Despite the positive economic data on jobs and inflation, mortgage rates in the United States have continued to decline for a second consecutive week, dropping nearly 0.25% over the past few weeks. This is welcome news for potential homebuyers as borrowing costs are decreasing.

There are various economic factors that typically influence mortgage rates. For example, the Federal Reserve may cut interest rates in response to a weak economy or concerns about a recession, which can then impact mortgage rates. The state of the bond market is also important, as mortgage rates are closely linked to bond market performance. Additionally, housing market conditions play a crucial role, as lenders may offer more attractive borrowing rates if there is an oversupply of available properties.

Mortgage rates in the US

According to Freddie Mac data issued on Thursday, the 30-year fixed-rate mortgage averaged 6.74% in the week ending March 14, down from 6.88% the week before. The average 30-year fixed rate was 6.60% one year ago. While there may be fluctuations in rates in the coming months, significant declines should not be anticipated.

Despite the recent decline, mortgage rates are still relatively high due to inflation putting pressure on the market, as noted by Sam Khater, Freddie Mac’s chief economist. It is likely that rates will remain elevated for an extended period in this scenario.

Homebuyers who have been facing challenges in a costly market can now purchase homes at more affordable prices, thanks to the decrease in mortgage rates over the past four months. However, the economy appears to be operating hotter than expected, as shown by strong inflation readings and unexpectedly high job numbers in February.

How does inflation impact mortgage rates in the United States?

The Federal Reserve controls inflation by raising the federal funds rate, which in turn makes borrowing more expensive for banks and results in higher interest rates on loans, including mortgages. High inflation affects the purchasing power of fixed-income investments like bonds, causing investors to seek higher returns on bonds.

This increased demand for higher returns on bonds leads to higher interest rates on mortgage-backed securities and subsequently, increased mortgage rates. However, if mortgage rates are falling despite rising inflation, there may be other factors at play such as bond market dynamics or housing market conditions.

The Federal Reserve rate-raising campaign

The Federal Reserve’s historic rate raise campaign has significantly reduced inflation over the past two years. Chair Jerome Powell believes the central bank should wait for further signs of inflation improvement before considering cutting interest rates.

As Fed rate decreases are not expected until the summer or even fall, this could keep mortgage rates elevated. While the Fed’s actions do not directly determine mortgage rates, they do have an impact since mortgage rates reflect the yield on 10-year US Treasury notes. Therefore, a decrease in inflation should eventually lead to lower mortgage rates.

More inventory is available but affordability issues remain

Homebuyers are pleased with the lower mortgage rates compared to last fall, when rates were around 8%. A continued downward trend in interest rates is expected to attract more buyers and sellers this spring. However, rising property prices may eat into savings, causing some buyers to hold off on purchasing in hopes of lower mortgage rates. Both choices have their drawbacks, as dropping rates are not guaranteed and prices are projected to rise.

FAQ

• What is Freddie Mac? Freddie Mac, or the Federal Home Loan Mortgage Corporation, is a government-sponsored enterprise that plays a key role in the US secondary mortgage market by purchasing and guaranteeing mortgages.
• How does the Federal Reserve impact mortgage rates? The Federal Reserve’s decisions on interest rates can influence mortgage rates indirectly by affecting the overall economic outlook and bond market performance.