Why Did Mortgage Rates Suddenly Drop?

Key Takeaways

• Rates for 30-year fixed rate mortgages dropped below 7% the first week of November.
• Rates have been moving higher for most of 2022, rising from around 3% to over 7%.
• More inflation and economic data needs to be released to know if inflation is finally cooling down or if this is a one-time event.

Mortgage rates have been rising since the start of 2022, thanks to the Federal Reserve raising interest rates to combat inflation. When a recent consumer price index report came in with lower-than-expected inflation, mortgage rates dropped, even though the Fed recently increased rates for the sixth time.

Here is what is happening with mortgage rates and where they might be going in the coming months.

Where mortgage rates stand today

According to Freddie Mac, a 30-year fixed-rate mortgage had an average interest rate of 6.95% for the week ending November 3, 2022. The prior week ending October 27, 2022, saw an average rate for 30-year fixed-rate mortgages of 7.08%.

15-year fixed-rate mortgages also saw a drop in interest rates to 6.29% for the week ending November 3rd, down from a 6.36% average the week before.

Because mortgage rates are extremely sensitive to economic data, they tend to move quickly. For the week ending November 10, 2022, the average rate on a 30-year fixed-rate mortgage went back up to 7.08%, and the 15-year fixed-rate mortgages rebounded to 6.38%.

Bankrate’s national survey of lenders shows that as of November 16, 2022, the 30-year fixed rate fell to 6.85% and the 15-year fixed rate fell to 6.13%. The previous week, the 30-year fixed rate stood at 7.08% and the 15-year fixed rate was 6.39%.

The trend of higher rates

Mortgage rates started the year in a period of historic lows. The average rate on a 30-year mortgage was 3.22%, and 2.43% on a 15-year mortgage. But the Federal Reserve raised interest rates by 25 basis points in March and by the end of March, the average rate on a 30-year mortgage stood at 4.67%, and the average rate for a 15-year mortgage was 3.83%.

As the Fed continued raising interest rates, mortgage rates climbed higher. They seemingly peaked in late June, with the 30-year hitting 5.81% and the 15-year reaching 4.92%. When inflation data came in lower than expected over the summer, many thought that inflation was finally cooling off and the Fed would ease the pace of raising rates. This sentiment helped to bring mortgage rates down.

In early August, the average rate on a 30-year mortgage was 4.99% and 4.26% for a 15-year mortgage. Things quickly changed with the release of more inflation data showing that inflation was not slowing down. This led to additional rate hikes by the Fed and a steady climb of interest rates to where we stand today.

Why did rates fall?

Mortgage rates are impacted by the federal funds rate, which is the interest rate banks charge each other for lending money. When the Fed increases interest rates, banks’ borrowing costs increase. To offset this rise in costs, they increase the rates on their loan products.

But the fed funds rate is one of many factors influencing mortgage rates. The bond market also plays a role. Most banks do not hold the mortgages they underwrite. They package them into a product called a mortgage-backed security and sell them to investors. Since bond buyers are looking for a competitive return on their money, the interest rate on mortgage-backed securities has to be high enough to attract buyers. The question is, how high?

The most common benchmark lenders peg mortgage rates to is the 10-year Treasury bond yield. Because of this, the interest rate on the mortgage-backed securities has to be higher than the 10-year Treasury yield since there is more risk associated with the mortgage-backed security than with a Treasury bond.

Another critical factor is the housing market. If home prices are so high that buyers decide to rent instead of buy, this lower demand impacts rates. This is because if very few people are buying homes, rates have to drop to encourage buyers to come to the market. The same is valid on the other side as well. If many consumers want to buy, this can drive up mortgage rates.

The supply of homes has an impact too. If there’s inadequate supply, this can cause rates to increase if there is high demand.

Finally, unemployment plays a role. If people have lost their job, they are unlikely to purchase a home. Fear of losing a job is also a factor. With talk of a recession coming, people will not make a large purchase like that of a home if they think they might be out of work soon.

All of these factors blend together to determine where mortgage rates are. No one source determines mortgage rates. Banks consider all of the above data before arriving at a rate they feel is competitive. Since each bank sets its rate, experts advise home buyers to shop around. While one bank might charge you 7%, another might charge you 6.5%. It all depends on the above factors and your credit profile.

This isn’t to say you can shop around in today’s environment and expect to find a bank offering 3%. The rates you are quoted will be in a small range. But this shouldn’t discourage you from finding the lowest rate. Not only will a lower rate make your monthly payment smaller, but you will pay thousands of dollars less in interest over the life of your loan.

Bottom Line

While the sudden drop in mortgage rates was welcome news to home buyers and the housing industry, more information is needed to know if rates will drop again. In the previous months, we saw reports suggesting that inflation was slowing, only for it to rise again the following month.

Once we have additional information indicating that the general trend of high inflation is easing, consumers can expect lower mortgage rates. Until that happens, it is wise to lock in now, as rates could still go higher, depending on future inflation reports. If they were to start falling, home buyers could refinance to take advantage of the lower rates.

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