The Fed’s pattern of rate hikes through early 2022 to mid-2023 culminated in a pause, announced at their latest meeting on March 20, 2024. Despite this pause, we’ve seen mortgage rates fluctuate. A notable instance was the decrease in rates in late December, despite the Fed’s decision to maintain its key rate during its December 13 meeting.
Lawrence Yun, the chief economist at the National Association of Realtors, explains that the bond market, including mortgage-backed securities, often adjusts longer-term interest rates in anticipation of future Fed policies. While the Fed plans to cut rates later this year, the exact timing remains uncertain. While the rates have remained unchanged, there’s an expectation of three rate cuts in 2024.
How the Federal Reserve Influences Borrowing Costs
The Fed sets borrowing costs for short-term loans via the federal funds rate, which affects how much banks charge each other for overnight loans. This rate, increased in 2022 and 2023 to control inflation, impacts borrowing costs across the economy, including credit card rates and home equity loans. However, fixed-rate mortgages, the most popular home loan type, are more closely aligned with the 10-year Treasury yield rather than the federal funds rate.
The Fed’s role in buying and selling debt securities also indirectly affects mortgage rates by influencing the credit flow.
What Affects Mortgage Rates?
The primary influencer of fixed-rate mortgages is the 10-year Treasury yield. A notable gap typically exists between this yield and the fixed mortgage rate. In 2023, the gap widened, leading to more expensive mortgages.
Mortgage rates are also subject to:
• Inflation: Higher inflation often leads to increased fixed mortgage rates.
• Supply and Demand: Lenders adjust rates based on their current business volume.
• The secondary mortgage market: The demand from investors for mortgage-backed securities can lower mortgage rates. Conversely, lack of investor interest might cause rates to rise.
The Fed’s Impact on Adjustable Rate Mortgages (ARMs)
While less common than fixed-rate mortgages, ARMs are significantly influenced by the Fed’s decisions. ARMs often tie to the Secured Overnight Financing Rate (SOFR), which the Fed’s actions can affect. Changes in the fed funds rate lead to adjustments in SOFR, consequently impacting ARM rates.
If you are looking to make a move this spring make sure to schedule a consultation with us on our website and we can review your needs and what best fits your needs.
