By Andrew Rosen via Iris.xyz
Whether purchasing your first home, your “forever home,” or even your retirement home, the questions looms: when should I buy? Considering interest rates are on the move, it’s a natural question and one worth addressing. So, let’s dive in shall we?
What’s happening with mortgage rates?
This is a good time to look back on some of my college economics classes. What I remember (after waking up from my class nap) is that The Federal Reserve uses short-term borrowing rates (referred to as the fed funds rate) to influence the economy. Their goal is to balance economic growth, unemployment and inflation. When inflation starts picking up (usually due to a thriving economy), increasing short-term rates helps to manage the economy from overheating. That commitment happens as long as the economy stays strong. Ideally, they are trying to get the formula perfect so people spend money, borrow money, and save money. In the end, these changes in short-term rates by the Federal Reserve begin to trickle through the debt markets into Treasury bonds and mortgage rates.
How (and why) do Treasury rates affect mortgage rates?
The reason Treasury rates have a defining impact on mortgage rates is quite logical when you break it down. Treasury bonds are issued by the US government. Since we are considered the World Bank when we issue bonds (or debt), it is basically considered a “risk free” investment. Therefore, default is not an option. In doing such, these bonds set the rate for what debt (or borrowing) rates should be in the economy. To be clear, when the Treasury rate increases, all bond (or debt like instruments) generally follow suit. Think about it in these terms — why would anyone purchase a bond which pays lower than a risk-free investment such as a Treasury? The simple answer is, they wouldn’t.
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