What? Higher mortgage rates are a good thing?
They can be.
Rising Mortgage Rates and The Federal Funds Rate
As Shivani Peterson explained in a recent episode of The Mortgage Reports Podcast, the Federal Reserve increasing its federal fund rate can have some profound benefits.
The federal funds rate is the rate at which banks lend money to each other overnight and is closely linked to mortgage rates. When the Fed increases the federal funds rate, mortgage rates usually go up.
In late July, the Federal Reserve raised its target rate by 0.75%; however, mortgage rates did not follow suit to such an extreme. This is because mortgage rates are not directly tied to the federal funds rate.
What Determines Mortgage Rates?
Various factors influence mortgage rates, including the yield on the 10-year Treasury note, inflation expectations, and lender demand.
In the short term, we may continue to see a modest increase in mortgage rates as lenders adjust to the higher cost of borrowing.
However, longer-term trends are more difficult to predict, and it's possible that we could see a sharp decline in rates depending on economic conditions.
Either way, it's important to remember that the Fed's decision is just one of many factors that will influence mortgage rates in the coming months.
Peterson explained that inflation is the main factor that determines mortgage rates. Therefore, if the Fed takes steps to bring down inflation, it will lead to lower mortgage rates; this is excellent news for potential homebuyers, as it will make financing a home more affordable.
By understanding how Fed policy affects mortgage rates, homebuyers can make informed decisions about when to purchase a home and how to finance it.
The Federal Reserve recently increased its benchmark interest rate to help combat rising inflation.
As Peterson explained, this is the "only lever the Fed has" for dealing with inflation and has been effective in the past.
By increasing the cost of borrowing, the Fed can reduce demand and help to cool inflationary pressures.
While there is no guarantee that this will be successful in combating inflation, it is a necessary step that the Fed is taking to maintain price stability.
In recent months, the Federal Reserve has begun to tighten monetary policy. As a result, mortgage rates have started to rise, making it more difficult for potential homebuyers to afford a home, and it is also leading some existing homeowners to put their plans to sell on hold.
While this may initially lead to slower home price growth, it could eventually help to create a more balanced housing market.
Sellers Staying Competitive
With fewer buyers competing for homes, sellers will be motivated to lower their prices to attract buyers. In addition, if interest rates continue to rise, it could price even more buyers out of the market, further increasing downward pressure on prices. As a result, while higher mortgage rates may be a headwind for the housing market in the short term, that could eventually lead to more sustainable price growth.
Home sellers are starting to feel the effects of a cooling housing market.
With fewer buyers in the market, sellers have to price their homes more competitively and be willing to make repairs that buyers request.
While it's not yet a buyer's market, we are beginning to see more of a balance between buyers and sellers than in the recent past.
As the market continues to cool, we may see even more concessions from sellers in order to get their homes sold.
Keeping Mortgage Rates in Perspective
For anyone in the market for a home, rising interest rates may be cause for concern. After all, higher mortgage rates can make a home purchase less affordable.
However, it's essential to keep things in perspective. While mortgage rates have risen from their record lows in 2021, they're still below the historical average.
There are plenty of other factors that affect affordability, such as income levels and home prices. So, while higher interest rates may not be ideal, they don't necessarily mean homeownership is out of reach.
