February 26, 2024

Ian Aubourg Discusses the Economy’s Impact on Mortgage Rates

Ian Aubourg of East Greenwich is the Regional Director of Movement Mortgage, LLC. In the following article, Ian Aubourg discusses how the economy affects mortgage rate opportunities for home buyers.

While borrowers are offered various mortgage interest rates depending on their financial health, government monetary policy, Federal Reserve decisions, and various economic factors affect the overarching world of mortgage rates. Each element, however, eventually boils down to one thing — the basic rules of supply and demand.

Ian Aubourg says that some of the underlying principles may be complex, but experts note that borrowers should aim to understand them to be in-the-know about future fluctuations and why they are paying the current rate.

Ian Aubourg on Inflation

The gradual, sometimes steep, upward momentum of prices due to inflation reflects the overall economy, and thus, impacts mortgage lenders. If the economy is forging strongly forward and inflation is rising, the borrowing demand increases, adding upward pressure to interest rates. In contrast, periods of low inflation and weak economies trigger lower mortgage rates to entice borrowing.

That said, it doesn’t directly determine mortgage rates. Instead, central banks set their policy rates based on economic conditions, like inflation. When inflation rises, central banks often respond by boosting interest rates to try to limit inflationary pressure and retain price stability. Once that happens, mortgage lenders typically put their rates up, making it more expensive to take out a home loan.

On top of that, higher inflation can lead to hiked borrowing costs for financial institutions. Often, it’s the borrower who ends up funding such costs as banks and lenders pass the responsibility on to their customers as increased mortgage interest rates.

Ian Aubourg of East Greenwich explains that lenders generally aim to ensure their interest rates overcome purchasing power erosion to make certain their interest returns equal a net profit. So, they keep a close on the inflation rate, adjusting their percentages accordingly.

Economic Growth Rate

When economic growth is positive, higher wages and a larger amount of consumer spending fluffs the financial space, urging more people to seek mortgages for home purchase.

Ian Aubourg of East Greenwich notes that unsurprisingly, this is fantastic for a country’s economy. However, it doesn’t bode well for people hoping to snag exceptionally low rates. The upswing in mortgage demand pushes mortgage rates higher since lenders have limited capital to lend.

During economic downturns, the opposite happens. Both wages and employment levels decline, lessening the demand for home loans, decreasing interest rates as a result.

Housing Market Trends

Conditions and trends within the housing market itself can influence mortgage rates, too.

Analysts say when fewer new homes are being built or provided for resale, the dip in home purchasing causes a decline in mortgage demand. As before, this pushes interest rates down.

Ian Aubourg notes that interestingly, economists have noted another, much more recent, factor that creates a downward shift in mortgage rates — the growing number of people choosing to rent over buy residences. This change has had a subtle yet significant impact on the wider world of mortgage interest rates.

Bond Market

Investment firms and banks market MBSs (i.e., mortgage-backed securities) as investment vehicles. To attract buyers, the yields from such securities need to be high enough.

The problem is that MBSs are battling against corporate and government bonds. The money people can earn on the competing products affects the mortgage-backed securities. So, the overall condition of the bond market indirectly impacts how much lenders charge to take out mortgages.

Ian Aubourg of East Greenwich says that more often than not, lenders use the 10-year treasury bond yield to peg their interest rates. Normally, MBS sellers have to offer higher yields since the money to be made isn’t guaranteed.

Federal Reserve Decisions and Policies

Financial professionals note that the Federal Reserve Bank is one of the most critical factors affecting the overall economy and interest rates, mortgage rates included.

Ian Aubourg reports that even though the Federal Reserve doesn’t set to-the-decimal-point interest rates in the mortgage market, its actions in compiling the Fed Funds rate and the upward/downward money supply significantly impact the niche.

Historical data shows that when money supply increases, downward force is applied to the rates, but when money supply decreases, upward force is applied to the rates.

It All Comes Down to Supply and Demand

Ian Aubourg of East Greenwich Every economic factor manipulating mortgage rates comes down to supply and demand, even the Federal Reserve’s decisions and monetary policies. Although, a borrower’s particular interest rate remains dependent on their particular financial health.