What’s The Story With Interest Rates Now?

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. But it also lies in some fundamental truths about how the real estate market supply and demand works with consumer interests and the economy.

Here’s a quick overview of what’s happening with mortgage rates and what experts say is ahead, and also simple truth about our current market.

Economic Factors That Impact Mortgage Rates

When it comes to mortgage rates, things like the job market, the pace of inflation, “consumer spending”, market 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 which makes sense that banks would passdown the increase in cost for funds.

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%).

You should know this 2% inflation marker was originally projected in the latter 4th quarter of 2023, to be reached by the 4th quarter of 2024, so in reality we are still ahead of schedule at present.

The graph below shows inflation since the spike in early 2022, and where we are now compared to their target rate: Not to shabby!

As the graph shows, we’re much closer to the 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, the nitty gritty is the rates are impacted by the economic and inflation data.

Meaning…, if they fall to low they increase buyer demand on an already depleted housing inventory, which in turn increases housing prices and diminishes consumer buying power.

So, inflation and stablization at the optimal interest rate range along with all other factors and impacts of the broader economy are going to be key moving forward.

So in a nutshell: It’s the long-term outlook for economic growth and inflation that have the greatest bearing on the level and direction of mortgage rates. Inflation, inflation, inflation — by itself.., that’s really not the hub on the wheel.” just a spoke!

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. That was the projection originally.

It’ll just be later than originally expected maybe 1st or 2nd quarter of 2025 in my opinion.

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, along with varying market uncertainty.

This is one of the reasons it’s usually not a good strategy to try to time the market to make a purchase based on rates. An conversations I have given 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.” Marry the house and date the rate, you can change it later!

If you have questions about what’s happening in the housing market and what that means for you, let’s connect. I’ll always share the best information I have on hand.