If you’re shopping for a new home or following the housing market, you’ve probably asked yourself, “Why are mortgage rates so high?” It’s a fair question, given how significantly these rates affect your financial future.
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To fully understand current high mortgage rates, you’ll need to dive into a bit of economics, including the role that the Fed interest rate has on mortgages and interest rates in general.
The Federal Funds Rate: What It Means for Mortgages
Mortgage rates fluctuate over time due to current economic conditions, market trends and even geopolitical events. Mortgage rates are typically tied to the health of the economy — if it’s flourishing, rates may rise, but if it’s faltering, they’ll generally drop. However, one of the most substantial influences on mortgage rates is the Fed interest rate.
The Fed interest rate, officially called the Federal Funds Rate, is a guideline set by the Federal Open Market Committee to help banks and other financial institutions set their lending rates. When the Fed interest rate is low, banks’ borrowing costs decrease, making lower mortgage rates available to most borrowers.
However, when the Fed raises interest rates, those increases trickle down to consumer products like home loans, which results in higher mortgage rates.
Historical Mortgage Highs and Lows
Mortgage rates have experienced dramatic highs and lows, reflecting changing economic climates. The late 1970s and early 1980s were marked by staggering mortgage rates that peaked at nearly 20%. This was a reaction to rampant inflation, which caused the Federal Open Market Committee to raise interest rates.
In the wake of the 2008 financial crisis, the economy was thrust into a marked downturn that became known as the Great Recession. Mortgage rates plunged to historic lows. As the Federal Reserve and the Federal Open Market Committee spearheaded efforts to stimulate the sluggish economy, rates remained low, hitting a stunning 2.68% in 2020.
Why Mortgage Rates Are So High Right Now
Mortgage rates are high due to various economic factors, such as:
- Inflation: Rising inflation diminishes the dollar’s purchasing power, which leads lenders to increase interest rates to defray potential losses over a loan’s lifetime.
- The Federal Reserve’s monetary policy: To curb inflation, the Fed has raised short-term interest rates, causing a rise in the yield of 10-year Treasury bonds, which are used as a mortgage rate benchmark.
- A strong job market: A robust job market means increased household incomes, which has led to an increase in demand for mortgages and higher rates.
Fluctuations in Mortgage Rates
Anyone with an interest in the housing market is likely wondering if mortgage rates will come down. The simplest answer is that it depends. The future of mortgage rates hinges on the steps that the Federal Reserve and the Federal Open Market Committee take to control inflation. For now, it seems that mortgage rates may remain high until the end of next year.
Factors such as inflation, economic growth and the Fed interest rate play significant roles in determining whether rates go up or down. Bear in mind that high mortgage rates, just like low ones, don’t last forever. Fluctuations in the economy — and in mortgage rates — are inevitable.