Why Did Mortgage Rates Jump Recently?

Why Did Mortgage Rates Jump Recently?

If you’ve been following our blog, you know that we’ve had a positive outlook on mortgage rates dropping as we move into the second half of 2023. The reason for this has always been the anticipation of inflation data improving following the persistent interest rate hikes by the Federal Reserve, eventually leading to the economy slowing down and entering a recession.


However, some key reports that came out last week threw the mortgage market for yet another loop as rates went up to the highest they’ve been this year. Let’s jump into why that happened, and what we believe you can expect with mortgage rates going forward.


Federal Reserve Not Finished Hiking Rates


The minutes from the June 14th Federal Open Market Committee (FOMC) meeting were released last Wednesday, and they showed that the Federal Reserve plans on keeping the Fed Funds rate elevated for longer than many anticipated. Not only that, but they are planning on even more rate hikes this year (most members of the Federal Reserve believe there needs to be two more rate hikes this year to make any meaningful progress on inflation).

The announcement that inflation is not improving quickly contributed to the rise in mortgage rates last week. Mortgage rates are determined by the prices of mortgage bonds, and inflation is a bond’s worst enemy because it erodes the purchasing power of the bond’s future cash flows. If inflation is increasing, the return on a bond is reduced in real terms (meaning it’s adjusted for inflation).


Because of this, persistent high inflation reduces the demand that investors have for bonds like mortgage-backed securities. As demand for mortgage-backed securities falls, so do their prices. This results in higher interest rates for all mortgage types, and it’s why the minutes from the FOMC meeting discouraged bond investors and sent mortgage rates higher last week.


Strong Economy Shocking Investors


While the minutes from the FOMC meeting played a part in rates rising last week, the main culprit was the release of employment data that showed the labor market is still surprisingly strong.


According to HousingWire:


Economic resilience is taking investors aback. Consumer spending keeps growing, as do auto sales, which were expected to soften. Real estate markets also speak to resilient conditions, as buyers have accepted mortgage rates in the new normal of 6% – 7% range and kept a steady pace of sales over the past few months. In addition, builders are recognizing the demand and the opportunity it presents, and they are pushing construction activity higher – about one-third of homes on the market are new construction, more than double normal levels.


A strong labor market means a strong economy, and one of the consequences of a strong economy is inflation. The new employment data, just like the minutes from the FOMC meeting, signaled to bond investors that inflation is likely to persist and continue eating away at bond prices, which again pushed mortgage rates higher.


When Will Mortgage Rates Improve?


Mortgage rates will fall when the bond market becomes confident that there is meaningful progress on slowing down inflation. This could happen with an announcement from the Fed about when they will cease hiking rates, or through economic data that shows the economy is slowing down.


Recessionary periods have been a common occurrence over the past century and have produced attractive opportunities for long-term investors (like those looking to buy homes) because they bode well for mortgage rates. As you can see in the chart below, whenever the economy slows down, mortgage rates decrease in response:

The Bottom Line


Mortgage interest rates shot up last week because of the combination of anticipation of more rate hikes by the Fed and a strong jobs report. These hikes are going to increase the likelihood of a recession, which historically has led to lower mortgage rates. While we can’t predict exactly when this will happen, we still anticipate that inflation will improve and the economy will contract enough to encourage more activity in the bond market later this year.


If you’re waiting until rates drop to buy a home, make sure you are in regular contact with a mortgage advisor who understands economic trends and is constantly monitoring the movement of the markets. Our team at NEO is doing this every day, and we would be happy to advise, educate, and help you create a plan to invest in real estate at the right time and start building wealth.

Overcoming Housing Market Fears

By Luminate Marketing Team • 06 May, 2024
The recent headlines broadcasting mortgage rates surpassing the 7% mark have instilled a sense of apprehension among potential homebuyers. In a market perceived as increasingly unaffordable, it's easy to feel discouraged. However, with the right mortgage strategy, you can transform this challenging market into an opportunity.  Historical Perspective on Mortgage Rates While current rates hovering around 7% seem daunting, a historical review reveals a broader context. During the early 1980s, mortgage rates soared to 18% and even in more stable times, rates have frequently fluctuated above 10%. This historical perspective is vital because it demonstrates that while today’s rates are higher than in recent years, they remain within a historical long-term normal rate range.

