Mortgage Rates

Four Components That Are Driving Mortgage Charges


Mortgage rates fell last year when coronavirus infections exploded. Then, as vaccines became widely available, the rates rose.

Now, the spread of the highly contagious Delta variant of COVID-19 is raising a new question for borrowers: Will another wave of coronavirus cases pull mortgage rates down again?

The answer is unclear, in large part because the direction of mortgage rates seldom depends on a single variable. “Mortgage rates are notoriously difficult to predict,” says Odeta Kushi, assistant chief economist at title insurer First American Financial Corp.

The pandemic is just one factor affecting mortgage rates. Other factors include inflation, the pace of economic recovery, and even the chaotic scenes from Afghanistan.

Dick Lepre, senior loan officer at RPM Mortgage in Alamo, Calif., Says these intertwined forces all play a role in the cost of your home loan. “Weak retail sales in July and heightened fear of COVID should ease concerns in the short term that economic growth will drive inflation higher,” he says.

After the coronavirus pandemic rocked the global economy last year, mortgage rates plummeted to an all-time low. Interest rates bottomed out in January when the average rate on a 30-year mortgage fell to just 2.93 percent, according to Bankrate’s national survey of lenders.

When vaccines became generally available in early 2021, rates soared and rose to 3.34 percent by mid-March. Since then, prices have fallen.

Here is a breakdown of four things the mortgage market is watching.

1. The coronavirus has come back strongly

The pandemic caused a deep recession in 2020 and the number of coronavirus cases remains perhaps the most important indicator of the direction of the economy.

“This is primarily a health crisis,” says Kushi. “There was this whole idea that things would be better by fall, but the Delta variant created new health insecurities.”

In June, the seven-day average of new coronavirus cases in the US had dropped to just 11,000 to 12,000 new diagnoses per day, according to the Centers for Disease Control.

Then came the easily transferable Delta variant, and the cases increased. On August 20, the CDC reported that the seven-day average of new cases of COVID-19 had exceeded 137,000, the highest since the bad ole days in early February.

Mortgage rates are closely tied to 10-year government bond yields, and those yields have fallen with the recurrence of COVID-19.

“We called it Delta Dip,” says Kushi. “This is really a factor that keeps 10-year government bond yields low, and therefore mortgage rates low.”

Bottom line: the economy cannot fully recover and mortgage rates cannot return to historical norms until the spread of the coronavirus is under control.

2. Inflation has risen to its highest level in years

If rising coronavirus cases push mortgage rates down, rising inflation will have the opposite effect. Inflation soared that spring and summer, exceeding 5 percent in June and July, according to the Bureau of Labor Statistics.

Increasing costs are evident to consumers when shopping for cars, groceries, homes and other everyday items.

But economists are hotly debating what this round of inflation means. Have prices increased year-over-year just because this year’s prices are compared to those from the depths of the coronavirus recession? Or will inflation stay here?

The answer is important because continued inflation would force the Federal Reserve to raise interest rates. The Fed cut rates to zero last year and promised to keep them there when the economy recovers. While the Fed does not directly control mortgage rates, the Fed’s moves indirectly affect the cost of a home loan.

3. The economy and jobs are recovering

The US economy has come back heavily. According to the US Bureau of Economic Analysis, GDP growth was over 6 percent year-on-year in both the first and second quarters of 2021.

The labor market has also recovered. According to the Bureau of Labor Statistics, the unemployment rate peaked at 14.8 percent in April 2020. However, in July 2021, a month in which the U.S. economy created 943,000 jobs, the rate had dropped to 5.4 percent.

While welcome, these trends are creating upward pressure on mortgage rates. A strong economy and a resilient labor market mean inflationary pressures, and that increases the chances that the Fed will hike rates.

4. The US exit from Afghanistan is chaotic

Mortgage experts are watching the images of desperate Afghans who have dominated news coverage since last week. It is unclear how the end of the American presence in Afghanistan will affect mortgage rates, but it is clear that the markets hate surprises.

The unrest in Afghanistan is a humanitarian crisis that raises concerns about human suffering rather than mortgage rates. But geopolitical events play a role in the rates.

In general, Kushi says, geopolitical upheaval can create uncertainty that drives mortgage rates down. In a recent example, the Brexit vote by British voters in 2016 brought mortgage rates to a rock bottom.

However, it is also worth noting how important these two nations are on the global stage. According to the World Bank, the UK has the fifth largest economy in the world, making it an economic powerhouse. Afghanistan, on the other hand, ranks 112th behind Senegal, El Salvador and Trinidad and Tobago.

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