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How Inflation Affects Mortgage Rates
When you read about the housing market in the news, you might see something about a recent decision made by the Federal Reserve (the Fed). But how does this decision affect you and your plans to buy a home? Here’s what you need to know.
The Fed is trying hard to reduce inflation and even though there’s been 12 straight months where inflation has cooled (see graph below), the most recent data shows it’s still higher than the Fed’s target of 2%:
While you may have been hoping the Fed would stop their hikes since they’re making progress on their goal of bringing down inflation, they don’t want to stop too soon, and risk inflation climbing back up as a result. Because of this, the Fed decided to increase the Federal Funds Rate again last week. As Jerome Powell, Chairman of the Fed, says:
“We remain committed to bringing inflation back to our 2 percent goal and to keeping longer-term inflation expectations well anchored.”
Greg McBride, Senior VP, and Chief Financial Analyst at Bankrate, explains how high inflation and a strong economy play into the Fed’s recent decision:
“Inflation remains stubbornly high. The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation. So, Fed has to pump the brakes a bit more.”
Even though a Federal Fund Rate hike by the Fed doesn’t directly dictate what happens with mortgage rates, it does have an impact. As a recent article from Fortune says:
“The federal funds rate is an interest rate that banks charge other banks when they lend one another money . . . When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy. When it’s too low, they’ll lower rates to stimulate the economy and get things moving again.”
How All of This Affects You
In the simplest sense, when inflation is high, mortgage rates are also high. But, if the Fed succeeds in bringing down inflation, it could ultimately lead to lower mortgage rates, making it more affordable for you to buy a home.
This graph helps illustrate that point by showing that when inflation decreases, mortgage rates typically go down, too (see graph below):
As the data above shows, inflation (shown in the blue trend line) is slowly coming down and, based on historical trends, mortgage rates (shown in the green trend line) are likely to follow. McBride says this about the future of mortgage rates:
“With the backdrop of easing inflation pressures, we should see more consistent declines in mortgage rates as the year progresses, particularly if the economy and labor market slow noticeably.”
Bottom Line
What happens to mortgage rates depends on inflation. If inflation cools down, mortgage rates should go down too.
How To Know If You’re Ready to Buy a Home
If you’re trying to decide if you’re ready to buy a home, there’s probably a lot on your mind. You’re thinking about your finances, today’s mortgage rates and home prices, the limited supply of homes for sale, and more. And, you’re juggling how all of those things will impact the choice you’ll make.
While housing market conditions are definitely a factor in your decision, your own life and your finances may be even more important. As an article from NerdWallet says:
“Housing market trends give important context. But whether this is a good time to buy a house also depends on your financial situation, life goals and readiness to become a homeowner.”
Instead of trying to time the market, it may help to focus on what you can control. Here are a few questions that can give you clarity on whether you’re ready to make your move.
1. Do You Have a Stable Job?
One thing to consider is how stable you feel your employment is. Buying a home is a big purchase, and you’re going to sign a home loan stating you’re going to pay that loan back. That can feel like a big obligation. Knowing you have a reliable job and income coming in can help put your mind at ease. As NerdWallet explains:
“A mortgage is a big commitment . . . Wait until your employment is stable before thinking about buying a house.”
2. Have You Figured Out What You Can Afford?
To make sure you have a good idea of what you’ll need to save and what you can expect to spend on your monthly payment, talk to a trusted lender. They’ll be able to tell you about the pre-approval process and what you can borrow, current mortgage rates and approximate monthly payments, closing costs to anticipate, what percent of the purchase price of the home you’ll need for a down payment and more.
The best part is you may find out you’re closer to your goals than you realized. You don’t necessarily need to put 20% down unless it’s specified by your lender or loan type. As Down Payment Resource says:
“A 20% down payment on a home is great, but . . . Many mortgages require no more than 3% to 5% of the purchase price as a down payment. Plus, there are loans and grants that may help cover these costs. Search for down payment assistance in your area, and discuss your results with your mortgage lender . . .”
3. How Long Do You Plan to Live There?
Another important thing to think about is how long you plan to stay put. It takes time to build equity in your home through paying down your loan and home price appreciation. If you plan to move too soon, you may not recoup your investment. For example, if you’re looking to sell and move again in a year, it might not make sense to buy right now. As a recent article from CNET says:
“Buying a home is a good idea if you’re planning to stay put for at least three years. Home values typically increase between 2% and 5% annually, so you could end up paying more in closing costs than you’d earn in proceeds if you sell after only a year or two.”
So, think about your future. If you plan to transfer to a new city with the upcoming promotion you’re working toward or you anticipate your loved ones will need you to move closer to take care of them, that’s something to factor in.
Above all else, the most important question to answer is: do you have a team of real estate professionals in place? If not, finding a trusted local agent and a lender is a good first step.
Bottom Line
If you’re trying to decide if you’re ready to buy a home, these questions can help. Ultimately, your best and most reliable resource is the help of trusted real estate professionals.
Sellers: Don’t Let These Two Things Hold You Back
Many homeowners thinking about selling have two key things holding them back. That’s feeling locked in by today’s higher mortgage rates and worrying they won’t be able to find something to buy while supply is so low. Let’s dive into each challenge and give you some helpful advice on how to overcome these obstacles.
Challenge #1: The Reluctance to Take on a Higher Mortgage Rate
According to the Federal Housing Finance Agency (FHFA), the average interest rate for current homeowners with mortgages is less than 4% (see graph below):
But today, the typical 30-year fixed mortgage rate offered to buyers is closer to 7%. As a result, many homeowners are opting to stay put instead of moving to another home with a higher borrowing cost. This is a situation known as the mortgage rate lock-in effect.
The Advice: Waiting May Not Pay Off
While experts project mortgage rates will gradually fall this year as inflation cools, that doesn’t necessarily mean you should wait to sell. Mortgage rates are notoriously hard to predict. And, right now home prices are back on the rise. If you move now, you’ll at least beat rising home prices when you buy your next home. And, if experts are right and rates fall, you can always refinance later if that happens.
Challenge #2: The Fear of Not Finding Something to Buy
When so many homeowners are reluctant to take on a higher rate, fewer homes are going to come onto the market. That’s going to keep inventory low. As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), explains:
“Inventory will remain tight in the coming months and even for the next couple of years. Some homeowners are unwilling to trade up or trade down after locking in historically-low mortgage rates in recent years.”
Even though you know this limited housing supply helps your house stand out to eager buyers, it may also make you feel hesitant to sell because you don’t want to struggle to find something to purchase.
The Advice: Broaden Your Search
If fear you won’t be able to find your next home is the primary thing holding you back, remember to consider all your options. Looking at all housing types including condos, townhouses, and even newly built homes can help give you more to choose from. Plus, if you’re able to work fully remote or hybrid, you may be able to consider areas you hadn’t previously searched. If you can look further from your place of work, you may have more affordable options.
Bottom Line
Instead of focusing on the challenges, focus on what you can control. Let’s connect so you’re working with a professional who has the experience to navigate these waters and find the perfect home for you.
