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 Thursday, when the U.S. Labor Department releases its inflation report for January. Inflation jumped to an annual rate of 6.2 percent in October, then reached 6.8 percent in November and 7 percent in December — the highest levels since the stagflation day of the early 1980s.
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 did 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 2021 before rising sharply in early 2022. Nearly everyone expects the Federal Reserve to begin raising interest rates at its March meeting.
“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Federal Open Market Committee said after its January meeting.
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.