Why Mortgage Rates are Declining — and Why the Trend Won’t Last
New Homebuyers Need to Act Before Summer’s Gone for Good
By Garrett Clayton | PaperCity Magazine | August 21, 2018
While the rest of us ushered in 2018 with fanfare and fireworks, the Federal Reserve System (a.k.a. “the Fed”) took the beginning of the new year as its cue to take mortgage rates up, up, and away — to highs we haven’t seen in years. With slow but steady rises throughout the first five months of the year, the third week of May marked a four-year high, capping off at 4.66 percent for a 30-year fixed-rate mortgage, according to Freddie Mac’s Primary Mortgage Market Survey.
But homebuyers and sellers needn’t fret yet. The average mortgage rates for the week of August 16, dropped to 4.53 percent for a 30-year fixed mortgage, down six basis points according to Freddie Mac’s latest data. The 15-year fixed-rate mortgage averaged 4.01 percent, down from 4.05 percent.
As Labor Day approaches, mortgage rates are trickling down.
This is a cause for a celebration worthy of more than end-of-the-summer fireworks and barbecues. Read on for a few reasons on why now is the right time to make your move into a new home because, just like summer, these low rates likely won’t last forever.
The Stocks and Bonds Balancing Act
What’s the stock market have to do with your mortgage interest rate? Quite a lot, actually. That’s because stocks and bonds, including mortgage bonds, are appealing to the same types of investors, meaning these two forces are essentially competing for the same money. When the stock market is hot, these investors often choose the higher risk of stock investments in favor of their higher rewards.
The opposite is also true, however. Should the stock market seem shaky, investors will often opt for the stability and low risk of a bond investment.
While there are a variety of bond types available to investors, in general, money moving from stocks (when the market is viewed as risky or uncertain) to bonds (often seen as a safer bet) is good for mortgage bonds and will cause interest rates to decline. This is the scenario currently playing out with investors, which is why we have seen a decline in interest rates.
Decreasing Treasury Yields
Treasury bonds are the type of bond that most directly impact mortgage rates. Guaranteed by the U.S. federal government, Treasury bonds are one of the safest bonds, which is a large part of their appeal. Mortgage bonds are riskier than Treasury bonds, but they also give a higher return on investment.
Because banks use Treasury interest rates as a gauge for where to set their own mortgage rates, typically keeping mortgage rates a few points higher than those of the Treasury, the correlation between Treasury yields and mortgage rates is a direct one. When Treasury rates go up, so do mortgages — and vice versa.
Currently, we are seeing a decline on U.S. Treasury yields, due to a variety of political and economic factors. Thus, we are also seeing a slight, and likely temporary, decline in mortgage interest rates.
International Trade Tariffs
Perhaps the largest factor influencing both the stock market landscape and Treasury yields is the recent trade tariffs discussed and enacted by the federal government.
Early this year, the U.S. government revealed its plans to enact tariffs on imports from foreign countries, including a notable tax on aluminum and steel from countries like the EU, Canada and Mexico (who have historically been our allies) and on a variety of Chinese products (as retaliation for what the administration views as unfair policies that penalize American companies operating in the Chinese market). As these tariff discussions continue and new tariff policies begin to take effect, the stock market has reflected investor fears of retaliation, fears which the past few weeks have shown are coming to fruition.
Uncertainty regarding international trade relations and the effects U.S. and foreign tariffs will have on the stock market is a primary factor in investors taking money from stocks and moving it to the relative safety of bonds, and Treasury yields in particular.
Why Declines Likely Won’t Last
Despite a potentially perilous stock market and a plethora of unknowns as to how escalating tariff tensions will impact our overall economy, other factors that heavily influence interest rates are indicating this decline may be short-lived. For instance, July saw a 157,000 increase in jobs, a sign that the economy is still flourishing, and the Fed continues to indicate its intention to implement multiple rate hikes by the end of the year.
Likewise, even the stock market has continued to bounce back after each round of new tariff announcements, indicating investors are not as turned off by these international developments as one might have expected.
Historically, interest rates continue to rise steadily during the final quarter of the year, so those in the market for a new home would be wise to make a purchase sooner rather than later to lock in the lowest interest rates we may see all year.
Terms to Know
The Fed: Short for The Federal Reserve System, this is the government entity responsible for raising and lowering interest rates on overnight loans that banks use to maintain their reserve requirement, or the amount of money the government requires them to have on hand each night. The Fed rate influences short term and adjustable rate mortgages, while Treasury yields influence fixed-rate mortgages. Since interest rates set by the Fed are based on factors like the economy and inflation, and used to control the U.S. money supply, we also see the effects of these rates in other economic areas, such as Treasury yields.
Mortgage Bond: A pool of mortgages and/or other bonds that are sold in a secondary market, often by the original lender to an investment bank. Rates typically do not change as the holder of the mortgage changes, so the homeowner is not impacted by the transfer of ownership.
Treasury Yield: The interest rate the U.S. government pays on its debts, or the return on investment to the lenders funding federal government debt obligations. The treasury yield influences other bond interest rates, including fixed-rate mortgages, and is seen as an indicator of how investors feel about the economy overall.
Trade Tariff: A tax on imported goods imposed by the government, often to raise revenue or protect domestic interests.
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