Mortgage rates are notoriously difficult to predict. They go up and down based on market sentiment, headlines, and various economic indicators. Here’s a look at what could move the markets this week.
The big economic news arrives Wednesday, when the US Department of Labor releases its inflation report for December. Inflation jumped to an annual rate of 6.2% in October, then hit 6.8% in November, its highest level in 39 years.
Economists debate the significance of these scorching readings. Have prices soared just because last year’s economic activity came to a halt amid a forced coronavirus lockdown? Or are huge stimulus packages driving up prices? When can clogged supply chains unblock?
Regardless of the answer, consumers have been surprised by the spikes in the prices of cars, housing and other items. “The inflation genius is out of the bottle,” says James Sahnger, mortgage planner at C2 Financial Corp. in Jupiter, Florida.
Although the rate of inflation does not determine mortgage rates, the two measures are strongly correlated. Inflation – and the Federal Reserve’s response to rising prices – could be the most important metric for mortgage rates in the coming months.
Economists say that a sustained rise in consumer prices would be accompanied by a change in Fed policy and a hike in mortgage rates, which reached record levels in January. The Fed announced last month that it was slowing the pace of its asset purchases, but did not say when it expected to raise interest rates.
“Inflation is high, largely reflecting factors that are expected to be transitory. Supply and demand imbalances linked to the pandemic and the reopening of the economy have contributed to significant price increases in some sectors, ”the Federal Reserve said in a statement in November.
Calculating mortgage rates is complicated, but here’s a simple rule: The 30-year fixed-rate mortgage closely tracks the yield of the 10-year Treasury. When that rate rises, so does the popular 30-year fixed rate mortgage.
Fixed rate mortgage rates are influenced by other factors, such as supply and demand. When mortgage lenders have too much business, they raise rates to reduce demand. When business is light, they tend to cut rates to attract more customers.
Ultimately, the rates are set by the investors who buy your loan. Most US mortgages are packaged in the form of securities and resold to investors. Your lender offers you an interest rate that secondary market investors are willing to pay.