Week in and week out, UrbanTurf reports on the average mortgage rate reported by Freddie Mac. In the last year, that average has more than doubled to its highest level in more than two decades. This article delves into the reasons behind the surge in mortgage rates, shedding light on the various factors that have contributed to this upward trajectory.
Economic Recovery and Inflation
One of the primary things driving the increase in mortgage rates is the broader economic landscape, specifically the rise in inflation. As economies around the world rebounded from the impact of the COVID-19 pandemic, central banks implemented policies to support economic growth. These policies included low-interest rates and quantitative easing which can inadvertently contribute to inflationary pressures. Inflation erodes the purchasing power of a currency, prompting central banks to raise interest rates to maintain stability. As central banks departed from ultra-low interest rates, mortgage rates, which are influenced by broader economic trends, rose in tandem.
Federal Reserve Policy Shift
The actions of the U.S. Federal Reserve play a pivotal role in shaping the mortgage rate landscape. For years, the Federal Reserve maintained historically low interest rates to stimulate economic activity. However, as the economy recovered, the Federal Reserve tapered its bond-buying program and raised interest rates.
Bond Market Dynamics
Mortgage rates are also closely tied to the yields of long-term government bonds, particularly the 10-year U.S. Treasury note. These bonds serve as a benchmark for determining the interest rates charged on various forms of credit, including mortgages. When bond yields rise, lenders may increase mortgage rates to align with market conditions. The yield on the 10-year note recently hit its highest point in 17 years, reflecting the Federal Reserve’s efforts to tame inflation by pushing borrowing costs higher.
The trajectory of mortgage rates in the coming months is anyone's guess, but predictions are being made. Last week, the Mortgage Bankers Association put out its forecast for where it sees rates heading in the next two years, which included averaging 5% by the end of next year and 4% the following year.
This article originally published at https://dc.urbanturf.com/articles/blog/why_are_mortgage_rates_so_high/21405.
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