What Drives Mortgage Rates Up?
by Gilberto Fuentes
A high demand for new housing helps drive up mortgage rates.
Changes in mortgage rates start with the level of prevailing economic growth. Economic conditions in which low interest rates are common increase the amount of consumer spending, borrowing and business investment. The aggregate effect of increased spending is economic growth, which places pressure on the supply of money circulating in the economy. More demand on the money supply eventually places upward pressure on market interest rates as more borrowers compete for limited funds.
Continued economic growth generates inflation and places further upward pressure on market interest rates throughout the economy. Inflation is the upward change in prices, which deteriorates spending power. Once inflationary pressure develops in the economy, mortgage lenders increase their interest rates to make up for the erosion in purchasing power
from of the returns on outstanding loans. Inflation can worsen if mortgage lenders expect inflation every year. As a result, inflation expectations encourage lending institutions to increase lending rates to keep up with the level of inflation.
Federal Funds Rate
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