Special Report

11 Reasons Mortgage Interest Rates Could Increase

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1. Fed policy

The Fed is arguably the most powerful economic institution in the world, as its decisions direct the course of the world’s largest economy. One of these critical decisions is where to set the federal funds rate, commonly referred to as the Fed’s benchmark interest rate. Average fixed mortgage interest rates track closely with longer-term Treasury yields. The fixed rate is almost always slightly higher, because mortgage-backed securities are relatively risky. Adjustable-rate mortgages (ARMS), by contrast, rise and fall with short-term rates.

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2. Recovery is speeding up

Mortgage debt as a percentage of Fed assets skyrocketed after the recession. The Fed now holds over $4.4 trillion in debt instruments, up from around $800 billion before the recession. Of that, $2.5 trillion is Treasury debt and almost $1.8 trillion is in mortgage-backed securities. The Federal Reserve is already indicating it will start gradually shrinking its balance sheet by selling these assets, a move of confidence perceived as another form of tightening that will lead to rate hikes.

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3. Unemployment drops

The unemployment rate and other labor market indicators are some of the many economic measures evaluated by rate setters. They are known as lagging indicators, which means companies adjust their hiring and firing behavior after trends of economic strength or weakness are established. Similarly, rising mortgage interest rates send the message that the economy is thriving. Currently, unemployment is very low, at 4.4% as of this May.

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4. Consumer confidence rises

You cannot have weak consumer confidence and a growing number of home purchases for very long. Economists and rate setters use the Consumer Confidence Index to approximate the degree of optimism among American consumers. The index is based on spending and savings levels across the nation. At the moment, consumer confidence is not exactly at an all time high, but is still considered strong. Since the recession consumer confidence has trended upwards, albeit with some erratic dips.