What Buyers Need to Know About What’s Driving Mortgage Rates

Mortgage interest rates are higher than they’ve been since the 70s, affecting the buyer market. How did we get here? What’s happening, and where will we be in the near future? 

The Federal Reserve is working in the background to ensure interest rates rise. Let’s take a deep dive into what you need to know about mortgage rates. By the end, buyers should have a clearer understanding of how to navigate the current housing market.

Why Higher Interest Rates are of High Interest to the Fed

As I said, higher interest rates are by design. That design is part of a strategy pulled out of the Fed’s playbook for tackling the problem of inflation. Simply put, things became too “affordable,” and as a result, more money was pumped into circulation. More money in circulation means prices of goods are driven up, leading to the vicious cycle we call inflation.

The Fed’s goal here is to discourage spending by driving up interest rates along with one other factor: unemployment. They want to put pressure on companies to cut expenses which will lead to lay-offs. Unemployment, of course, will also discourage overall spending. Their ideal unemployment rate is 5%. That’s in contrast to the current 3.5% we see now. 

None of this is a permanent solution, and there are risks involved. That’s why we’ve been seeing an “easing” into price increases rather than a full-on “ripping off of the bandaid” to get us used to these higher rates again. 

The Fed hopes that the economy starts to meet them at a mid-way point along the way. This only happens if they successfully drive down demand in the market. By bringing down demand, you force companies to lower prices to encourage people to buy again. Lower prices, of course, mean lower rates of inflation.

What Does this mean for Home Buyers?

All this has put a strain on the housing market. Buyers are uncertain of how to proceed in fear that interest rates will make mortgages unaffordable or that they won’t be able to sell at a higher rate later. While these fears aren’t unfounded, the news scares people from a potentially wise decision. 

In reality, the best course of action is to buy now rather than later. Yes, you may have to eat the interest rates at first, but it’s not forever. Interest rates WILL go down again; they have to. If you were one of the few to buy a home beforehand, you’d be able to refinance at a lower rate versus having to buy the same house at a higher cost later. 

Why would that house be priced up? Two reasons. One: with interest rates lowered, home prices will rise to meet the new wave of demand. Two: We are currently in a supply shortage of houses versus the demand for them, and you have the perfect mix for bidding to drive prices even higher. 

If you buy now, you actually mitigate the risk of paying higher prices for the same house later. You can also employ different lending strategies, such as a 2-1 buy down, to spend less on interest temporarily and then refinance once rates lower again.

Final Thoughts

The final verdict here is that buyers are not crippled. Fear in the market is being fueled by pumped-up headlines that don’t cover the reality of why prices are going up. When you cut through that fear, it’s evident buyers still have power in the housing market today. 

My advice is this: don’t try to time the market yourself. There are resources for market data that will allow you to stay informed and equip yourself with the tools to make sound investment decisions.