Why Cash Buyers Dominate the 2024 Real Estate Market

By Luminate Marketing Team • 28 Apr, 2024
The 2024 real estate market is ROUGH. Losing to multiple offers, emotional frustration, and the stress from competing offers is discouraging to say the least. Notably 32% of home sales are being clinched by all-cash buyers, the strategic advantage of wielding cash has never been clearer. This resurgence in all-cash transactions underscores a market where immediacy and certainty reign supreme, especially as home prices continue their upward trajectory against a backdrop of scarce inventory. Within this context, it’s prudent to evaluate every option that can help you sell an existing home and get your offer accepted on a new home. Navigating the Alternatives iBuyers : These entities provide a quick, straightforward selling process for homeowners looking to bypass the traditional market. By making instant cash offers, iBuyers appeal to those seeking immediacy and convenience. However, this often comes at a cost, including service fees and potentially lower offer prices, as the iBuyer model is designed for speed over maximizing seller profits. Power Buyers : Power buyer programs cater to homeowners wishing to purchase their next home before selling their current one. They typically employ financial tools like bridge loans to facilitate this process, offering a solution to the timing mismatch between buying and selling. While this approach adds flexibility, it can also introduce complexity and additional costs into the transaction. But it's important to remember that not all of the innovative iBuyer and Power Buyer programs are the same. It's all about finding the right fit for your situation. Luminate's Unique Approach At Luminate Home Loans, we've carved out our own niche in the market. We offer a program that turns our clients into cash buyers. This isn't just a minor perk; it's a game-changer. Being a cash buyer makes your offer far more appealing to sellers, cutting through the delays that often come with loan approvals. Our approach is designed with you, the homeowner, in mind. We give you the immediate advantage of a cash offer, coupled with the flexibility to choose the best financing option for you down the line. It's about giving you control and confidence in your home-buying journey. If you're navigating the complexities of buying and selling homes, our program might just be the solution you've been searching for. We focus on ensuring our processes are straightforward, your personal information is secure, and the transition to your new home is as smooth as possible. With Luminate, you're not just moving houses. You're stepping into a well-thought-out system designed to get you into your dream home with ease and certainty. If this sounds like what you need, we're here to make it happen.

Understanding Economic Shifts: How Rising Fast Food Prices Intersect with the Housing Market

By Luminate Marketing Team • 21 Apr, 2024
Have you been noticing the prices of fast food and other products going up? Well, you're not alone. Across the country, families are feeling the financial pain of previously low-priced items suddenly costing double (or triple!) what they’re used to. For example, a lunch for two in California at a fast food chain can easily be $40 nowadays, which is a big jump for places that tout “cheap fast food.” But why exactly is this happening, and what does it have to do with you buying a home? Keep reading for more insights. Why Are Prices Going Up? Starting in April of 2024, the minimum wage for fast-food and healthcare facility employees in California was increased. As a result, their wages went from $16/hour to $20/hour in order to provide better wages and living conditions for these workers. This rise in minimum wage, while much needed for the economy, is happening all across the nation. And when businesses have to pay their employees more, they often raise their prices to cover the costs. Which, unfortunately, means the burger and fries you love might cost more now. What Does This Have to Do with Housing? In recent news, you may have heard of President Biden’s housing plan to help first-time homebuyers and to reduce housing costs. This plan would give money to first-time homebuyers and some families looking to sell their homes. But just like with the fast-food industry, the effects can vary. In some places like California, where not enough houses are available, making homes more affordable might not be enough. In other places, it might help a bit more. So, What's the Best Move for Homebuyers? If you're thinking about buying a home in the near future, it's good to know about these changes and plans. By staying informed and working with an expert lender, you can take advantage of any changes as soon as they happen. But even though extra money in the economy sounds great, it's important to look at the whole picture, like how many houses are available and how much they cost. If more homes become available and the costs of borrowing money for a home go down, this could be a better outcome for buyers vs money that is thrown into the economy. Conclusion Understanding these changes can help you make better, informed choices about your financial future. Whether you're saving up for a big purchase or just deciding where to grab lunch, let us help you save money where it counts! Reach out to us today so we can help you navigate your home-buying journey without having to skip out on the fries.
Share by: