The calm is often said to come before the storm; but in the case of mortgage rates, it has been the opposite.
For mortgages, the storm came in the form of a spate of interest rate increases -- seven increases in eight weeks from early May to late June, pushing 30-year mortgage rates more than 1 percent higher. Since then, though, mortgage rates have settled into a much calmer pattern, with a series of up-and-down fluctuations that have scarcely changed rates overall.
So what's next for mortgage rates? Do they slide back down and set off a new wave of home-buying and refinancing opportunities, or do they resume their upward trek? Or, perhaps, has the range of 4.0 to 4.5 percent become the new norm?
To ponder these questions, it is helpful to consider three key variables that impact mortgage rates:
- Economic strength. The rise in mortgage rates began with growing optimism about economic growth, since faster growth would increase loan demand. More recently, though, that optimism has faded. The advance estimate of the second quarter's GDP growth rate was a lackluster 1.7 percent, and job creation in July fell well below the average for the prior year. If the optimism about the economy proved to be short-lived, will the rise in mortgage rates that it spurred prove short-lived as well?
- Inflation. Inflation has been unusually quiet in recent years, but began to flare up in June due largely to rising energy prices. Mortgage lenders don't want to earn less interest than the rate of inflation, so if rising prices become a trend, expect mortgage rates to follow suit.
- Federal Reserve policy. When the Fed stops buying mortgage-backed securities, mortgage rates are likely to rise. When this will happen depends largely on the two factors discussed above.
For those of you keeping score, that makes two factors which could push mortgage rates higher, and one which could push them back down. In the meantime, perhaps the main thing that has kept rates relatively stable is uncertainty about how each of these factors will play out in the months ahead. How long 4.0 to 4.5 percent mortgage rates remain the new normal may depend on how long uncertainty remains the order of the day.