Why Are Mortgage Rates Rising

This is the question I am repeatedly being asked. It’s because of Iran, right? Well partially, but it is more nuanced than that. Mortgages are a long-term debt that has a lender expecting to be paid back a certain amount of money, with interest over a number of years.

If you were a lender and found that the money you were likely to make at the end was suddenly going to be less, wouldn’t you want to charge more (raise your interest rate)? That is exactly what is happening right now. The conflict in Iran has pushed energy prices sharply higher which has pushed other prices higher as well. Rising prices are called inflation. Inflation means your money isn’t worth the same in the future as it is right now.  

When lenders see that their money being paid back isn’t as valuable, they charge higher rates to compensate. It isn’t a conspiracy; the markets actually do it naturally as the possibility for higher inflation rises. Mortgage rates closely follow US Treasury bond yields, which react quickly to inflation expectations. So, yes…the Iran conflict has caused rates to rise but now you understand why. 

Energy Costs Could Slow Inflation 

Another interesting economic reality to consider is that long-term higher energy costs are actually deflationary. If energy costs remain elevated, that causes consumers to reduce spending and businesses to see their margins compressed. This is constraining the economy, which leads to deflation (lowering of prices). That is good news for future rate drops. 

Markets Focused on Geopolitical News 

This week was relatively quiet with economic news. All the markets remained glued to the news reports about peace plans or escalations. Economic reports continued to take a back seat to the barrage of news updates. Unfortunately, rates did hit the highest level in over 6 months. These are not the record rates we were expecting. Just as quickly as things have gotten worse, they can change for the better if oil price fears begin to wane. 

Looking Ahead: BLS Jobs Report Drives Outlook 

The big report next week will be Friday’s Jobs report from the BLS. This is Good Friday and markets will be closed. Any reaction to the Jobs report will be seen on the following Monday. 

 
Tuesday (3/31): Job Openings and Labor Turnovers (JOLTS), Consumer Confidence, FHFA and Case-Shiller Home Price indices. 

 
Wednesday (4/1): Retail Sales, ISM Manufacturing 

 
Thursday (4/2): Initial and Continuing Jobless Claims 

 
Friday (4/3): BLS Jobs Report for March 

 
Next week is Holy Week in the Christian faith as well as the beginning of Passover for the Jewish faith. We should all pray for peace and lives to be saved.