Are you frustrated with mortgage rates in Metro Detroit? Would you like to know why they are so high? More importantly, when will they go down? Let’s review how the economy impacts Mortgage Rates and trends to watch for when they will start declining.
How the Economy Impacts Mortgage Rates
Hello Metro Detroit 🤓! Are you thinking about buying or selling a home? If so, you’re probably watching mortgage rates and wondering what the future holds. Let’s explore how the economy impacts these rates and what they mean for you.
Understand How Mortgage Rates Are Determined
Your Base is the 10-year Treasury Yield
Understanding how mortgage rates are determined can help you make smarter home-buying decisions when purchasing a home in Metro Detroit. Mortgage rates are closely tied to the 10-year Treasury yield, the government’s interest rate on its 10-year bonds. When this yield goes up, mortgage rates often rise, too, and when it goes down, mortgage rates usually follow. Lenders use the 10-year Treasury yield as a benchmark because it’s a stable, low-risk investment.
MBS Gap is Your Most Important Trend to Watch
In addition to the Treasury yield, lenders add the MBS (Mortgage-Backed Securities) Price Gap to account for factors like MBS demand and supply, credit risk, and operational costs. The simple formula for determining mortgage rates is Mortgage Rate = 10-Year Treasury Yield + MBS Price Gap.
By understanding this, you can better anticipate changes in mortgage rates and make more informed decisions when buying or refinancing a home. The 50-year average MBS Gap Spread is 1.72%. When the government shut the U.S. down due to COVID-19, the MBS Gap rose on average to 2.75%. This is another reason why mortgage rates are so high. To keep up to date, bookmark Today’s Mortgage Rate: What’s Driving the Change or request our Real Estate Insider Newsletter.
Understanding the Federal Funds Rate and Mortgage Rate
One critical element influencing mortgage rates is the Federal Funds Rate, which determines how much it costs banks to borrow money from each other. Although the Federal Reserve (the Fed) doesn’t directly control mortgage rates, they control the Federal Funds Rate. The relationship between the two means that changes in the Federal Funds Rate can impact mortgage rates.
People are closely watching to see when the Fed might lower the Federal Funds Rate. When this happens, it typically puts downward pressure on mortgage rates. The Fed meets regularly to assess economic conditions and decide on the Federal Funds Rate. Here are three crucial metrics they consider:
- The Rate of Inflation
- How Many Jobs the Economy Is Adding
- The Unemployment Rate
Let’s explore each of these factors in detail.
1. Let’s Talk About the Elephant in the Room ~ Inflation in Metro Detroit
Inflation’s effect on mortgage rates has been pretty stubborn. Although it has started to decrease, it’s not trending down to the 2% target the Fed wants it to be. As you can see, inflation trended up until the Fed’s last interest rate hike of 5.25-5.50% was implemented.
Inflation is measured in two ways. The Fed’s preferred method is the PCE ( Personal Consumption Expenditures), which has stayed steady at 2.6%. The better news is that the CPI (Consumer Price Index), which includes housing, came down .04%, trending closer to the 2% rate the Fed is looking for. 🥳
2. Job Creation: Tracking Employment
Every month, the Fed examines the number of new jobs created. They prefer to see a steady but slower pace of job growth. Recent data shows that while new jobs are still being added, they’re happening slower, which is exactly what the Fed wants to see. The jobs market is starting to show signs of stress, and that’s why the Fed is cutting rates on September 18th.
3. Unemployment Rate: A Balancing Act
The unemployment rate tells us how many people are looking for jobs but can’t find one. A low unemployment rate means more people are working, which is excellent. However, if too many people are working and spending, it can push prices up, leading to inflation. Lately, the unemployment rate has been low but is starting to inch up a bit, which helps cool down spending and control inflation.
When Will They Drop?
Let’s take a glimpse into the future of Metro Detroit!🔮 With economic indicators moving in the Fed’s favor, mortgage rates are expected to trend down. There has been a 1% adjustment in mortgage rates since May.
So, what does this mean for you? The Fed policy will change on September 18th with an interest rate cut. The next possible cut will be in November. I recommend learning how to predict where mortgage rates are heading so you know when it’s the right time to lock your rate. Check out the blog post to learn how.
Boost Your Homebuying Power ~ Let’s Explore Together!
Did you know that changes in mortgage rates can significantly enhance your ability to buy your dream home? Let’s connect to discuss how recent rate cuts could benefit you! We can schedule a Zoom call where I’ll share my screen and walk you through the details. Would you prefer an in-person meeting or a phone call? Let’s set up a time that suits you best. And don’t forget, there’s a chat and call option at the bottom right if you need quick answers. I’m here to help you make the most of these opportunities—let’s start your homebuying journey!
Key Takeaway
Now you know how inflation affects mortgage rates. Understanding the factors, particularly inflation and Fed policies, can help you make informed decisions about buying or selling a home in Metro Detroit.
A good piece of advice is not to wait for the perfect moment based on the economy. Roll up your sleeves and start crunching the numbers. I have two helpful blog posts to help you determine your home-buying budget.
- Do You know your Home Purchasing Power
- Do You know How Much Home Equity ~ Your Down Payment for Your New Home
- Master Pricing Your Home Right
- Need Mortgage Help
Afterward, if buying or selling a home feels right for your current situation, that is probably the best decision. We know mortgage rates will be lower over time. When interviewing lenders, check into their fees regarding refinancing and work that into your budget. Not only select a lender for today’s rates but find one that is willing to negotiate on refinancing as well. Feel free to reach out if you have questions or need advice about the housing market. I’m here to help make sense of all this for you.⤴️
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