4 factors that determine mortgage rates



Mortgage rates fell last year due to the coronavirus outbreak. Then, when vaccines became widely available, their numbers skyrocketed.

Now the spread of the highly contagious Delta variant of COVID-19 poses a new question for borrowers: will there be mortgage rates be overwhelmed by a new wave of coronavirus cases?

The answer is unclear, largely because the direction of mortgage rates rarely depends on any one variable. “As you know, mortgage rates are difficult to predict,” says Odeta Kushi, deputy chief economist at insurance company First American Financial Corp.

The pandemic is just one factor affecting mortgage rates. Other factors include inflation, the pace of economic recovery and even chaotic scenes in Afghanistan.

Dick Lepré, senior loan officer at RPM Mortgage in Alamo, California, says all of these interconnected forces play a role in how much your home loan is worth. “Weak July retail sales and heightened concerns about COVID should allay fears that economic growth will lead to higher inflation in the short term,” he says.

After the coronavirus pandemic shook the global economy last year, mortgage rates fell to an all-time low. Rates bottomed out in January when the average rate on 30-year mortgages fell to 2.93%, according to data Bankrate National Creditors Survey

Then, when vaccines became widely available in early 2021, rates soared, reaching 3.34 percent by mid-March. Since then, rates have dropped.

Here are four things the mortgage market is watching.

1. The coronavirus is back strong

The pandemic caused a deep recession in 2020, and the number of coronavirus cases remains perhaps the most important indicator of the direction of the economy.

“This is primarily a health crisis,” says Kushi. “There was this whole idea that things would get better by the fall, but the Delta option created new uncertainties about health.”

In June, the seven-day average number of new coronavirus cases in the United States fell, reaching between 11,000 and 12,000 new diagnoses per day, according to data Centers for Disease Control

Then the easily transmitted variant of Delta emerged, and the number of cases skyrocketed. On August 20, the CDC reported that the seven-day average of new COVID-19 cases exceeded 137,000, the highest level since the bad old days of early February.

Mortgage rates are closely related to 10-year government bond yields, and those yields have dropped as COVID-19 reappeared.

“We call it the Delta Fall,” says Kushi. “This is indeed the factor that keeps the yield on 10-year Treasury bonds low and therefore low mortgage rates.”

Bottom line: The economy may not fully recover, and mortgage rates may not return to historical levels until the spread of the coronavirus is brought under control.

2. Inflation has reached its highest level in recent years.

If rising coronavirus cases lead to lower mortgage rates, rising inflation will have the opposite effect. Inflation rose sharply this spring and summer, exceeding 5 percent in June and July, according to the Bureau of Labor Statistics.

The rise in costs is evident for consumers buying cars, groceries, homes and other everyday items.

But economists are heatedly debating what this round of inflation means. Are prices going up year-on-year simply because prices this year are comparing to prices from the depths of the coronavirus recession? Or will inflation remain?

The answer matters, because sustained inflation will force The federal reserve raise rates. The Fed cut rates to zero last year and promised to keep them at that level as the economy recovers. While The Fed does not directly control mortgage ratesthe Fed’s actions indirectly affect the cost of a mortgage loan.

3. The economy and jobs are recovering.

The US economy is strong again. According to US data, annual gross domestic product growth exceeded 6 percent in both the first and second quarters of 2021. Bureau of Economic Analysis

The labor market has also recovered. The unemployment rate peaked at 14.8 percent in April 2020, according to the Bureau of Labor Statistics. But as of July 2021, when the US economy created 943,000 jobs, that figure has dropped to 5.4 percent.

These trends, while welcome, create upward pressure on mortgage rates. A strong economy and robust labor market means inflationary pressures, and this increases the chances of a Fed rate hike.

4. The US withdrawal from Afghanistan is chaotic.

Mortgage experts are following the images of desperate Afghans who have dominated the news since last week. It is unclear how the end of the US presence in Afghanistan will affect mortgage rates, but it is clear that the markets hate surprises.

The unrest in Afghanistan is a humanitarian crisis that raises concerns about human suffering, not mortgages. But geopolitical events do affect rates.

Overall, says Kushi, geopolitical turmoil could create uncertainty that will lead to lower mortgage rates. In one recent example, UK voters’ vote on Brexit in 2016 caused mortgage rates to drop to their lowest.

However, it is also worth noting the relative importance of these two countries on the world stage. The United Kingdom has the fifth largest economy in the world, according to The World Bankwhich makes it an economic powerhouse. On the other hand, Afghanistan ranks 112th behind Senegal, El Salvador and Trinidad and Tobago.

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