I thought rates were going down? What’s going on with mortgage rates?
Economics is science so we are going to lightly delve into how the science of economics works as it applies to your home financing rate.
Yes, the Federal Reserve voted once again to lower lending rates by a quarter point. But, that only affects bank rates – the money banks lend at so your bank accounts and credit cards and even auto loans will eventually all have lower rates – bad for savers, good for people with credit card debt. Although, that is not going to propagate as fast as people might want. It takes longer for rates to drop than it does for them to be hiked.
So why, if the Feds lowered rates again, aren’t mortgage rates going down? In fact, they’re going up! What gives? Good question. The answer is in how mortgage rates are calculated. Home loan rates are tied to the 10-year treasury bond rate. The reason is that those bonds are used to hedge mortgages and the life of a typical mortgage is from seven to ten years. That’s because most people either refinance or pay off their mortgage (because they sell their house) within that time. The stock market is on fire due to the so-called Trump Bump and when the stock market goes up (a Bull market) typically people sell their bonds and invest in equities (stocks.) When a bond’s price goes down (because people are selling it – just like any product if there is a glut then the price goes down aka supply and demand, it’s the same in stocks) then the rate the bond pays in interest goes up – the price and the bond rate are inverse of each other. (There is a reason I will not get into, just trust me here.) And since mortgage rates are typically tied to the 10-year treasury bond, the rate on your mortgage goes up.
So until the bond market heats up or banks decide they just want more mortgage loans so they offer discounts, except rates to stay above 6% for the foreseeable future.
