Four Factors Affecting Rising Mortgage Rates

With interest rates increasing yet again and more economists sounding the recessionary warnings, it’s only natural to be concerned about the U.S. economy and what that means for mortgage rates. Many factors can affect the rate a particular individual qualifies for in purchasing a home—credit score, for example, and the size of the down payment—and the same is true in a more global sense as well. Whether you’re buying or selling, it’s important to understand what drives rising mortgage rates and how to make the best decision about when to sell your home or buy new property.

Rising Rates of Inflation

At the beginning of the global COVID pandemic, the worldwide lockdowns and the resulting chaos dealt a shock to the U.S. economy. Purchasing in almost every sector slowed way down or stopped, for both consumer and business products and services. The Federal Reserve System (or “the Fed”) slashed interest rates to help encourage more spending.

Flush with pandemic relief cash, both individuals and businesses delivered. But then prices began to rise—and they kept rising. Across almost all sectors, the U.S. economy has been struggling with rising rates of inflation. In fact, national annual inflation rates have shot up from 1.4% in 2020 to 8.3% for 2022 thus far.

Inflation weakens an individual’s purchasing power, and it also depresses spending across the board. To continue to meet their profit margins, mortgage lenders increase lending rates to make up for the shortfall in borrowers.

The Role of the Fed and Its Monetary Policy

The Fed describes itself as “the central bank of the United States.” As part of its mission to ensure a healthy operating U.S. economy, the Fed sets monetary policy for the nation, in furtherance of the goals Congress sets for it to pursue. Those goals include healthy employment numbers, stable pricing, and “moderate long-term interest rates.” That last goal is why the Fed periodically adjusts interest rates in response to prevailing economic conditions.

While the Fed itself does not directly set mortgage rates, the actions it takes with respect to the nation’s money supply and prevailing long-term rates do ultimately impact the mortgage industry’s decisions. For example, when the Fed tightens up the U.S. money supply, mortgage rates tend to increase.

Economic Growth Indicators

Certain economic indicators, such as the gross domestic product (GDP), the employment rate, and other factors, can also impact mortgage rates. As the economy grows and expands, consumers typically enjoy higher pay and more buying power. That means they have more money available to explore the process of buying a home whereas they might not have before.

However, as home buying increases, so does the stress on mortgage lenders who have a limited amount of money to lend out to mortgage borrowers. Lenders, therefore, raise rates to tamp down that demand. When the economy contracts, both pay and employment rates tend to slide down, which in turn decreases the demand for new mortgages. In response, lenders lower rates to attract more borrowers.

The Real Estate Market Itself

Lastly, it’s important to recognize the impact of the housing market’s current condition itself on mortgage rates. As new home construction numbers decline, there’s less interest in new mortgages as well. That means a corresponding dip in the accompanying mortgage rates.

Moreover, when consumers trend more towards renting as opposed to purchasing, mortgage rates decrease as well. The effect is the same. Fewer borrowers mean lower rates.

Deciding Whether to Sell or Buy a Home Now

Whether you want to buy some property or sell your home, it’s still a good time to consider doing so. Certainly, mortgage rates are higher than they were a few years ago, but they’re also historically fairly affordable, considering that 30-year mortgage rates topped 10% as recently as the early 1980s. If you’re ready to buy or sell, talk to a local real estate agent who’s familiar with your market’s conditions. They can help you make the right decision on timing, pricing, and more.