United States 30-Yr Mortgage Rate
Last year marked one of the lowest mortgage rates of 2.65% in history. So it’s no wonder my parents and other prospective homeowners scrambled to buy houses during this time. But it prompts the question: What does the 30-year mortgage rate indicator tell us? Although the simple answer lies in the economic foundation of supply and demand, let’s contextualize why and how people experienced an all-time low mortgage rate in 2021.
A mortgage is a type of loan to purchase a home or real estate and can be paid back with (ideally) low interest rates for up to 30 years. Although there are different types of mortgages consumers can apply for, such as a 15-year fixed rate or 30-year adjustable-rate mortgage, this economic indicator tracks a 30-year fixed mortgage. It is the most common mortgage loan, and the interest rate does not change throughout the 30 years.
The year 2020 marked the beginning of the pandemic. It also marked the decline of mortgage rates! The question is, why? Consumer spending naturally dropped as people were locking themselves inside and staying home. The drop in mortgage rates during that time can be perceived as a way to encourage consumers to spend. Another big thing: the Federal Reserve lowered the federal funds rate to zero and pumped other liquidity into the economy. If one applied for a 30-year fixed mortgage during this period, it was an incentive to achieve the American dream of becoming a homeowner without worrying about high interest.
Since there was less business during the pandemic (less demand), mortgage lenders lowering interest rates created (in some sense) more supply of financing, as it allowed for more people to buy. However, the United States 30-year mortgage rate economic indicator shows one of the steepest inclines towards the beginning of 2022. How did this happen?
The most significant factor to consider is the pandemic. At the beginning of the pandemic lockdown, people were unable to go out and, in turn, there was less spending and more saving. Then, when things started to ease up, consumers resumed their spending. The problem, though, was a supply-chain shortage. Companies were unable to keep up with consumer demand as many cut down production during the pandemic. With the country’s reliance on imported goods, the distribution process also took longer.
When there is more demand than supply, prices go up. And when prices rise, inflation occurs. With high inflation, the government tries to discourage consumers from spending money to tame inflation. The government can do this by raising federal fund rates, which are used as a mortgage base rate. When interest rates are higher, people are less likely to spend money and, in turn, save until costs are cheaper.
The 30-year mortgage rate indicator, along with a Forbes article, shows how mortgage rates in recent weeks have slightly leveled since late June but have increased almost double since last year. As rates drop, more people are likely to apply for mortgages with a lower monthly payment. Based on comments from the Federal Reserve, it would be safe to presume that rates will not drop anytime soon, but rates may stabilize over time. Another possibility lies in the indicator predicting rising home prices or home starts as rising demand may lead to more home development.
