Factors That Influence Mortgage Rates

The Importance of the Latest CPI Report

With the latest CPI (Consumer Price Index) report coming out today showing inflation around 4%, it is important to understand how inflation impacts mortgage rates. We have come a long way since the CPI report in June of 2022 showed inflation over 9%. The battle is not over, but we also have a lot to celebrate when it comes to inflation. With that being said, the subject of mortgage rates can be complex and overwhelming for many people. However, it is crucial to understand the numerous factors that influence them before you begin the home buying process. In this short article, we will discuss the connection between mortgage rates and inflation. We will also explain the various other factors that also influence mortgage rates. Whether you are a first-time homebuyer or an experienced investor, this article will provide valuable insights into the dynamics of mortgage rates.

“Housing is the most important asset of most households and therefore of the country’s aggregate household wealth.” -Robert Shiller

Inflation and Mortgage Rates: Inflation plays a significant role in determining mortgage rates. When inflation is high, the cost of goods and services increases, making borrowing more expensive. Therefore, the Federal Reserve increases interest rates to control inflation (which is what we have been seeing). When they do this, mortgage rates also tend to increase in response. On the other hand, when inflation decreases, the Federal Reserve can (key word, “can”) decrease interest rates, leading to a reduction in mortgage rates.

Economic Indicators: The economy plays a significant role in determining mortgage rates. Economic indicators such as gross domestic product (GDP), employment rates, and inflation can impact mortgage rates. GDP reflects the health of the economy, and a higher GDP on a quarterly and annual basis can often lead to higher mortgage rates. Employment rates also have a significant impact on mortgage rates. When the job market is strong, mortgage rates tend to increase. As mentioned before, inflation is another crucial economic indicator. Mortgage rates tend to follow inflation because banks have to adjust their lending policies to keep up with the overall increasing prices.

Bond Market: The bond market is not as well-known as the stock market, but it is equally vital in determining mortgage rates. Mortgage rates are often influenced by the bond market because bonds and mortgages are both investments. When the bond market is strong, mortgage rates tend to be low. If there is a significant fluctuation in interest rates in the bond market, it can mean a rise in mortgage rates.

Credit Score: Your credit score is a crucial determinant of mortgage rates. The higher your credit score, the lower the mortgage rate will be. A credit score above 700 is considered excellent and can result in lower mortgage rates. When applying for a mortgage, it’s essential to have a good credit score to receive a better interest rate.

Mortgage rates can be a complex topic, but it’s crucial to understand the various factors that determine them. Interest rates, economic indicators, the bond market, and credit scores all play a significant role in determining mortgage rates. However, the correlation between inflation and mortgage rates cannot be underestimated. Decreasing inflation can lead to a decrease in mortgage rates, while increasing inflation can lead to an increase in mortgage rates. As a home buyer or investor, it’s essential to understand these dynamics and keep up to date on market conditions. This knowledge can help you make informed decisions and save you money in the long run.