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Mortgage rates plunged last year as coronavirus infections exploded. Then, as vaccines became widely available, rates jumped.
Now, the spread of the highly contagious Delta variant of COVID-19 raises a new question for borrowers: Will mortgage rates be dragged back down by another wave of coronavirus cases?
The answer is unclear, in large part because the direction of mortgage rates rarely hinges on any single variable. “Mortgage rates are notoriously difficult to forecast,” says Odeta Kushi, deputy chief economist at title insurer First American Financial Corp.
The pandemic is just one factor affecting mortgage rates. Other factors include inflation, the pace of the economic recovery and even the chaotic scenes from Afghanistan.
Dick Lepre, senior loan officer at RPM Mortgage in Alamo, California, says these interwoven forces all play a role in how much your home loan costs. “Weak July retail sales and increased COVID angst should, in the short term, mitigate concern that economic growth will press inflation higher,” he says.
After the coronavirus pandemic rocked the world economy last year, mortgage rates plunged to all-time lows. Rates hit bottom in January, when the average rate on a 30-year mortgage fell to just 2.93 percent, according to Bankrate’s national survey of lenders.
Then, as vaccines became widely available in early 2021, rates rose sharply, climbing all the way to 3.34 percent by mid-March. Rates have eased since then.
Here’s a breakdown of four things the mortgage market is watching.
1. The coronavirus has come back strong
The pandemic caused a deep recession in 2020, and coronavirus case counts remain perhaps the most important indicator of the direction of the economy.
“This is first and foremost a health crisis,” Kushi says. “There was this whole idea that things would be better by the fall, but the Delta variant has created new health uncertainty.”
In June, the seven-day average of new coronavirus cases in the U.S. had fallen, reaching levels of just 11,000 to 12,000 new diagnoses a day, according to the Centers for Disease Control.
Then came the easily transmitted Delta variant, and cases spiked. On Aug. 20, the CDC reported that the seven-day average of new cases of COVID-19 had topped 137,000, the highest level since the bad old days of early February.
Mortgage rates are closely tied to yields on 10-year government bonds, and those yields have fallen as COVID-19 has re-emerged.
“We’ve been calling it the Delta dip,” Kushi says. “That’s really a factor that’s keeping the 10-year Treasury yield low, and thereby mortgage rates low.”
The bottom line: The economy can’t make a full recovery, and mortgage rates can’t return to historical norms, until the spread of coronavirus is under control.
2. Inflation has risen to its highest level in years
If rising coronavirus cases push mortgage rates down, rising inflation will have the opposite effect. Inflation spiked this spring and summer, topping 5 percent in June and July, according to the Bureau of Labor Statistics.
Rising costs are obvious to consumers shopping for cars, groceries, homes and other everyday items.
But economists hotly debate what this round of inflation means. Are year-over-year prices up simply because this year’s prices are being compared to those from the depths of the coronavirus recession? Or is inflation here to stay?
The answer matters because sustained inflation would force the Federal Reserve to raise rates. The Fed cut rates to zero last year and has promised to keep them there as the economy recovers. While the Fed doesn’t directly control mortgage rates, the Fed’s moves do indirectly influence the cost of a home loan.
3. The economy and jobs are recovering
The U.S. economy has come back strong. Year-over-year growth in gross domestic product topped 6 percent for both the first and second quarters of 2021, according to the U.S. Bureau of Economic Analysis.
The job market has rebounded, too. The unemployment rate peaked at 14.8 percent in April 2020, according to the Bureau of Labor Statistics. But the rate was down to 5.4 percent as of July 2021, a month in which the U.S. economy created 943,000 jobs.
Those trends, while welcome, create upward pressure on mortgage rates. A strong economy and robust labor market mean inflationary pressures, and that boosts the chances of the Fed raising rates.
4. The US exit from Afghanistan is chaotic
Mortgage experts are watching the images of desperate Afghans that have dominated news coverage since last week. It’s unclear how the end of the American presence in Afghanistan will affect mortgage rates, but it is clear that markets hate surprises.
The turmoil in Afghanistan is a humanitarian crisis, one that raises concerns about human suffering rather than mortgage rates. But geopolitical events do play a role in rates.
In general, Kushi says, geopolitical upheaval can create uncertainty that pushes down mortgage rates. In one recent example, the 2016 Brexit vote by British voters sent mortgage rates to rock-bottom levels.
However, it’s also worth noting the relative importance of those two nations on the global stage. The United Kingdom has the world’s fifth-largest economy, according to the World Bank, making it an economic power. Afghanistan, on the other hand, ranks 112th, trailing Senegal, El Salvador and Trinidad and Tobago.
- What the spike in 10-year Treasury notes means for mortgage borrowers
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- Coronavirus stimulus might spur inflation