Today we’re stepping away from our town-by-town analysis and looking at the broader mortgage rate environment.  With the war in Ukraine entering its 12th day everyone is starting to recognize the economic impact that it is going to have throughout the world, including right here in Montgomery and Bucks County.

Real estate agents will tell you that the primary way to know how mortgage rates are going to move is to look at the activity of the 10-year U.S. Treasury note (often just called “the ten year”).  When prices of these particular notes fall, that means the “yield” (a representation of the return you will get over time) goes up.  Since mortgages are, in essence, a note that a homebuyer pays over time – the return to mortgage investors has to have some relationship to the return a U.S. Treasury investor would get during that same time.  Therefore, as bond yields go up…so do mortgage rates.

While this is obviously a very elementary example of a detailed topic, keeping an eye on the 10-year yield will help understand mortgage rates.  Now let’s look at some of the things impacting the yield on the ten year over the last few weeks to help us understand where things may be going.

  • Oil Prices:  Everyone is seeing the “pain at the pump”…including lenders.  The rapid-rise of gas prices in America will be a key determinant of inflation (more on that later) and will influence the Federal Reserve (more on them later) to try to bring rising prices under control.
  • Supply Chain Challenges:  The inability of producers to get goods to market also impacts the housing industry.  Not only are new homes stalled for lack of cabinets, etc but the lack of sellable housing inventory drives prices of homes higher.  See last month’s Q&W post for more about that.
  • Inflation:  Just like oil/gas, prices are rising for many goods that consumers buy every day.  This price-inflation can make the average consumer’s purchasing ability significantly less, which means they will be able to buy fewer things. When companies sell fewer things, they have to lay off workers, which makes purchasing price-inflated-goods even harder. To combat inflation, monetary policy says you have to take money out of the market…which of course means less money available to lend to homebuyers.
  • The Federal Reserve:  Finally, this is where everything comes full circle.  The Federal Reserve Board (aka “The Fed”) are the governors of the country’s main banks.  While again this is a basic analysis, the governors of the The Fed decide how much it will cost to borrow the government’s money.  The lower the rate, the more money gets borrowed (and then lent to consumers).  If you follow the analysis about inflation and “too much money” in the system, the primary tool The Fed has is to make that money more expensive to borrow.  That drives down the cost of a 10-year Treasury (and drives up the yield) which, as we started this post discussing, drives up the mortgage rate.

So what does all of this mean for real estate buyers and sellers in Montgomery and Bucks Counties?  First of all, it means that homes are going to continue to be a great investment.  Since 2017 median home prices in Pennsylvania have increased by 35% (Source: Pennsylvania Association of REALTORS).  But it also means that buyers should be in constant contact with their agent and their mortgage lender.  Quinn & Wilson agents often rely on the skill of Annette Dougherty at Mortgage Network for advice; buyers have found her understanding of the markets top-notch throughout the COVID pandemic and the recent inflationary period.