Mortgage rates are notoriously difficult to predict. They rise and fall based on market sentiment, headlines and a variety of economic indicators. Here’s a look at what could move markets this week.
The big economic news comes Wednesday, when the U.S. Labor Department releases its inflation report for December. Inflation jumped to an annual rate of 6.2 percent in October and then reached 6.8 percent in November — its highest level in 39 years.
Economists debate what those hot readings mean. Did prices soar simply because last year’s economic activity ground to a halt amid a coronavirus-forced lockdown? Or are huge stimulus packages causing prices to rise? When might clogged supply chains unclog?
Whatever the answer, consumers have been surprised by price spikes in cars, housing and other items. “The inflation genie is out of the bottle,” says James Sahnger, a mortgage planner at C2 Financial Corp. in Jupiter, Florida.
While the rate of inflation doesn’t determine mortgage rates, the two metrics are strongly correlated. Inflation — and the Federal Reserve’s response to rising prices — could be the most important metric driving mortgage rates in the coming months.
Economists say a sustained spike in consumer prices would be accompanied by a change in policy from the Fed and a rise in mortgage rates, which reached record lows in January. The Fed announced last month that it was slowing its pace of asset purchases, but it did not say when it expected to boost interest rates.
“Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” the Federal Reserve said in a statement in November.
The calculus behind mortgage rates is complicated, but here’s one easy rule of thumb: The 30-year fixed-rate mortgage closely tracks the 10-year Treasury yield. When that rate goes up, the popular 30-year fixed rate mortgage tends to do the same.
Rates for fixed mortgages are influenced by other factors, such as supply and demand. When mortgage lenders have too much business, they raise rates to decrease demand. When business is light, they tend to cut rates to attract more customers.
Ultimately, rates are set by the investors who buy your loan. Most U.S. mortgages are packaged as securities and resold to investors. Your lender offers you an interest rate that investors on the secondary market are willing to pay.