Mortgage Rates and Inflation

by Tom Tousignant

in Blog, Home Buying, Mortgage Rates

Inflation and mortgage ratesAll day, every day, conforming and FHA mortgage rates in North Carolina are changing.  Rates move in response to hundreds of factors as mortgage backed bonds are traded on Wall Street.

Among the biggest influences on mortgage rates is the threat of inflation.  When traders expect future inflation, they will sell low yielding mortgage bonds in order to protect their investors.  If inflation is tame, like it is now, mortgage bond prices will rise, and interest rates will fall.

What is inflation, exactly?  Most people think inflation means ‘stuff’ costs more.

By definition, inflation is when a currency loses its value; when what used to cost $1.00 now costs $1.10. inflation really means that a dollar buys less.

As consumers, we recognize inflation by the items we buy on a daily basis becoming more expensive.  However, it’s not that goods are more expensive — it’s that the dollars we’re using to buy them have become worth less.

With mortgage bonds, the holder of that bond will get the principle and interest back with dollars that can’t buy as much anymore.  If an investor expects this, they would want more interest paid to compensate them.

Mortgage rates move opposite of bond prices, as inflation takes hold, mortgage rates rise as the bond prices fall.

Lately, inflation has been exceptionally low. The Federal Reserve acknowledged as much in its last statement to the markets, and available data backs that position.  This, after predictions that inflation would be “runaway” in 2010.

There is not much threat of inflation right now in the economy, so for a while at least, you can expect rates to stay lower, until the traders start to fear inflation in the future – when that happens, rates could shoot higher.

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