Tag: federal reserve (Page 1 of 3)

The Disconnect Between Mortgage Rates and the Federal Funds Rate

October 18, 2024 / Tom Bonetto

I’m asked regularly about mortgage rates – and how they behave relative to the Federal Reserve and their Federal Funds rate.

While it might seem intuitive that changes in the federal funds rate should directly affect mortgage rates, the relationship between the two is more complex.

Mortgage rates do not move in lockstep with the federal funds rate due to multiple factors, including the role of longer-term bonds, overall market dynamics, and investor sentiment.

Let’s take a closer look…

The Role of the Federal Funds Rate

The federal funds rate is the interest rate at which banks lend reserves to each other overnight. It is set by the Federal Reserve as a tool to control monetary policy, with the goal of managing inflation and stimulating economic growth.

When the Federal Reserve raises or lowers this rate, it directly affects the short-term borrowing costs for banks, which can influence consumer rates for products like credit cards and auto loans.

However, it is much more indirect when it comes to mortgage rates, which are typically tied to other longer-term financial instruments. The federal funds rate is a short-term rate, while mortgages often span 15 to 30 years, leading to differing influences on these financial products.

Influence of Longer-Term Bonds on Mortgage Rates Mortgage rates are more directly influenced by the yields on long-term bonds, particularly the 10-year U.S. Treasury bond.

Investors use the yield on these bonds as a benchmark for determining mortgage rates, as they represent a relatively safe long-term investment. When the yield on 10-year Treasury bonds rises, mortgage rates often follow suit, and when it falls, mortgage rates tend to decrease.

This connection is much stronger than the relationship between mortgage rates and the federal funds rate because both mortgages and Treasury bonds are long-term financial commitments that reflect broader economic expectations over time.

Market Forces and Supply-Demand Dynamics

The supply and demand for mortgage-backed securities (MBS) also play a significant role in determining mortgage rates.

Banks and mortgage lenders often bundle mortgages into securities and sell them to investors, and the demand for these securities can influence the rates that lenders offer to consumers. When demand for MBS is high, lenders can offer lower mortgage rates, as they can sell the bundled mortgages more easily at favorable terms.

On the other hand, when demand for these securities fades, lenders must increase mortgage rates to make them more attractive to investors. This dynamic operates independently of changes in the federal funds rate, as it is more tied to market sentiment and investor appetite for longer-term fixed-income investments.

Impact of Inflation Expectations

Inflation expectations are another key factor that drives mortgage rates, often with minimal direct influence from the federal funds rate.

roll of american dollar banknotes tightened with band

Mortgage lenders are keenly aware of inflation risks over the life of a loan, which can erode the real value of the fixed interest payments they receive. If inflation is expected to rise, lenders will demand higher mortgage rates to compensate for the anticipated decrease in purchasing power.

Alternatively, when inflation expectations are low, mortgage rates usually drop – or stay hover at a lower rate. The federal funds rate does influence inflation to some extent, but the relationship is not always immediate or proportional, resulting in instances where mortgage rates may not track movements in the federal funds rate.

Global Economic Factors and Risk Aversion

Mortgage rates are also influenced by global economic conditions and risk aversion among investors.

For example, during periods of global economic uncertainty, investors often flock to safe-haven assets like U.S. Treasury bonds, driving their yields down and potentially lowering mortgage rates in turn. This dynamic was particularly evident during the 2008 financial crisis and the COVID-19 pandemic, where mortgage rates fell despite significant volatility in the federal funds rate.

This illustrates that external economic factors and the global appetite for safe investments can decouple mortgage rates from domestic monetary policy changes, creating a gap between mortgage rates and the federal funds rate.

The Role of Mortgage Lender Pricing Strategies

Individual mortgage lenders also play a role in determining rates through their own pricing strategies, which can introduce further variations. Lenders adjust their rates based on competition, risk assessments, and internal profit targets.

These adjustments mean that even if the broader market conditions suggest a decrease or increase in rates, lenders may not always follow suit immediately.

For example, during times of economic stress or uncertainty, lenders may keep rates higher to offset increased risks of defaults. This autonomy in pricing further weakens the direct relationship between the federal funds rate and mortgage rates.

The Delayed Response of Mortgage Rates to Rate Changes

Even when changes in the federal funds rate indirectly influence mortgage rates, the response is often delayed.

When the Federal Reserve adjusts the federal funds rate, it can take months for the effects to filter through the economy and reach the mortgage market. This lag occurs because it takes time for banks to adjust their lending practices, for market expectations to shift, and for the impacts on inflation and economic growth to become clearer.

