Inflation has gotten everyone in a tizzy. While no one is safe from its impact, it is acutely affecting those looking to buy and sell property. The Federal Reserve has raised mortgage rates from an impressive low, causing them to almost double from where they were a year ago.
People who are holding off on transactions until the time is right are looking at several indicators. Chief among them is the labor market. Read on to find out how more about the relationship between mortgage rates and unemployment.
The Mortgage Rate-Inflation Connection
Let’s start by examining why the feds raise mortgage rates in times of inflation. To most, it may seem counterintuitive.
Well, the reasoning behind it is that doing so makes it more expensive to borrow money. This reduces the demand for consumer goods and services, forcing businesses to lower prices. And lowering prices will beat inflation.
The Feds have been taking action as mortgage rates, which averaged 3.22% a year ago, are now up to 6.48%, more than doubling in the past 12 months. So far, their efforts have worked to lower inflation, but it hasn’t quite reached the 2% target they are hoping for.
As a result, the Feds will be taking it on a case-by-case basis, determining at each meeting whether they want to make mortgage rates higher or lower. However, experts predict a positive trajectory. They are expecting rates to fall as low as 5.2% by the end of 2023.
Meanwhile, many buyers and sellers are holding off on making moves waiting for a more significant drop.
How Labor Plays a Role
Those who are interested in mortgage rate trends should be keeping their eyes on the labor market.
The labor market is directly related to the gross domestic product (GDP), which in turn, affects market rates. The GDP is the total monetary or market value of all the goods and services produced within the country’s borders. Another factor that affects GDP is consumer spending, including consumers seeking mortgage loans for homes.
So how’s the labor market doing? As of the week ending Dec. 31, unemployment benefits were at 204,000, decreasing from 19,000 the previous week. This is a sign that lower mortgage rates may be on the horizon.
Other Factors That Play a Role in Mortgage Rates
However, labor isn’t the only factor that plays a strong role in mortgage rates. Here are some other elements to consider.
The Bond Market
Banks and investment firms offer mortgage-backed securities (MBSs) to consumers. These can be described as bonds consisting of a bundle of home loans and other real estate debt bought from banks. Those that invest in them receive periodic payments. For banks to get people to invest, the securities must offer attractive returns.
This return is also contingent on government and corporate bonds. The returns on these long-term fixed-income investments affect how much you can earn from an MBS. They impact the condition of the bond market overall, indirectly affecting how much lenders will charge for mortgages. Lenders must be able to generate a significant return on MBSs to ensure they are competitive in the debt security market.
Mortgage lenders often look to the 10-year Treasury Bond to determine interest rates. MBS sellers will usually offer higher returns because buyers know payment is not guaranteed.
The Housing Market
The housing market itself also affects mortgage rates. When few homes are being bought and sold, interest rates tend to go down. The hope is that lower rates will attract more buyers creating an upturn in the market.
At this point, the feds are raising rates to purposely yield a downward turn in the market. The hope is that people will lower their prices to increase demand. Their efforts have been somewhat successful, but only time will reveal whether they reach their goal.
Final Thoughts
Mortgage rates and the housing market can never be fully predicted. But if you look at factors such as the labor market, the bond market, and the housing market, you will get some strong indications concerning which way the wind will blow. Here’s hoping it moves in your favor.
