Understanding why mortgage interest rates rise can help you make better decisions when buying or investing in real estate. It’s not just one factor, but a combination of forces from Wall Street to Washington.

1. Economic Health and Inflation

The primary driver of rising rates is the overall health and speed of the U.S. economy, specifically related to inflation.

  • Economic Growth: When the economy is doing well, unemployment is low, and people spend more money. This increased demand can cause prices to rise, leading to inflation.
  • The Inflation Response: When inflation becomes too high, the Federal Reserve (the Fed) often steps in. They raise interest rates to slow down spending, cool the economy, and bring inflation back to their target, which in turn makes mortgages more expensive.

2. Federal Reserve Policy and the Bond Market

The Fed’s actions don’t directly set mortgage rates, but they have a massive indirect influence through the financial markets.

  • Federal Funds Rate: The Fed controls the federal funds rate, which is the rate banks use to lend to each other. When the Fed raises this rate, borrowing money across the board becomes more expensive, which quickly translates to higher costs for consumers, including mortgages.
  • The Bond Market Connection: Mortgage rates are strongly linked to the yields of U.S. Treasury bonds, especially the 10-year Treasury note. When investors sell bonds (which they do when they expect inflation or higher growth), bond prices fall and their yields rise. Because mortgage lenders use these bond yields as their benchmark, mortgage rates usually increase in lockstep.

3. Housing Market Conditions and Loan Supply

The immediate dynamics of the real estate sector itself also play a role in rate fluctuations.

  • Supply and Demand for Loans: When more people want loans (high demand) but there’s a perceived shortage of funds or capacity among lenders (low supply), lenders may raise rates to manage demand. Conversely, competition among lenders in a slower market can often lead to lower rates.
  • Lender Risk Assessment: Lenders look at economic instability or uncertainty as a higher risk. To protect themselves against potential defaults, they might raise rates across the board, even for otherwise highly qualified borrowers.

4. Global Events

Mortgage rates, despite being a local decision for a local home, are surprisingly sensitive to international events.

  • Geopolitical Instability: Global events like geopolitical tensions or economic instability in other countries can cause investors to seek safe investments. Often, that safe haven is the U.S. Treasury bond market, which drives bond demand up and rates down (but volatility in global markets can often be reflected as volatility in mortgage rates).

Knowing these factors can help you understand why mortgage rates change and how it might affect your real estate plans. If you have any questions or need more information, feel free to reach out.