For those consumers out there, who have been on the fence about refinancing their mortgage or buying a home because of concern about interest rates, pay close attention to the facts. The economic drivers of rates are a tall tale sign of the future of mortgage rates…
Inflation has driven mortgage rates up in the last months of 2022. This comes as no surprise. The Federal Reserve is increasing the Fed funds rate to slow down inflation and hopefully bring the economy to a more balanced situation. An added contribution to the rise in rates has been the Federal Reserve’s balance sheet runoff. If we rewind the clock for the last ten years, the Federal Reserve had been buying mortgage-backed securities. The buying of those mortgage-backed securities put the full faith and guarantee of the US government into mortgage-backed securities. The Fed just this year in 2022 has begun withdrawing from the markets. Meaning selling off their securities. The full faith of the US government is no longer there as it relates to new mortgage-backed securities. So, on one hand of the spectrum interest rates have been rising and on the other end of the spectrum, the volume has diminished resulting in less origination.
Less origination means fewer loans being created which means not as many loans to run off the federal reserve’s balance sheet. When the Fed is done with their balance sheet runoff, and they’re done increasing the Fed funds rate to slow down inflation, mortgage rates will not only stabilize but more than likely will start to trend back down. Perhaps not back down to the levels of 2021, but back down into the mid-4 % most likely.
The reason for that is mortgage rates were at those levels from late 2009 all the way until 2019. 30-year mortgages in the mid-fours are a healthy range for mortgage rates to remain in when the economic movement we’re experiencing ends. Based on these elements it’s unlikely that we’re ever going to see 7% mortgage rates. The Federal Reserve is doing everything it can to control inflation. A byproduct of that is the US recession which means lackluster growth which means the bond market becomes a much more attractive vehicle for investors to place their money resulting in driving mortgage rates lower over time. If you’re thinking about purchasing a home or refinancing a mortgage and you can accomplish your objective with whatever the market will bear in relation to your cash, credit, and income. Take out the mortgage now, achieve your financial goal and you can always refinance the mortgage down the line when the market provides opportunistic numbers in the future.
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