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  • Writer's pictureKCStark

Mortgage Rates: Why Did the Interest Rates on Mortgages Drop After the FED Raised Rates?

Good news home shoppers! Mortgage rates dropped to their lowest levels since late 2022 AFTER the Federal Reserve raised rates.


  • The Consumer Price Index peaked last June at 9.1%.

  • Inflation has steadily fallen 6.5% in December.


How can mortgage rates drop even after the FED raises rates?


The Federal Reserve (FED) sets a target for the overnight rate, which is the interest rate at which banks lend money to each other overnight. This rate is used as a benchmark for other short-term interest rates, including mortgage rates. However, mortgage rates and the overnight rate set by the FED are not always directly tied, and there are a number of factors that can influence mortgage rates, including:


  1. Bond market: The yield on 10-year Treasury bonds is often used as a benchmark for mortgage rates. If investors expect lower inflation, they may demand lower yields on bonds, which can drive down mortgage rates even if the FED raises the overnight rate.

  2. Competition: The mortgage market is highly competitive, and lenders may choose to lower mortgage rates in order to attract borrowers, even if the FED raises the overnight rate.

  3. Economic conditions: A strong economy with low unemployment and rising wages can increase demand for homes and drive up mortgage rates, while a weak economy can put downward pressure on mortgage rates.


Therefore, it is possible for mortgage rates to go down even when the FED raises the overnight rate, as these other factors can have a greater impact on mortgage rates.


What is the 10-year bond market?

What is the 10-year bond market?


The 10-year bond market refers to the market for bonds with a maturity of 10 years. These bonds are issued by governments and corporations as a means of raising capital, and are bought and sold by investors seeking fixed income and a predictable return on their investment.


  • The interest rate, or yield, on a 10-year bond is used as a benchmark for various financial products and as an indicator of economic conditions and expectations.


What does a drop in the 10-year bond market mean for home loan shoppers?


A drop in the yield of 10-year bonds typically leads to lower mortgage rates, which can make home loans more affordable for prospective buyers.


When the yield on 10-year bonds decreases, it signals to investors that they can expect lower returns on their investments, which leads to a decrease in mortgage rates as well. As a result, home loan shoppers may be able to secure lower interest rates on their mortgage, making it cheaper to borrow money to buy a home. This, in turn, can increase demand for housing and drive up home prices.However, it's worth noting that the relationship between the 10-year bond market and mortgage rates is complex and not always straightforward.


Relationships: Inflation vs the 10-year bond market.


  • The relationship between inflation and the 10-year bond market is often seen as inverse.


When inflation is expected to increase, investors generally demand a higher return, or yield, on their investments to compensate for the loss of purchasing power caused by inflation. This demand for higher returns can drive up the yield on 10-year bonds. Conversely, when inflation is expected to decrease, investors may be less concerned about the loss of purchasing power, and demand for lower yields can drive down the yield on 10-year bonds.


The yield on 10-year bonds is widely watched by financial markets as a benchmark for interest rates, and changes in the yield can impact the cost of borrowing for individuals and businesses.


  • When the yield on 10-year bonds rises due to inflation expectations, it can signal higher interest rates on loans.

  • When the yield on 10-year bonds falls due to low inflation expectations, it can signal lower interest rates.


How do today's rates compare with the historical average for home buyers?


The 10-year bond market and home mortgage interest rates on a typical 30-year conventional loan with 20% down.


  • The 10-year bond yield has averaged around 5% since the 1950s.

  • The average interest rate on a 30-year conventional mortgage with a 20% down payment has been around 6%.

  • The 10-year bond yield can serve as a benchmark for interest rates, it is not always directly tied to mortgage rates.


When is the best time to buy a home in America?


Short answer: when it best fits your economic and lifestyle needs. The market will do what markets do.


  • It's what you do with the market that matters most.


Determining the best time to buy a home in America can depend on several factors, including personal financial situation, housing market conditions, and individual preferences. Some general considerations to keep in mind include:


  • Economic conditions: A strong economy with low unemployment and rising wages can indicate a strong housing market, while a weak economy can put downward pressure on home prices.

  • Interest rates: Low interest rates can make mortgage payments more affordable, which can increase demand for homes and drive up prices.

  • Housing inventory: When the supply of homes for sale is low, prices tend to be higher, while a surplus of homes for sale can put downward pressure on prices.

  • Personal financial situation: It's important to have a solid financial foundation, including stable income, good credit, and sufficient savings, before buying a home.


Ultimately, the best time to buy a home is when you are personally ready, both financially and emotionally, and when the housing market conditions meet your needs and preferences.


It's important to work with a real estate professional and/or financial advisor to determine the best time for you to buy a home based on your unique circumstances.

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