Inflation Drives Mortgage Rates

First time home buyers are finding homes more affordable than ever before.  Values are better, but these 5% interest rates really extend home affordability.

Home prices tend to rise gradually with any increases realized over the course of months or years on an even pace.  Rates for first time home buyers change in the blink of an eye.

If home prices jump 5%, the impact on housing payments would be half as much as if rates went from 5% to 6%.

If you’re trying to gauge whether mortgage rates will be rising or falling, watch for news on inflation.  Loan rates are very responsive to inflation and with good cause.

By definition, inflation is when a currency loses its value.  Say something used to cost $1.00, but now costs $1.10.  That’s inflation.  It’s perceived that goods are more expensive.  They’re not.  It’s just that the dollar used to buy the goods is worth less.

This is a big deal to mortgage rates because mortgage bonds are denominated, bought, and sold in U.S. dollars.  As the dollar loses value to inflation, therefore, so does the value of every mortgage bond in existence. When bonds lose their value, investors don’t want them and bond prices fall.  Mortgage rates move opposite of bond prices.

Prices down, rates up.

In today’s market, the relationship between inflation and mortgage rates is helping home buyers. The Cost of Living made its smallest annual gain in 6 years last month and the Fed has repeatedly said that inflation will stay low for some time. The combination is driving investors to buy mortgage bonds which, in turn, is suppresses rates.

So long as it lasts, the cost of homeownership will remain relatively low.  Low rates and soft values, combined with the expiring tax credit, means that the timing to buy a first home may never be better than right now.