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Interest Rates Heading Lower?

In the last 60 days interest rates jumped approximately 1/2% from about 6.25% to 6.75%.  This was quite a dramatic jump for such a small timeframe but has been seen before.  We saw a nearly identical spike in rates in 2006 at almost the exact same time.

People often ask me what brings about changes in the interest rates.  While I’m not an economist, I can give you a pretty good overview of the factors that affect the mortgage market:

  1. Inflation fears
    • If the market believes that inflation is moving higher, interest rates typically do too.
  2. Federal Reserve
    • It might surprise you, but the Federal Reserve Bank doesn’t have nearly as much influence as it once did.
    • The “Fed” adjusted rates more than 2% but we saw very little movement in the mortgage market for over a year.
    • The rates that the Fed adjusts are the overnight lending rates between banks, not the long term rates that mortgages are based upon.
    • Where the Fed’s influence really comes into play is in their commentary on inflation, deflation, market expansion and contraction.  Eventually their interest rate hikes do affect the mortgage market but their commentary has its effect almost instantaneously.
  3. Stock Market
    • When the stock market climbs, money that was in bonds moves to stocks, decreasing bond demand and increasing the interest rate on those bonds
  4. Foreign Markets & Countries
    • Today much of our debt is held outside the US by both foreign investors aswell as foreign countries, these investors will buy & sell bonds based off of not only our market, but their market as well.
    • Foreign countries have been using the US bond market to help balance out their own country’s stability.
  5. Seasonal fluctuations
    • Demand for bonds typically are higher in the first half of the year and slower in the 2nd half of the year. 
  6. The best benchmark for the mortgage rates is the 10-year treasury bill
    • The “10-Year T-Bill” runs nearly identical to the mortgage rates because most banks base their 30-year fixed rate loans off of it.

So are mortgage rates poised to fall?  If you look at the chart below showing the last two years activity, it certainly appears like history may repeat itself and rates will fall the 2nd half of the year.  Only time will tell for sure!  (click graphic for full-size version)

10 Year T-Bill 7-1-07

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This website is a service of Aaron Dickinson of Edina Realty, a broker Participant of the Regional Multiple Listing Service of Minnesota, Inc.