Whether we are at the pump, the grocery store, or the car dealership, America is feeling the inflationary pressure. The same goes for mortgage rates, which nobody argues are rising. What caused the record high rates back in the 70’s/80’s? Record high inflation. What has pushed rates higher at the fastest pace since then over the last six months? The same story.
When you think about mortgage rates vs. inflation, it makes sense. Rates are based on bonds, which are a “fixed-income” investment. This means that the buyer (investor) agrees to receive payments over time on a fixed set of terms upfront. If I am a bond investor(mortgage lender), I am paying a large amount of cash upfront, and you will pay me the set price over however many years we agree upon. Now, think about the same example with record high inflation. Your monthly payment used to be able to buy me a certain amount of “stuff.” Now, due to high inflation, the same “stuff” will cost me 1.5x what it used to. So, in order for me to be able to buy the same amount of “stuff” I used to be able to, I have to charge a higher rate. That is the most basic illustration on how rising inflation affects interest rates.
In order to combat inflation, the FED raises rates, not mortgage rates exactly, but that is for another discussion! They announce how much they will raise rates eight times every year. The next meeting is on July 27th, and the question is, how much will they raise rates? The last spike was .75% and some are thinking that the next spike will be 1.00%, as inflation is still affecting the economy greatly. Higher rates have done some great work in the housing market so far. We are seeing purchase numbers drop, inventory opening up, contingencies coming back, and less competition as prospective buyers get priced out of the market. However, we are still not back to pre-pandemic numbers and some markets are still unaffected, like Miami for example.