Last week we were coaxing a borrower to lock several loans before rates climbed further, and he said: “I want to wait because I think they will realize that they pushed rates too high and then bring rates back down”. This borrower is a smart man who owns a large and very successful company, but he is in the dark when it comes to interest rates.
We tried to explain to the borrower that there is no “they”; there is no person or government body that simply sets mortgage rates, but our borrower would not believe it.
The Federal Reserve influences interest rate policy with its various tools (buying/selling bonds, Fed Funds Rate, etc.) but it cannot simply set mortgage rates.
External factors like inflation and the global economy influence mortgage rates. When the economy heats up, investors and capital are attracted to other investments. So interest necessarily has to go up in order to attract these investors back to mortgage securities (over alternative investments).
Likewise, if higher inflation appears likely, investors will demand higher yields (rates) to ensure that their investment-returns exceed the rate of inflation. Otherwise, they will take their investment dollars and buy inflation hedges (commodities, hard assets, bonds that adjust with inflation, etc.).
Rates have jumped 3/8 of a per cent in recent weeks, and as long as the economy continues to show signs of strength they will likely remain higher irrespective of what the Fed says or does.
Founder/Broker | JVM Lending
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