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Mortgage Rates - Where Are They Headed?
Dated: March 14 2023
Views: 55
Mortgage interest rates have been fluctuating quite rapidly in recent times. But what makes them move up or down? What metrics or data help give an indication of what rates will look like later this year? One of the figures to watch is the inflation rate. The inflation rate came down from 6.4 to 6.0 in February 2023. Not a huge change but a hint that things are still moving in the right direction, albeit slowly. In fact, since June of 2022, the inflation rate has been trending downward.
As the inflation rate decreases, it also means that the Federal Reserve will hopefully take less drastic measures when it comes to increasing the prime lending rate to stem inflation. It’s important to note that when you hear in the news that the fed is increasing interest rates, it is the rate of interest at which banks lend money to each other, not mortgage interest rates. Mortgage interest rates tend to trend with the inflation rate and are more directly related to the 10-year treasury note. Typically, the 10-year treasury note and the fixed interest rate for 15- and 30-year mortgages move together, with mortgage interest rates hovering about 1-3% above the 10-year treasury note yield. For example, if you see the 10-year Treasury yield around 4%, mortgage interest rates are around 7% (see chart below). This is because the investors purchasing Treasury bonds are the same investors that purchase a package of 30-year fixed rate mortgages, also known as mortgage bonds or mortgage-backed securities. The Treasury bond is guaranteed by the U.S. government while mortgage bonds are not. Because of the greater risk, mortgage bonds are priced higher to compensate investors. This is why mortgage interest rates are typically 1-3% higher than the Treasury yield.
Now back to the inflation rate. When we see this rate go down, or up, mortgage interest rates tend to move in harmony with it. While it is not a direct relationship, as it is between mortgage interest rates and the 10-year treasury yield, they generally move together. This is good news since the inflation rate is trending downward and thus, mortgage interest rates should follow suit. The chart below shows the rate changes in the last week. We got below 6% on February 2nd but have since climbed back up. In fact, mortgage rates topped 7% in the last week again but then have fallen back down to 6.76% as of March 14th.
With ongoing efforts to stem inflation, we should see a continued decrease in the mortgage interest rate. Here is what the experts predict for the remainder of this year:
While a deeper dive into some of the information mentioned is above my pay grade, hopefully it helps give you a starting point to understanding the figures mentioned in the news and what the implications are. In summary, to see what mortgage rates are on a daily basis, a helpful web site is Mortgage News Daily. If you are so inclined, you can take a look at the U.S. Treasury yield and/or the inflation rate.
Sean Gilliam
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