During this time, other factors, such as changes in the housing market, shifts in investor sentiment, or unexpected economic data, can alter the trajectory of mortgage rates independently of the federal funds rate.

In Conclusion

While the federal funds rate plays an important part in shaping broader economic conditions, it does not directly dictate mortgage rates due to the factors mentioned previously.

Mortgage rates respond more directly to the yields on longer-term bonds like the 10-year Treasury and are subject to a range of market forces that the federal funds rate cannot control.

If you’d like to find out more, or have a detailed conversation about mortgage rates and where they might be headed, don’t hesitate to reach out to me, as it would be my pleasure to help in any way I can!

The blog postings on this site represent the positions, strategies or opinions of the author and do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deductions.

The Fed Has Finally Cut Its Federal Funds Rate. Now What?

September 18, 2024 / Tom Bonetto

fed building facade against stairs in city

Federal Reserve officials and most investors have long expected that borrowing costs would be reduced in 2024, at some point.

As of today, the Fed finally cut its federal funds rate (the inter-bank lending rate) by 50 basis points.

Why So Long?

At the end of last year, many were hopeful that the Fed would begin cutting rates early in 2024, easing pressure not just for consumers, but also for businesses. A spring rate cut seemed to be in the cards around the turn of the year and most prognosticators estimated the first cut would arrive sometime before the summer.

But for the first 8 ½ months, those rate cuts never materialized. Inflation was much, MUCH more stubborn than they anticipated and stayed above their target. The Fed was very cautious and wanted to see the numbers come down over the course of this year.

Interestingly, inflation has still remained over their 2% target…but unemployment has grown and is now over 4%.

However, all of that changed today, as the Federal Reserve cut their inter-bank lending rate by 50 basis points.

What Does That Mean for Mortgage Rates?

scrabble letters spelling fed on a green mat

Interestingly, the Federal Funds rate does not directly control mortgage rates. And mortgage rates remained unchanged after the announcement.

Mortgage rates are far more influenced by the bond market…the 10-year Treasury to be exact. You can find the specifics here…

Over the last two decades, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25%, and by as little as 0.50%.

A far better way to track mortgage interest rates is by looking at the yield on the 10-year Treasury bond. The 30-year fixed mortgage rate and 10-year treasury yield move together because investors who want a steady and safe return compare interest rates of all fixed-income products.

U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages.

How? When Treasury yields rise, so do mortgage interest rates.

That’s because investors who want a steady and safe return compare interest rates of all fixed-income products…and investors move to these type of products to fulfill their needs.

Today’s Actions

We have seen a very nice move in the reduction of mortgage rates over the last 100 days, as the bond market has seen inflation slow a bit and unemployment rise. The bond and mortgage backed securities markets have been ahead of the curve on rates.

Rates have moved nearly .75% to the good for would-be buyers or refinancers.

I do believe we will continue to see rates move lower, but at an inconsistent pace. There will be bumps in the road…so locking in now might be a good idea.

Housing Pricing Pressure Ahead?

As rates move lower, more buyers will become eligible to purchase. In fact, the National Association of Realtors states that for every 1% decline in mortgage rates, 5 million more people can be eligible to buy.

Even if a small fraction of these eligible buyers decides to move forward, it will likely pressure prices higher and shrink the number of available home choices even further. More on that here…

The Bottom Line

Home price appreciation remains strong and inventory is slightly increasing. The fact that mortgage rates are coming down will only add to an increase in housing prices, as that’s basic supply and demand.

Home values continue to set new all-time highs, and housing still proves to be one of the best investments out there.

If you’ve been thinking about purchasing, now is a good time to do it! Reach out to me so we can strategize about your next purchase or refinance.

Federal Reserve “Getting Closer” to Rate Cuts

July 29, 2024 / Tom Bonetto

After years of higher rates by the Federal Reserve, it looks like thing might be changing.

Thanks to friendly inflation readings throughout the second quarter, more Fed members are signaling they are “getting closer” to cutting interest rates.

Remember, the Federal Reserve does not control mortgage rates (you can find out more about that here), but their actions and comments do impact the mortgage market.

It looks like the first cut might happen at their meeting on September 18. Inflation and labor market data between now and then will play a pivotal role in this decision.

Nick Timaros, the Wall Street Journal’s go-to writer for all things Federal Reserve, recently penned an article title “A Fed Rate Cut Is Finally Within View” (subscription required).

