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Mortgage Rates — And Home Affordability — At The Whim Of The Federal Reserve

By
Mortgage and Lending with Jamie Russen - Greentree Mortgage NMLS ID #95705

Fed Funds Rate and Mortgage Rates 1990-2011

The Federal Open Market Committee starts a two-day meeting today, the third of its 8 scheduled meetings this year.

The FOMC is a special, 12-person committee within the Federal Reserve. It’s led by Fed Chairman Ben Bernanke and the group is responsible for voting on our nation’s monetary policy. This includes setting the Fed Funds Rate, the rate at which banks borrow money from each other overnight.

The general public tends to confuse the Fed Funds Rate for “mortgage rates” but, as shown in the chart at top, the two interest rates are very different. There is no direct correlation between the Fed Funds Rate and everyday mortgage rates in Voorhees.

Since 1990, the two benchmark rates have been separated by as much as 5.29 percent, and have been as close as 0.52 percent.

Today, the separation between the Fed Funds Rate and the national average for a standard, 30-year fixed rate mortgage is 4.625 percent. This spread will widen — or shrink — beginning 12:30 PM ET Wednesday. That’s when the FOMC adjourns and releases its public statement to the markets.

According to Wall Street, there’s a 100% chance that the FOMC leaves the Fed Funds Rate in its current “target range” of 0.000-0.250 percent, the same range in which it’s been since December 2008. Depending on the verbiage in the press release, plus the comments of Fed Chairman Ben Bernanke in his scheduled, 2:15 PM ET press briefing, mortgage rates aren’t expected to steady as well.

If the Fed projects higher growth in late-2011/early-2012, or hints at new market stimuli, expect mortgage rates to rise on concerns about inflation. Inflation is bad for mortgage rates, in general.

On the other hand, if the Fed indicates that the economy is slowing down, or that it plans to withdraw its existing, $600 billion bond market stimulus, look for mortgage rates to fall.

It’s hard to be a home buyer in the Barclay area when the Federal Open Market Committee meets. There’s just so much that can change mortgage rates and rising mortgage rates can affect purchasing power in a flash.

In the 6 months since November 2010, home affordability is off 9%.

So, if you’re shopping for mortgages, or just floating a rate, consider getting locked in before the FOMC issues its press release Wednesday. Once the statement hits, mortgage rates could soar.

Comments (1)

Mike Morrison
Will & Will Real Estate Brokers, The Woodlands, Texas - Houston, TX

Jamie, QE 3, 4 , ... is a lock. If & when QE2 ends, who will buy the t**d pile of treasury's ? I am no longer amazed at RE industry's lack of knowledge of what you posted. All one has to do is look at the fed's balance sheet.

I see agents comment on why the TBTF's aren't lending. Why would they ? Go to the discount window,borrow fed funds and turn around & buy treasury's. What a deal!! Nice little profit with NO RISK.

You are correct, this FOMC statement will have far reaching effects. 

Apr 27, 2011 05:04 AM