Housing News

What Today’s Mortgage Rate Environment Means for Homebuyers

Mortgage rates are influenced by far more than decisions made by the U.S. Federal Reserve.

From U.S. Treasury yields and government borrowing to global investment and inflation, several forces are helping shape today’s mortgage market. Understanding what’s keeping rates where they are can help homebuyers make more informed decisions about when and how to buy.

A combination of rising U.S. government debt, changing demand for U.S. Treasuries, geopolitical events, higher bond yields, and renewed inflation concerns may not seem like they have much to do with the housing market. But they are putting pressure on borrowing costs, according to a new NAF Insights report.

“If you’ve looked at mortgage rates lately and wondered why they aren’t tumbling down, the answer isn’t found at your local bank branch,” wrote New American Funding Principal Analyst Ryan Schoen in the report. “It’s actually sitting across the ocean.”

For homebuyers, those seemingly distant economic forces can eventually show up much closer to home, influencing mortgage rates, monthly payments, home prices, and the types of homes available for sale.

Schoen’s analysis also points to an unusual development that could create an opportunity for some homebuyers: New construction is becoming increasingly competitive with existing homes on price.

Here’s what homebuyers need to know.

Why Treasury yields matter for mortgage rates

One of the most important factors influencing mortgage rates isn’t set directly by the Federal Reserve. It’s what’s going on in the bond market.

The 30-year, fixed mortgage rate tends to move in the same general direction as the 10-year Treasury yield. When Treasury yields rise, mortgage rates generally rise.

Schoen argues that the growing amount of money the federal government needs to borrow is becoming an increasingly important part of that equation.

U.S. gross national debt has climbed to roughly $39.4 trillion, according to the report, while annual net interest costs are approaching $1 trillion.

Financing that debt requires the Treasury to sell government bonds to investors. Strong demand can help keep yields lower, while weaker demand can require higher yields to attract buyers.

Those higher yields can ripple through the economy, including to mortgages.

What global investors have to do with U.S. mortgage rates

The mortgage rate story also stretches far beyond the U.S.

Schoen points to changing monetary policy in Japan as another force affecting the U.S. bond market.

For years, extremely low Japanese interest rates encouraged investors to borrow cheaply in yen and invest elsewhere, including in U.S. assets.

As Japanese interest rates rise, those global investment flows can shift. Schoen argues that reduced foreign demand for U.S. government debt could leave domestic investors absorbing more bonds.

For someone shopping for a home, events in Japan may seem far removed from a monthly mortgage payment.

The connection runs through the bond market: Global demand can influence Treasury yields, which in turn can influence mortgage rates.

Inflation can also influence where mortgage rates go

Inflation is another part of the mortgage-rate equation.

Schoen points to higher oil prices as a potential source of inflation pressure. Rising energy costs can increase transportation, manufacturing, and other business expenses, potentially making inflation more difficult to bring down.

Persistent inflation can also put upward pressure on longer-term interest rates.

For homebuyers, the takeaway isn’t to try to predict oil prices or bond markets. It’s that waiting for mortgage rates to return to the unusually low levels seen during the pandemic may not be the most useful way to plan a home purchase.

Homebuyers can instead focus on the financial factors they have more control over, including comparing mortgage offers, exploring different loan programs, improving their credit profile, and determining a monthly payment that works for their budget.

Today’s housing market may be creating new opportunities

The same forces keeping mortgage rates elevated are also reshaping the housing market.

Many homeowners secured significantly lower mortgage rates during the pandemic and may be reluctant to give them up by selling and financing another home at today’s rates. Schoen describes this as a “golden handcuff” effect.

Fewer existing homeowners putting their properties on the market can limit the number of existing homes available for sale and help support prices.

The median price reached a record $446,400 for a single-family existing home in June, according to National Association of Realtors data.

New construction, however, is moving differently.

New construction may be worth another look

Schoen pointed to what he calls a “historic inversion where new construction is priced below existing inventory.”

For homebuyers who have assumed a newly built home would automatically cost more, the changing market may warrant a second look.

Builders have more flexibility to respond to homebuyer demand. They can adjust home sizes and prices. Depending on the builder and community, they may be able to offer incentives such as mortgage rate buydowns or assistance with closing costs. (A buydown is when the seller, buyer, builder, or lender pays to have the interest rate on the mortgage temporarily, or even, permanently lowered.)

That can make monthly payment comparisons particularly important.

A homebuyer comparing new construction with an existing home should consider the mortgage rate, builder incentives, property taxes, homeowners insurance, HOA fees, maintenance expenses, and other costs alongside the sales price.

The better deal may not always be the home with the lower asking price.