Three Reasons

Timaros thinks that a September cut is likely given these three factors:

Inflation over the last quarter has shown progress and has given the Fed the confidence they need that inflation is going to get to their 2% target
The labor market is starting to cool, with the unemployment rate rising each of the last three months and now at a level of 4.1%
Fed Chairman Jerome Powell is concerned about waiting too long to cut rates and cause unnecessary economic weakness and a potential recession

What This Might Mean

A rate reduction this fall would be the first since the pandemic and could be a potential boost to the economy. Fed rate cuts, over time, typically lower borrowing costs for such things as mortgages, auto loans and credit cards.

It really depends on how the economy performs in the next few months. That factor will likely determine how quickly the Federal Reserve will act.

If economic growth remains solid and employers keep hiring, the Fed would most likely take its time and cut rates slowly as inflation continues to decline.

Mortgage Rates

For mortgage rate shoppers, one of the key messages for which to listen is the one the Fed talks about on inflation. Inflation is the enemy of mortgage bonds and, in general, when inflation pressures are growing, mortgage rates are rising.

Fortunately, this trend seems to be abating, but at a slow rate. We’ve also seen the 10-year Treasury Bond yield move lower, and that is actually a better measure of mortgage rates.

The 30-year fixed mortgage rate and 10-year treasury yield move together because investors who want a steady and safe return compare interest rates of all fixed-income products.

In Conclusion

We will be hearing more comments from the Federal Reserve and Chairman Powell over the next few weeks. Nothing is set in stone, but it does appear that rates might be coming down this fall.

Don’t Wait For Lower Rates to Buy

July 16, 2024 / Tom Bonetto

Don’t wait for mortgage rates to drop before making that home purchase.

So, should you wait for rates to decline before making your home purchase? The answer might surprise you.

There’s a good chance rates may be dropping in the not-too-distant future based on a slowing economy, moderating inflation and a weakening job picture.

Even if a small fraction of these eligible buyers decides to move forward, it will likely pressure prices higher and shrink the number of available home choices even further.

It’s also likely the Fed will be forced to start cutting rates in the near future.

The advantage of buying ahead of a drop in rates is that you can capture the substantial benefit of appreciation, then refinance to a lower rate once they come down. However, this does come with a cost.

The added temporary interest expense along with the cost to refinance must be considered. When you weigh it against the much greater benefit of appreciation, the choice may become clear to marry the home today, while dating the rate in the interim. More on that here…

I have the tools to allow you to evaluate what the forecasted appreciation is on the home you’re looking to purchase and weigh it against the temporary interest expense to see if it makes sense for you.

Don’t hesitate to reach out…as it would be my pleasure to help!

The Lending Coach 2024 Mortgage and Real Estate Forecast

January 11, 2024 / Tom Bonetto

My 2024 real estate and mortgage rate forecast centers specifically around supply and demand…of both real estate and mortgage backed securities. As we know, all prices are determined by supply and demand.

Right now, housing supply is relatively low, and demand is growing – and that means home price appreciation.

On the mortgage side, will interest rates finally come back?

Well, inflation is the biggest driver of interest rates…and that seems to be finally coming down to manageable levels – and this should lead to lower rates moving forward!

Let’s take a look at the factors that will impact mortgage rates and real estate in 2024…

Inflation

The single biggest driver of bond yields AND mortgage rates is inflation.

Mortgage rates are essentially driven by inflation, which erodes the buying power of the fixed return that a mortgage holder receives. When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of that buying power.

When the Fed hikes rates, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will decline.

History proves this during rate hike cycles for the past 50 years, per the slide below. Unfortunately, this isn’t an overnight fix.

Essentially, the Federal Reserve bungled their management of inflation in 2020 and 2021 and were forced to make severe changes to offset the damage. This brings market instability and increased mortgage rates.

Fortunately, inflation does seem to be coming down (and that’s primarily why rates are better today than they were in October of 2023. And the news on the horizon looks promising.

It looks like core inflation might be in the 2% range by the middle of this year, which bodes very well for lower mortgage rates:

The trend in inflation is working in the borrower’s favor, and it means the Fed’s going to have to look at cutting the Federal Funds rate in 2024.

You can find out more on inflation, The Federal Reserve, and mortgage rates here…

The Fed and Rate Cuts

The Fed said they’re going to start cutting before we get to 2% core inflation. I think there’s a good probability March 20th, we’ll get the first Fed rate cut, and certainly by May 1st.

Now, what does the market say on this?

Well, there’s odds-makers. Just like if you were to go take a look on DraftKings and see what the odds are on a football game, well, there’s odds-makers on what the Fed will do as well.

