If you’ve seen any of my videos about the Frisco real estate market over the past several months, you’ll know that I’ve often said inflation is the enemy of mortgage rates.

Recently, as they’ve done repeatedly over the past 18 months, the Federal Reserve raised interest rates, but how does that decision impact mortgage rates and your plans to buy a home?

Although inflation has cooled over the past 12 months, the most recent data shows it’s still above the Fed’s target of 2%.

While many hoped the Fed would stop their rate hikes, if they stop too soon there is a risk inflation could start climbing again. With that in mind, the Fed did raise rates by another 0.25% at their last policy meeting in July 2023. As Jerome Powell. Chairman of the Fed, said;

We remain committed to bringing inflation back to our 2 percent goal and to keeping longer-term inflation expectations well anchored.

Greg McBride, Senior VP, and Cheif Financial Analyst at Bankrate, explains how high inflation and a strong economy play into the Fed’s recent decision;

Inflation remains stubbornly high. The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation. So, Fed has to pump the brakes a bit more.

While the Federal Funds Rate doesn’t directly impact mortgage rates, it does influence them as explained in a recent article from Fortune;

The federal funds rate is an interest rate that banks charge other banks when they lend one another money…When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy. When it’s too low, they’ll lower rates to stimulate the economy and get things moving again.

How Does This Affect You

In its simplest form, when inflation is high, mortgage rates are also high. If the Fed succeeds in bringing inflation down, it should ultimately lead to lower mortgage rates and increased home affordability.

This graph helps illustrate how mortgage rates typically follow the path of inflation;

Given the trend of inflation (the blue line) over the past year, it is reasonable to expect mortgage rates (the green line) will follow suit and start trending down soon. Greg McBride has this to say about the future of mortgage rates;

With the backdrop of easing inflation pressures, we should see more consistent declines in mortgage rates as the year progresses, particularly if the economy and labor market slow noticeably.

Bottom Line

What happens to mortgage rates depends on what happens with inflation. As inflation cools, mortgage rates should come down as well.

While mortgage rates are expected to come down, and mortgages can always be refinanced at a later date, the latest data is showing us home prices here in Frisco are not expected to fall in the coming months.

Want to know if now is a good time to consider locking in home prices before they increase? Schedule a Call and let’s discuss what options are available to you.

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