Why Mortgage Rates Are on the Rise

Just when it looked like mortgage rates might finally be moving in the right direction, they've reversed course. The average 30-year fixed mortgage rate rose to 6.76% this week, up from 6.71% last week and 6.35% a year ago. That's the third consecutive weekly increase and the highest average mortgage rate we've seen in more than 14 months.

What's particularly interesting is why rates are moving higher, because this isn't simply a story about the Federal Reserve. Mortgage rates are heavily influenced by the bond market, particularly the 10-year U.S. Treasury. That yield has climbed sharply, reaching approximately 4.92% this week, compared with 4.77% just one week ago and 3.97% in late February.

One of the biggest factors behind that increase has been the war with Iran. The conflict has pushed oil prices higher, which has renewed concerns that inflation could accelerate. Higher inflation expectations tend to push bond yields higher, and as Treasury yields rise, mortgage rates generally follow.

There is another issue putting pressure on rates as well: the growing U.S. national debt. Investors are demanding higher yields to hold long-term government debt, adding additional upward pressure to Treasury rates and, ultimately, borrowing costs for consumers.

All of this puts the Federal Reserve in a difficult position. The Fed has been trying to bring inflation under control, but higher energy prices could make that job harder. Fed Chair Kevin Warsh recently indicated that inflation hasn't improved enough and that the central bank may still have more work to do. Financial markets are now pricing in a significant possibility that the Fed could raise its benchmark interest rate at its upcoming meeting.

It's important to remember that the Federal Reserve doesn't directly set mortgage rates. Mortgage rates can move before the Fed does because bond investors are constantly adjusting their expectations about inflation, economic growth and future Fed policy. That's essentially what we're seeing now.

For homeowners and buyers, the practical effect is straightforward. Higher rates increase the cost of financing and reduce purchasing power. They also affect homeowners considering refinancing, tapping equity or taking out a second mortgage. The average 15-year fixed mortgage rate, for example, has also moved higher, reaching 6.09%.

The bigger takeaway is that mortgage rates don't move in isolation. A geopolitical event thousands of miles away can push oil prices higher, which can increase inflation expectations, move Treasury yields and ultimately change the interest rate on a mortgage here in Los Angeles.

That's why I'm watching inflation, oil prices, Treasury yields and the Federal Reserve just as closely as I'm watching mortgage rates themselves. Those are the pieces that will help determine where borrowing costs go from here.

If you're considering buying, refinancing or accessing equity in a property, I'm always happy to look at the numbers and talk through what the current rate environment means for you.