After the Fed met on Wednesday May 1st, You may
have heard mortgage rates are going to stay a bit higher for longer than
originally expected. And if you’re wondering why, the answer lies in the latest
economic data. Here’s a quick overview of what’s happening with mortgage rates
and what experts say is ahead.
Economic Factors That Impact Mortgage Rates
When it comes to mortgage rates, things like the job market,
the pace of inflation, consumer spending, geopolitical uncertainty, and more
all have an impact. Another factor at play is the Federal Reserve (the Fed) and
its decisions on monetary policy. And that’s what you may be hearing a lot
about right now. Here’s why.
The Fed decided to start raising the Federal Funds Rate to
try to slow down the economy (and inflation) in early 2022. That rate impacts
how much it costs banks to borrow money from each other. It doesn't determine
mortgage rates, but mortgage rates do respond when this happens. And that’s
when mortgage rates started to really climb.
And while there’s been a ton of headway seeing inflation
come down since then, it still isn’t back to where the Fed wants it to be (2%).
The graph below shows inflation since the spike in early 2022, and where we are
now compared to their target rate:
As the graph shows, we’re much closer to their goal of 2%
inflation than we were in 2022 – but we’re not there yet. It's even inched up a
hair over the last 3 months – and that’s having an impact on the Fed’s plans.
As Sam Khater, Chief Economist at Freddie Mac, explains:
“Strong incoming economic and inflation data has caused
the market to re-evaluate the path of monetary policy, leading to higher
mortgage rates.”
Basically, long story short, inflation and its impact on the
broader economy are going to be key moving forward. As Greg McBride, Chief
Financial Analyst at Bankrate, says:
“It’s the longer-term outlook for economic growth and
inflation that have the greatest bearing on the level and direction of mortgage
rates. Inflation, inflation, inflation — that’s really the hub on the wheel.”
When Will Mortgage Rates Come Down?
Based on current market data, experts think inflation will
be more under control and we still may see the Fed lower the Federal Funds Rate
this year. It’ll just be later than originally expected. As Mike Fratantoni,
Chief Economist at the Mortgage Bankers Association (MBA), said in response to
the Federal Open Market Committee (FOMC) decision yesterday:
“The FOMC did not change the federal funds target at its
May meeting, as incoming data regarding the strength of the economy and
stubbornly high inflation have resulted in a shift in the timing of a first
rate cut. We expect mortgage rates to drop later this year, but not as far or
as fast as we previously had predicted.”
In the simplest sense, what this says is that mortgage rates
should still come down later this year. But timing can shift as new employment
and economic data come in, geopolitical uncertainty remains, and more. This is
one of the reasons it’s usually not a good strategy to try to time the market.
An article in Bankrate gives buyers this advice:
“ . . . trying to time the market is generally a bad
idea. If buying a house is the right move for you now, don’t stress about
trends or economic outlooks.”
Bottom Line
If you have questions about what’s happening in the housing
market and what that means for you, let’s connect.
Source: Real Estate with Keeping Current Matters
