If you plot inflation (not just base inflation) against mortgage rates, you will find that mortgage rates follow inflation up and down.
You also have another predictor.. the ratio of federal bonds sold vs federal bonds bought back.
If more bonds are being sold by governments than they are buying back (or redeeming on maturity) then interest rates will go up as the price of bonds go down.
These two statements are not independent, High inflation is being brought under control by sale of bonds (they take money out of circulation). Inflation is spurred on by redeeming or buying bonds back by government, which puts money into circulation, and particularly into the money-lending part of the economy.
Thus, buying back bonds by the federal government will lower mortgage interest rates.
The ratio of buying to selling of course tells the whole story, other than the cumulative effect of inflation.
US government spending to support a lot of war efforts tends to be inflationary, and the sale of bonds to remove the spending from the economy would have offsetting effects, But inflation tends to make investors more insistent on having higher interest rates. Governments have to pay more interest to get money away from mortgage markets. Mortgage markets then have to pay more interest to get money back.
So, returning to our start, we see that inflation is a primary driver of interest rates.
A stable currency tends to keep interest rates down, while a weak currency will discourage investors from making funds available for bonds or mortgages. This will weigh in on increasing interest rates.
USA has elevated inflation, weak dollar, government selling more bonds than it redeems, so all trend setters are to higher interest rates for mortgages.
The other side, lenders are asking for more money down, so taking less risk. This means those who get mortgages are likely to be paying less risk premium, while sub-prime borrowers can expect to pay heavily for higher risk.What do you predict will happen to mortgage rates in the future?
The future is a long time, so I can factually tell you that mortgage rates will rise and they will fall.
In the very near future they will rise, because risk is being recognized (finally) and capital is drying up.
I can assure you of only one thing. They will go down. And up. Which way first, and over what timeline, who knows? If you can accurately predict that, you can make a fortune in the bond market.
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