Currently the 30 year mortgage rate sits at 6.89%. Buyers want to see a lower rate and so do sellers. What positive actions in the economy will bring about a reductions in the 30 year mortgage rate to a rate below 6%?
Here are 6 factors that need to come together to make such a rate possible.
1. Federal Rate cuts: Although the Fed does not directly set mortgage rates, it does influence them through the federal fund rate. Lower fed fund rates reduce borrowing costs for banks, leading to lower mortgage rates.
2. Declining inflation: Inflation is a major driver of interest rates. Lower inflations expectations reduce the risk premium in mortgage rates.
3. Weaker economic growth: A slowing economy without full-blown inflation can push rates lower. With slower growth moderate and consumer spending the Fed may feel comfortable easing monetary policy.
4. Increased demand for mortgage-backed securities: If investors, including foreign buyers, seek the safety of U.S. bonds and MBS, yields will drop leading to lower mortgage rates.
5. Reduced government debt: This is the real challenge. High government borrowing leads to higher yields on bonds, pushing up the mortgage rates. If government reduces deficits and borrowing, bond yields could decline.
6. A softer labor market without a crash: A strong labor market keeps inflation high, but a modest cooling in job growth and wage increases can ease inflation pressure. This would allow the Fed to cut rates sooner.
Bottom Line:
Keep a sharp eye on the economy and the factors listed above as you contemplate purchasing a home, especially if you are looking for a lower mortgage rate.
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