Tag: mortgage rates (Page 1 of 2)

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.

Missed Opportunities by Trying to Time the Market | Don’t Wait!

August 5, 2024 / Tom Bonetto

Those who have been waiting for mortgage rates to come down have missed a huge financial opportunity.

Home prices rose 6% in 2022, 6% in 2023 and 4% so far year-to-date in 2024.

person holding white ipad on brown wooden table

That means over the last 30 months home prices have risen on average 17% compounded.

Using a median home price of $350K 30 months ago – if you waited for rates to improve, you would have missed a $60,000 wealth creation opportunity.

But don’t let those statistics discourage you. Now’s a very good time to purchase, as appreciation gains look likely for the near future!

What the Experts Are Saying

Case-Shiller’s lead analyst, Brian Luke said “while annual gains have decelerated recently, this may have more to do with 2023 than 2024, as recent performance remains encouraging. Our home price index has appreciated 4.1% year-to-date, the fasted start in 2 years”

He goes on to talk about the cost of waiting, saying “the waiting game for the possibility of favorable changes in lending rates continues to be costly for potential buyers as home prices march forward.”

Mortgage Rates

Mortgage rates are near 12-month lows – as inflation seems to be coming down and the unemployment rate has moved higher.

Both of these are potential recession indicators, meaning that the Federal Reserve may cut the Federal Funds rate shortly. You can find out more here…

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, despite higher mortgage rates and slightly increasing inventory.

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!

Do reach out to me and we can strategize about your next purchase or refinance!

Federal Reserve “Getting Closer” to Rate Cuts

July 29, 2024 / Tom Bonetto

scrabble letters spelling fed on a green mat

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!

Why Mortgage Rates Are Staying Stubbornly High…and What Does The Future Hold?

April 22, 2024 / Tom Bonetto

Mortgage interest rates are staying higher than initially anticipated, due to the staying power of inflation today.

Inflation is a terrible thing for prosperous, economic growth…and it significantly impacts mortgage rates for the worst.

Today, we are seeing the impact of stubbornly sticky inflation in the mortgage marketplace – and relief doesn’t appear to be coming in the near term.

The most recent inflation data showed prices rising by 3.5% year-over-year in March, which exceeds the Federal Reserve’s 2% target.

Why Does This Happen?

Rising inflation shrinks buying power as prices of goods and services increase. Higher prices can then influence the Federal Reserve’s interest rate policy, affecting the cost of borrowing for lending products like mortgages.

inflation erodes the purchasing power of money over time. As the cost of living rises, the value of each dollar decreases, leading to a decline in the real value of mortgage payments. Hence, mortgage lenders must charge more in interest to make the same profit.

Then, as inflation cools, mortgage interest rates can be expected to ease as well.

The Federal Reserve and the 10-Year Treasury Note

When inflation rises, the Federal Reserve banks has respond by tightening monetary policy to control inflationary pressures. This involves raising the federal funds rates to reduce borrowing and spending, thereby slowing down economic growth and inflation.

At this point, this strategy hasn’t worked nearly as well as expected.

More importantly, the Federal Reserve does not set mortgage rates. Instead, the central bank sets the federal funds rate target, the interest rate that banks lend money to one another overnight. A Fed increase in this short-term interest rate often pushes up long-term interest rates for U.S. Treasuries.

Fixed-rate mortgages are tied to the yield on 10-year U.S. Treasury notes, which are government-issued bonds that mature in a decade. When the 10-year Treasury yield increases, the 30-year mortgage rate tends to do the same.

Short Term Outlook

The average mortgage rate for a 30-year fixed is 7.12%, nearly double its 3.22% level in early 2022.

“There is some optimism for rate cuts, however, we were forecasting three to four rate cuts in 2024 at the beginning of the year, and it now is unlikely. People are now adjusting those expectations down to two,” says Ali Nassirian, vice president of consumer & home lending at Travis Credit Union.

“Looking at the current data, there’s roughly a 50% chance we’ll see a rate cut in June,” Nassirian adds.

As little as two weeks ago, there was generally a greater optimism that the Fed would start rate cuts in June. However, that now seems to many like a hopeful start date.

There’s also a good chance that mortgage rates will remain relatively unchanged for the remainder of 2024.

“I don’t see a rate cut at the next Fed meeting. I think June would be the soonest cut we see. Even if they cut rates two or three times this year, I don’t think we will see many moves in the mortgage market from those,” says Brian Durham, vice president of risk management and managing broker at Realty Group LLC.

“The things that will have a bigger impact on the mortgage markets will be things like the Fed’s quantitative tightening policy, job numbers, and other inflationary or deflationary variables like the cost of oil,” Durham adds.

You can find out more here from Jake Safane at MoneyWatch…

In Conclusion

Mortgage rate forecasts vary depending on the expert you ask, but the overall consensus seems to be that there won’t be significant decreases in the near future. With that said, conditions can change, as recent expectations of rate cuts so far in 2024 have not come to to pass.

It’s actually possible that we’ll even see mortgage interest rates rise if inflation persists.

So, some buyers might prefer to act now, rather than waiting for however long it might take for mortgage rates to become more favorable, if at all.

Please do reach out to me to discuss how to make the best mortgage and purchasing decisions in today’s environment.

Tag: mortgage rates (Page 1 of 2)

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

Missed Opportunities by Trying to Time the Market | Don’t Wait!

What the Experts Are Saying

Mortgage Rates

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

Why Mortgage Rates Are Staying Stubbornly High…and What Does The Future Hold?

Why Does This Happen?

The Federal Reserve and the 10-Year Treasury Note

Short Term Outlook

In Conclusion

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