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Mortgage Rates May Keep Rising Even as Fed Holds Steady

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Mortgage Rates May Keep Rising Even as Fed Holds Steady
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The Federal Reserve voted to hold the overnight borrowing rate steady Wednesday, which analysts had widely expected. Mortgage rates increased in the lead up to today’s Fed meeting, as markets prepared for rising inflation fueled by spiking oil prices.

When oil costs rise, it becomes more expensive to produce and ship goods, pushing up inflation. Though we’re nearly three weeks into a war with Iran, it’s too early to measure the full impact on inflation; March’s Personal Consumption and Expenditures price index (the Fed’s preferred inflation gauge) won’t be released until April 9. Central bankers are unlikely to make any significant moves until there’s enough data to chart a trend.
Mortgage lenders, on the other hand, are much quicker to react to news. Rising inflation reduces the value of future loan returns, so mortgage rates usually move higher to compensate. As the Iran war has choked the Strait of Hormuz (a major passageway for shipping energy products), oil prices jumped to their highest point in almost four years.

Accordingly, mortgage rates have been on a distinct upward trend since the war began. Fixed rates for 30-year loans averaged 6.15% APR in the week ending March 18, according to rates provided to SS by Zillow.

“When energy costs rise considerably, gas pumps aren’t the only places consumers and businesses feel the sting,” says Elizabeth Renter, SS senior economist. “Potential risks to inflation are rising with each day the conflict drags on.”

Higher mortgage rates make borrowing more expensive for buyers and shut out would-be refinancers. The National Association of Realtors (NAR) reported Tuesday that pending home sales grew month-over-month in February, as declining rates made homebuying more affordable. That trend could be reversed if higher oil prices drive mortgage rates up.

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Mortgage rates rise as government bonds lose their safety status

While analysts had previously expected two or even three cuts to the federal funds rate over the course of the year, these hopes have gone up in smoke, since any cuts could exacerbate inflation even further. Many analysts are now predicting the Fed will make just one cut — or even no cuts at all — for the remainder of this year. Mortgage rates often fall ahead of expected rate cuts, but mortgage borrowers can no longer rely on a reprieve.
But the Fed isn’t the only player affecting mortgage rates. The Iran war is also contributing to volatility in 10-year Treasury yields, which act as a benchmark for mortgage rates because they’re similar long-term investments.
In times of economic volatility, investors tend to prefer bonds, which pushes yields lower. Yields (the return investors earn on bonds) move in the opposite direction of prices. When investors get spooked by uncertainty, they’re more likely to gravitate toward government bonds, which carry less risk than stocks. This demand for bonds pushes prices up, bringing both Treasury yields and mortgage rates down.

However, rising inflation means government bond payouts lose purchasing power, and investors expect higher yields to compensate. As Treasury note yields are pushed higher, mortgage rates have been moving up with them.

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What mortgage borrowers are watching for

Mortgage rates may continue rising if investors believe higher energy prices will push inflation upward. However, in an interview with ABC News on Sunday, Energy Secretary Chris Wright said he expects gas prices to come down in the next few weeks as the conflict in Iran will “certainly come to an end.”

If President Trump is able to assemble a coalition of countries to open the Strait of Hormuz, oil prices could fall — easing pressure on inflation and potentially letting mortgage rates drop sooner. Alternatively, if the war drags on and oil prices remain elevated for longer than anticipated, it may be a while before mortgage rates inch back below 6%, where they’d been comfortably sitting earlier this year.

Borrowers might feel at the mercy of global forces outside of their control, but there’s wisdom that holds true in all market conditions:

  • Shopping around with multiple lenders can help you find the best rate, even as APRs go up.

  • You can’t time the market any more than you can predict when wars will end.

  • If you get a rate offer that works for you, lock it in.
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