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The Real Estate Market Is Still Crazy—When Will Interest Rates Drop?

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Aug. 19 2021, Published 5:26 a.m. ET

As the real estate market continues its unprecedented run, many aspiring homeowners have been left on the sidelines, frustrated. And rightfully so—getting into a home at this moment means capturing interest rates at their all-time lows, and they're a moving target. Emerging economic metrics move the needle up and down. The latest jobs report has sent mortgage interest rates up a bit, but when will they drop again?

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What factors determine mortgage interest rates?

Many factors determine what interest rate a homeowner receives from a mortgage bank, such as the borrower’s creditworthiness. Interest rates are also set by the Federal Reserve.

Rates are determined by the Federal Open Market Committee (FOMC), which consists of seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The committee meets eight times per year to determine the direction of monetary policy, and sets interest rates. These decisions ultimately affect short-term and variable interest rates.

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What are mortgage interest rates right now?

The release of the July employment report on Aug. 6, 2021, from the U.S. Bureau of Labor Statistics disclosed that employment grew by a net 943,000 jobs in Jul. 2021. As they often do when the economy displays signs of health, interest rates rose slightly.

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Mortgage rates felt the pressure from another source. Statements from Federal Reserve members indicate they want the central bank to end quantitative easing, a policy that ensures the free flow of money and keeps rates artificially low. The policy has been in effect since Mar. 2020 in response to the coronavirus pandemic.

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With quantitative easing, the Fed buys billions of dollars each month in government debt, including mortgage-backed securities. As a result, money becomes cheaper, meaning interest rates go down for many kinds of loans, including mortgages. Fed Chair Jerome Powell hasn’t indicated a rush to end quantitative easing before the end of the year. But some notable voices within the Fed have been eager for it to end it sooner than later.

Last week, the interest rate on a 30-year mortgage was up by ten basis points over the previous week’s rates, at 2.91 percent. The interest rate on a 15-year mortgage rose one basis point to 2.2 percent.

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Where are mortgage interest rates going?

Mortgage interest rates likely won’t change that much in Aug. 2021. As the pandemic maintains its hold on the economy, interest rates will probably stay historically low. When the economy slows, investors hedge their investment through safe bonds, including mortgage-backed securities. As a result, mortgage rates fall as investors compete to buy mortgage-backed securities.

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However, as the pandemic evolves, it’s difficult to predict just how the economy will react. Other factors like eviction moratoriums ending, quantitative easing, and further housing shortages could continue to dictate where mortgage interest rates go.

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