WHAT REALLY IMPACTS MORTGAGE RATES?
If you have been watching mortgage rates lately, you may be wondering the same thing many buyers are asking: Why are mortgage rates still this high? Or maybe you have heard that the Federal Reserve may lower rates and thought: Wouldn't that mean mortgage rates should come down too? It would certainly make things easier if it worked that way. The truth is, mortgage rates are influenced by several parts of the financial market, and one of the biggest indicators to watch is something most buyers never think about: The 10 year U.S. Treasury yield.
THE FED DOES NOT DIRECTLY SET MORTGAGE RATES
This is probably one of the biggest misunderstandings when people talk about interest rates. When you hear that the Federal Reserve raised or lowered rates, it is usually referring to the federal funds rate. That is a very short term interest rate. Mortgage rates, especially 30 year fixed mortgage rates, work differently. They are influenced much more by what is happening in the bond market, especially mortgage backed securities and longer term Treasury securities. So even when the Federal Reserve begins lowering short term rates, mortgage rates may not immediately follow. That is why you can sometimes hear good news about the Fed and then look at mortgage rates and wonder why nothing seems to have changed.
WHY THE 10 YEAR TREASURY MATTERS
The 10 year Treasury yield is one of the numbers mortgage professionals watch very closely. Mortgage rates and the 10 year Treasury do not move exactly together, but they usually move in the same general direction. When investors begin demanding higher returns to hold Treasury bonds, yields rise. When Treasury yields rise, borrowing costs throughout the economy can rise with them. That can eventually show up in the mortgage rate a buyer is quoted. Think of the 10 year Treasury as one of the market's temperature gauges. It does not tell us exactly where mortgage rates will be tomorrow, but it gives us a pretty good idea of what kind of pressure the market is feeling.
SO WHY ARE TREASURY YIELDS RISING?
There is not just one answer. Several things can push Treasury yields higher.
INFLATION - Inflation is still a big part of the interest rate conversation. If investors believe inflation may remain higher for longer, they usually want a higher return on the money they are lending. If you are loaning money for 10 years, you want to know that the dollars you receive back in the future will still have strong purchasing power. That concern can push Treasury yields higher. And when Treasury yields move higher, mortgage rates often feel that pressure too.
A STRONG ECONOMY - This one sometimes feels a little backwards. Good economic news can actually keep interest rates higher. Strong employment, strong consumer spending and continued economic growth can make investors believe inflation may be harder to bring down. That can lead to expectations that interest rates may stay higher for longer. So yes, sometimes good economic news can be good for the economy but not so good for mortgage rates.
FEDERAL DEBT AND GOVERNMENT BORROWING - This is another piece of the puzzle that is getting more attention. The federal government finances deficits by selling Treasury securities. As government borrowing increases, more Treasury bonds, notes and bills have to be sold to investors. When there is a large supply of government debt coming to market, investors may begin demanding higher yields before they are willing to buy it. That can put upward pressure on Treasury yields. It does not mean federal debt is the only reason mortgage rates are high. It is simply one of several important forces affecting the market right now.
MORTGAGE BACKED SECURITIES MATTER TOO - There is one more part of this that is worth understanding. After many mortgages are originated, they are bundled together into investments called mortgage backed securities, often referred to as MBS. Investors compare those mortgage backed securities with other investments, including Treasury securities. If Treasury yields rise, mortgage backed securities also need to offer a return that investors find attractive. That can create upward pressure on mortgage rates. In very simple terms, the relationship can look something like this:
Treasury yields rise
Investors expect better returns
Mortgage backed securities have to compete
Mortgage rates feel the pressure
It is not a perfect one to one relationship, but it helps explain why people in the mortgage industry pay so much attention to the 10 year Treasury.
WHY MORTGAGE RATES CAN CHANGE SO QUICKLY
Mortgage rates can move faster than many buyers expect. They react to things like inflation reports, employment numbers, economic growth, Federal Reserve comments, government borrowing, investor demand, Treasury yields and mortgage backed securities. That is why rates can look one way on Monday and a little different by Friday. It is also why trying to perfectly time mortgage rates can be frustrating. There are simply too many moving pieces.
WHAT DOES THIS MEAN FOR BUYERS IN BRUNSWICK COUNTY AND SURROUNDING AREAS?
This is where I think the conversation becomes much more useful. Instead of asking only: When are rates going down? I encourage buyers to look at the complete picture. What home price feels comfortable? How much will the property taxes be? What will homeowners insurance cost? Will flood insurance be needed? Is there an HOA? And most importantly: What will the total monthly payment actually be?
A buyer can sometimes focus so much on the interest rate that the rest of the payment gets lost in the conversation. But taxes, insurance, flood insurance and HOA fees can make a meaningful difference in what a home costs each month. That total monthly number matters.
DO NOT BUILD YOUR BUYING DECISION AROUND A FUTURE REFINANCE
You have probably heard the advice that you can buy now and simply refinance later if rates come down. That may become an option, but I would not want a buyer making today's decision based on something that may or may not happen tomorrow. I look at it a little differently. If you purchase a home, I want the numbers you are agreeing to at the closing table to be numbers you are comfortable living with. If rates improve later and refinancing makes financial sense, great. But that should be an opportunity down the road, not what makes the home affordable today.
SHOULD BUYERS WAIT FOR LOWER RATES?
There really is not one answer that fits every buyer. Instead of trying to guess where rates will be six months from now, I think it is more useful to ask: Do the home, the total payment and my plans make sense together right now? That means looking beyond the advertised interest rate and considering the entire monthly cost, including taxes, homeowners insurance, flood insurance when applicable and HOA fees. Sometimes the answer will be yes. Sometimes waiting really will be the better decision. The important part is making that decision from your own numbers rather than from a prediction about where mortgage rates might go next.
THE NUMBER I WOULD WATCH
If you are trying to understand what is happening with mortgage rates, do not watch only Federal Reserve announcements. Keep an eye on the 10 year Treasury yield too. It will not tell us exactly what mortgage rates will do tomorrow, but it gives us a much better picture of what is happening in the longer term interest rate market.
Right now, inflation, economic growth, federal borrowing, investor demand and the mortgage backed securities market are all part of the story. And yes, that story can change pretty quickly. For buyers here in Brunswick County and the surrounding areas, I think the most important thing is not trying to perfectly time the market.
It is understanding the numbers well enough to know when the home, the payment and your personal financial situation all come together in a way that feels comfortable.
If you are considering buying and wondering what today's rates mean for your actual buying power, I am always happy to help you look at the real estate side of the numbers and connect you with a trusted lender who can help with the financing side.
Sometimes seeing the whole picture makes the decision a lot easier.
Sue Singleton
Owner/Broker in Charge
Carolina Coast Homes Real Estate, LLC
910-777-9311
Disclaimer: I am a licensed real estate broker, not a financial adviser or mortgage broker. This information is provided for general educational purposes only and should not be considered financial or lending advice. Buyers should speak with a qualified mortgage professional or financial adviser about their specific situation.