Why Do Mortgage Rates Change?
“Mortgage rates are at historic lows!” Seems we have been saying that now for several years running, and interest rate volatility has been nearly non-existent in the recent past.
When we do see interest rate movement, however, there can be a variety of factors in play. Here are some of the most significant:
The Federal Reserve
The first place to look is the monetary policy from the Federal Reserve, which sets the interest rate banks charge each other for short-term loans. Markets are always looking to guess what “The Fed” will do next. This is a Committee of national economic experts that work to manage the interest rate environment in a way that will help the U.S. economy. Financial markets hang on every word spoken by the committee members and markets may react on days when they provide notes from their meetings.
During a period of economic growth, interest rates generally increase. The U.S. economy has seen very little growth in Gross Domestic Product over the past several years, resulting in very little interest rate movement. Alternatively, interest rates often, but not always, come down in a recession-type economy. Dramatic changes in long term rates came as a result of the “Great Recession” which began with the housing crash of the last decade. They’ve remained low since then.
Financial markets also work to forecast economic conditions to stay ahead of periods of economic growth or decline. Economic factors such as unemployment can influence mortgage rates as well.
The housing market plays a small role in mortgage rate movements as well. Depending on the demand for home mortgage loans, rates can move up and down as pipelines fill and empty. For example, it might be advantageous to consider a refinance during a slowdown as lenders might be willing to offer more attractive terms.