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Understanding Mortgage Rate Fluctuations: Insights from a Top Economist

 5-MINUTE READ  February 26, 2024

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Wondering why the mortgage rates are fluctuating? Zillow's chief economist sheds light on the real reasons behind it and offers insights into what to expect in 2024.


Recent Economic Trends:

In the past year, the economic scene has seen some changes. Inflation dropped from nearly 9% to about 3%, and we've observed a cooling in the job market. Rent and home prices have stabilized, and wage growth has slowed down. All these signs point to the U.S. economy cooling off.


Isn't the Fed Involved?

Mortgage rates don’t depend on the Fed. They depend on inflation, expectations of future inflation, and economic growth. The Fed's actions can impact short-term rates, but long-term rates, like mortgage rates, don't always respond the same way.


So who was to blame when rates were going up?

When rates go up, it's usually a result of a strong economy. People are buying, businesses are hiring, and this robust economic activity causes inflation to rise. It’s a strong and resilient economy that boosted inflation to a 40-year high. In response, the Fed may raise interest rates to cool things down, leading to higher interest rates across the board. So a strong economy is essentially at fault.


If we anticipate the economy and inflation to cool down from this point onward due to the Fed cutting rates, will mortgage rates fall?

As Zillow's chief economist said earlier, mortgage rates don’t necessarily respond one-to-one with the Fed policy rate. So a decrease in the Fed policy rate may not cause mortgage rates to decrease that much further. Mortgage rates don't always drop in sync with the Fed policy rate. It would take a significant economic downturn for rates to fall significantly. These big drops in mortgage rates are rare.


If we don’t think rates will fall much further this year, what about actual home prices?

New construction is thriving, especially for single-family homes. As these homes hit the market, it should ease the pressure on prices. If the cost of financing new projects decreases, more construction might happen, putting further downward pressure on prices. While prices are expected to keep rising, the pace will likely be slower than in recent years.


Let's say I have enough money to buy a house, and I think mortgage rates might go down slowly, even if not by a lot this year.

Would it be advisable to opt for an adjustable-rate mortgage in this situation?


I'd suggest not taking the risk. If you can afford to buy a home now, it's better to do so. Your home's value is likely to increase, and you'll build equity.


However, if mortgage rates decrease, it might be due to economic struggles. If you keep your job, you can consider refinancing, as many did during the pandemic.


So, Advice for those thinking about buying a home is to minimize the risk of potential higher mortgage rates by buying now if you can afford it.


To sum it up, Zillow's chief economist explains why mortgage rates go up and down, pointing out recent economic changes. The article highlights that the Federal Reserve's actions don't always directly influence long-term mortgage rates. If the economy slows down, it might not lead to a big drop in mortgage rates. New construction could help stabilize home prices, but for those thinking of buying a home, the suggestion is to reduce risks by buying now if you can afford it, rather than relying on uncertain adjustable-rate mortgages.

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