The Mortgage Memo: Rates Have Peaked?

Basic Mortgage Rates Understanding: Mortgage rates are directly impacted by inflation which is directly impacted by the bond market. When you hear someone saying investors are “buying bonds” this means they are investing their money into something safe and that will guarantee themselves a solid rate of return. They could instead put their money into stocks but since stocks aren’t doing too well and companies are taking major losses at the moment, they look for something safer instead. Since they are buying bonds, inflation begins to drop because there are now less dollars in the economy, making the dollar more valuable. Inflation = more money available to buy the same amount of goods, so more money means the dollar is less valuable. As inflation begins to drop, interest rates will follow as well and begin to drop.

When you hear news that the Fed is “hiking rates,” this means they are raising rates on the Federal Funds Rate, which is the rate that banks charge one another when they borrow money from each other. Hiking rates is a way to slow down and lower inflation which as you guessed it…will lower mortgage rates. The goal whenever the government wants to lower mortgage rates is to lower inflation.

Market Update: Mortgage rates slightly increased last week following the Federal Reserve’s announcement to continue to raise short-term rates to combat high inflation. The 30-year fixed rate had its 3rd consecutive week above 7 percent and even higher for most other loan types. According to Joel Kan, the MBA’s Vice President and Deputy Chief Economist, “Purchase applications increased for the first time after six weeks of declines but remained close to 2015 lows, as homebuyers remain sidelined by higher rates and ongoing economic uncertainty.” Despite economic uncertainty, it seems we are headed towards lower than 7 percent rates since the October CPI (Consumer Price Index) showed year over year inflation decline from 8.2% to 7.7%. This is a clear sign that the Fed’s rate hikes over the past few months have begun to positively affect inflation and mortgage rates will slowly begin to follow suit.

When the CPI inflation news was released, an immediate increase in the purchase of bonds took place, resulting in a drop in 30 year fixed-rates.

Will rates continue to improve? If CPI data follows a similar downward trajectory, we can say with near certainty that we’ve seen the peak of mortgage interest rates.