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Why Are Rates Going Down When They’re Supposed to Be Climbing?

house-with-treeThis is the year when rates were finally going to increase.

So why have mortgage rates stopped rising even though the Fed keeps increasing short-term rates? (Short answer: b/c of tariffs and the Fed)

And – will mortgage rates start to increase again? (Short answer: probably 😊)

These are the questions a lot of people are asking.

Here are the long answers:

WHY DID MORTGAGE RATES STOP GOING UP?

Mortgage rates did go up this year about ½ percent and they are expected to continue to increase. This is b/c the Fed is raising its short-term Fed Funds rate, and b/c the Fed was going to stop buying mortgage backed securities and actually start selling them (from their huge portfolio).

But mortgage rates have leveled off recently and even gone down. Here are a few reasons why:

  • Mr. Trump’s tariffs and potential trade wars are seen as threats to economic growth, and such threats usually move investors from stocks to bonds, and that in turn pushes rates lower.
  • As a reminder: Signs of a weakening economy often push rates down, while good economic news pushes rates up. In addition, economic news in general can often outweigh the effects of increases or decreases in the Fed Funds rate.
  • Another reason rates have remained low is that the Fed is still buying mortgage backed securities (MBS) even though it was supposed to stop. This is b/c the Fed is using the proceeds from the mortgages that pay off to buy more MBS. This artificial demand for mortgages/MBS pushes rates down too.

WILL MORTGAGE RATES CONTINUE TO RISE?

The Fed increased its short-term Fed Funds rate three times last year, twice this year already, and will likely do so twice more this year b/c the economy remains relatively strong.

Numerous increases in short-term rates have usually resulted in eventual increases in longer-term (mortgage) rates in the past, even though the results do not always show up in lockstep manner.

B/c of this and the Fed’s desire to push rates up to fend off inflation, it seems likely that mortgage rates will start to increase again. Another ½ percent increase by yearend is a real possibility.

Jay Voorhees at (925) 855-4491
Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646