As you can see above, the chances are pretty much assured that by May we’ll get that first rate cut.

In fact, there’s pretty good odds that we’ll have multiple rate cuts by May and June.

Per the chart above, there’s a 56% chance of at least 50 basis points cumulatively and by June there’s a 53% chance, better than 50-50, that you will have three 25 basis point cuts by June 12th.

Now something that’s also very important to watch is the Fed’s balance sheet. The supply of mortgage-backed securities has been hurting rates through most of 2023 because the Fed reducing its balance sheet.

They had their balance sheet go up during the great financial crisis and it got up much higher during the COVID crisis to a point of $8.5 trillion. That was just too much buying on behalf of the Fed.

The chart above shows their outright holdings of treasuries and mortgage-backed securities and they’ve offloaded $1.4 trillion over the last 18 months or so. That’s been a big driver in mortgage rates…and rates started to rise because the market had to absorb all of these securities.

But recently interest rates have improved and that is because the expectation for lower rates is causing banks to be aggressively buying treasuries and locking the higher rates in anticipation that rates go lower.

So, let’s take a look at what the Fed might be comfortable with on their balance sheet. That will be critical, because the Fed is going to slow down or eventually stop that runoff and stop that added supply of treasuries and mortgage-backed securities on the market.

As we go through each month, you can see that as we get into March, right before the March 20th meeting from the Fed, it will most likely be below 25%. I believe that’s too high of a number for the Fed to be comfortable and they’d like it to be lower.

When you start to see what happens the second half of the year, you get to a level that the Fed is much more comfortable with and I believe that the Fed will stop their quantitative tightening and reverse course.

The Fed’s balance sheet will be a critical component because less supply on the market means that interest rates should improve because the buyers will be bidding on fewer amount of paper or supply that’s available.

Mortgage Rate Forecast

So what’s the mortgage rate forecast for 2024?

Well, for 2024, I see 30-year fixed rate mortgages in the mid-fives (later in the year) to high-six range (early in the year). Under 6% rate on mortgages should unlock move of buyers and create more activity.

The 10-year Treasury will fluctuate between 3% and 4.4%, as we are starting the year a little above 4%. I believe that the overall trend, while it might move up and down a little bit, will be to gravitate towards 3%, which is good news for mortgage rates.

And maybe we get a more normal return to the spreads between Treasuries and mortgage rates, which is around 2%, not 3%. So that should help mortgage rates reduce as well.

Real Estate Forecast

Let’s turn our attention to real estate.

The forecast for real estate centers again on supply and demand, and the supply is tight. Look at inventory over the last 10 years, how it continues to decline while our population goes up:

Demand is continuing to be very, very strong. The blue lines represent households being formed.

As you can see, there are far more households being formed than builders putting up homes. This is why the real estate market’s been so strong of late and why you we seeing prices increase due to a lack of inventory. It’s going to be a similar story for 2024.

We won’t see much more inventory, although we will see more activity. But, we don’t see the amount of supply coming to market in order to meet that demand. So that’s why prices should stay firm.

I’m forecasting between 4.5% and 5% home appreciation nationwide.

But, perhaps even a greater importance while we have a very solid real estate valuation market, is that overall real estate transactions should rise by 15% to 20% in 2024. Good news for the economy in general, for sure.

In Conclusion

It’s looking like 2024 should be a much better year for real estate! Do reach out to me to discuss how you might be able to move forward in 2024 to take advantage of this changing market!

Tag: federal reserve (Page 1 of 3)

The Disconnect Between Mortgage Rates and the Federal Funds Rate

The Role of the Federal Funds Rate

Market Forces and Supply-Demand Dynamics

Impact of Inflation Expectations

Global Economic Factors and Risk Aversion

The Role of Mortgage Lender Pricing Strategies

The Delayed Response of Mortgage Rates to Rate Changes

In Conclusion

The Fed Has Finally Cut Its Federal Funds Rate. Now What?

Why So Long?

What Does That Mean for Mortgage Rates?

Today’s Actions

Housing Pricing Pressure Ahead?

The Bottom Line

Federal Reserve “Getting Closer” to Rate Cuts

Three Reasons

What This Might Mean

Mortgage Rates

In Conclusion

Don’t Wait For Lower Rates to Buy

The Lending Coach 2024 Mortgage and Real Estate Forecast

Inflation

The Fed and Rate Cuts

Mortgage Rate Forecast

Real Estate Forecast

In Conclusion

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