lending tightens.
Where are mortgage rates going?
Average mortgage rates were mostly down compared to a week ago. Many housing market experts don’t expect mortgage rates to recede significantly in the coming months unless the Fed decides to cut its benchmark interest rate.
On June 11, 2024, officials voted unanimously to leave the benchmark rate unchanged, marking the seventh consecutive meeting in which the policy rate stayed steady. The next meeting is July 30, 2024. The Fed remains cautious about changing the rate while it monitors inflation.