In spite of a challenging economic big picture in 2020, real estate professionals had one of the best years in recent history. First time home buyers kept the housing market alive because of incredibly low mortgage rates. 2021 foreshadows a different phase as rates are now increasingly likely to rise. If we understand three basic principles contributing to fluctuating interest rates, we can manage buyer and seller expectations in this new market landscape.
Low Bond Prices = Higher Mortgage Rates
And vice-versa. The direction of mortgage rates is connected in an inverse relationship to US Treasury Bond prices. Simply put, Treasury Bonds are investment vehicles guaranteed by the full faith and credit of the United State government. Lenders set mortgage prices based on bond pricing. The economy, market conditions, political conditions, and current events determine investor confidence which in turn impact demand. In 2021, bonds prices started to fall, and as demand in the bond market drops, interest rates typically rise.
Inflation Concerns and Rising Mortgage Rates
The U.S. Federal Reserve is the foundation for our financial system that influences the supply of money and credit. This responsibility includes maintaining available cash flow to keep the government running as well as funding recent federal COVID-19 stimulus programs. Drastic, prolonged intervention by the Federal Reserve could signal an across-the-board increase for the price of goods and services. Consumer prices as of January were at a 5- month high. While the annual inflation rate over the past 12 months has held steady at 1.4%, market conditions that could facilitate an increase also impact the direction of rates.
COVID-19-Related Issues and its Impact on Mortgage Rates
The pandemic has affected virtually every aspect of America’s status-quo of doing business, which eventually translates into an expense. Factors ranging from reduced employee work hours resulting in slow turn times to the cost of employee paid COVID tests affects mortgage pricing just like it affects other industries.
So, what can real estate professionals do to mitigate the anxiety over volatile interest rates?
• Reassure clients that while mortgage rates could raise incrementally, rates are still hovering at the lowest level in over 20 years, and it’s still a great time to purchase and refinance.
• Procrastination is not a friend. While rates are historically low, don’t wait to start your loan application.
• Other factors contribute to the overall mortgage rate. Credit score, employment status, and other criteria are just as important in determining the overall cost of your loan.
Our Peak Finance mortgage team is monitoring mortgage rates and diligently looking for new mortgage programs to provide borrowers more options at the lowest rate possible. Although nobody can predict future trends, we believe that being forewarned puts our clients ahead of the pack.
Talk with your Peak Finance loan specialist for more information on the market and available options.