If you want to buy a home, you may have your eye on mortgage rates – after all, if they drop, a monthly housing payment could become more affordable.
Home sales have been sluggish since mortgage rates ramped up to north of 6% in 2022, as higher rates have caused potential buyers and sellers to sit on the sidelines waiting for rates to come back down.1 Rates did fall from around 7% to just above 6% in September of this year, but even then, home sales remained muted.2 As of early November, rates have again climbed to nearly 6.8%.3
So, when are mortgage rates expected to fall?
No one has a crystal ball, but there are some reliable indicators we can use to guide us. For instance, mortgage rates often fall in sync with the 10-year treasury yield.
What is the 10-Year Treasury Yield?
Anyone can buy a government treasury bond that matures over a number of years. The “10-year treasury yield” refers to the interest rate the government pays to borrow money for a decade.
Because 10-year treasury bonds are guaranteed by the federal government, the 10-year treasury yield is often used as a barometer of economic health and investor confidence.4 Historically, if investors are feeling good about the state of the economy, they usually put more money in higher-risk investments like the stock market and less money in 10-year treasury bonds, which may be more reliable, but less lucrative. The decreased demand for 10-year bonds may cause the price to drop and the yield, or interest rate, to rise.
How Does the 10-Year Treasury Yield Impact Mortgage Rates?
Historically, when the 10-year treasury yield rises or falls, mortgage rates often follow the same pattern. The two are closely linked because government bonds and mortgage-backed securities generally compete for the same investors.5 Mortgage lenders tend to adjust their interest rates based on treasury bond performance. Additionally, demand for both is impacted by the same economic factors, including inflation and employment rates.
However, it’s a common misconception that the 10-year treasury yield is directly correlated to mortgage rates. While the two metrics often fall in sync, that doesn’t mean they always do. Not to mention, mortgage rates are usually higher than the treasury yield because they carry more risk for investors.
While mortgage rates bear a close relationship with the 10-year treasury, other economic factors influence whether rates climb or drop, including the federal funds rate.
How Does the Federal Reserve Affect Mortgage Rates?
Economic policy also plays a role in both mortgage rates and the 10-year treasury yield, which is why economists and analysts often speculate about whether the Federal Reserve will make changes to the federal funds rate.
The Fed’s job is to keep employment high while keeping prices stable across the economy, and one way they do that is by adjusting the federal funds rate, or the rate at which banks borrow money from each other overnight.
In September, the Fed judged that inflation had slowed down enough to lower the federal funds rate, a move highly anticipated by investors. A decrease to the federal funds rate represents a “loosening” of monetary policy that makes it cheaper to borrow money, which enables financial institutions to lower their interest rates in turn.
However, though some had hoped that a lowered federal funds rate would bring down mortgage rates, mortgage rates have remained stubbornly high.
Though the federal funds rate does have some influence on mortgage rates, it’s less tied to mortgage rates than the 10-year treasury yield is because the federal funds rate is more closely related to short-term interest rates than long-term interest rates.
What Other Factors Influence Mortgage Rates?
The movement of mortgage rates is difficult to foresee because there are several major economic factors pushing and pulling on rates at all times, including but not limited to:
- Inflation. High inflation means the value of the dollar has eroded, making it more expensive for lenders to lend out money, which sometimes causes mortgage rates to rise.
- Economic growth. When the economy is healthy, employment tends to increase, wages might go up and consumer spending may grow. But this growth often increases mortgage rates, as well, since demand for home loans usually increases when people are flush with cash.
- The housing market. Mortgage rates may fluctuate depending on the supply of homes available for sale and the amount of demand for new homes.
- Current events. Global happenings like war or political occurrences like major elections can both impact the U.S. economy at large, which usually has some push/pull effect on mortgage rates.
Keep in mind that your personal mortgage rate will also be impacted by things like your credit score, your debt-to-income ratio and the home you choose to buy.
How Can I Get the Best Mortgage Rate for Me?
Even if you’re constantly monitoring economic fluctuations, you can’t predict with any certainty when mortgage rates will change. Waiting for the market to give you a favorable mortgage rate might result in great housing opportunities passing you by.
No matter where you are in your homeownership journey, Newrez is here to help. If you want to buy a home and you’re not sure what sort of loan you need, reach out to one of our mortgage experts, who can tell you about your options. Not sure how much you can afford? Use our mortgage calculator.
References:
1 United States Existing Home Sales
2 September 2024 Housing Market Trends Report—Realtor.com Research
3 30-Year Fixed Rate Mortgage Average in the United States (MORTGAGE30US) | FRED | St. Louis Fed
4 What Is the 10-Year Treasury Yield? - NerdWallet
5 How does the 10-year Treasury yield affect mortgage rates? Experts explain - CBS News
