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investment risk and uncertainty in the real estate housing market


2022 is not off to a great start for mortgage interest rates.  During the week between Christmas and New Year, rates moved to their highest levels in about 9 months.  Then to start the first week of the new year, mortgage interest rates have moved up again.  Generally, 30-year mortgage rates currently range from 3.2% to 3.3% with no points.  In the short term, it is possible that mortgage interest rates may come down some, but the overall expectation for 2022 is for mortgage interest rates to move higher.

How Are Mortgage Rates Determined

Contrary to what many believe, the Federal Reserve and banks do not directly determine mortgage interest rates.  However, the policies of the Federal Reserve can and do impact the market and market perceptions.  The current policies of the Federal Reserve that are impacting rates are two-fold:

  1. The Federal Reserve has begun to reduce the number of mortgage-backed securities that they purchase on a monthly basis. This is seen as bearish for mortgage rates and is primarily the reason mortgage rates moved higher in the 4th quarter of 2021; and
  2. In the event Inflation continues to increase as we move into 2022, the Federal Reserve will be forced to adjust their policy to fight inflation. Historically, inflation has led to higher interest rates across the board.

Mortgages are similar to bonds and there are many types of bonds in the bond market.  Movement in the bond market generally translates to movement in mortgage rates.

Additionally, lenders make additional adjustments to rates based on factors like credit scores, down-payment amounts and other risk factors. Those adjustments rarely change, so day-to-day movement in an individual rate quote is almost always determined solely by bond market movement.

Going Forward

Most analysts expect interest rates to be higher in 2022 than they were in 2021.  Many forecast mortgage rates between 3.5% and 4% although the timing of these increases is unknown.  What is known is that rates bottomed out around 2.625% for a 30-year fixed rate in early 2021 and ended 2021 with 30-year mortgage rates .5% higher at approximately 3.125%.