Rates, The Fed and Apple Pie, too.
As we paused to reflect on Martin Luther King, Jr. day the rest of the world was having a financial melt down. Why? Well, it seems they were worried about us. Record foreclosures, billion dollar write downs and the threat or realization of recession. Ben Bernanke and Fed decided on Tuesday morning that things were looking grim and emergency action was needed. They infused a .75% reduction in rates and the media went to town. What did they talk about? The great news of mortgage rates going down .75%. The problem is they were wrong, as they usually are. The Fed action had nothing to do with and never does have anything to do with mortgage rates directly.
When the Fed lowers rates it is lowering a rate that allows banks to borrower money from each other and from the Fed window overnight. A very short term rate. This in turn will usually lower the prime rate. While we as consumers have some credit accounts tied to prime rate such as credit cards, Home Equity lines and some car loans, the prime rate is a rate that banks lend money to their best customers. The best customers are business. When a business is able to borrower money at a cheaper rate they are able to expand, purchase and hire employees at a higher rate. This causes expansion which can cause inflation. Inflation is the biggest worry of the bond investor and bonds are where mortgage money comes from.
What has kept rates low for the last few weeks is other economic conditions. It all started with the employment numbers for December. Now do not get me wrong, rates were pretty good prior to that time. We were expecting some 80k in new jobs and only created 18k. In addition, unemployment went from 4.7% to 5%. A big shock number. With this the flight to quality continued. Other economic factors including the erosion of the stock market kept money pouring into the bond market.
Rates stayed down on Tuesday because the slash in fed rates did not have its intended effect. It did not stop the stock market sell off. Bonds are a safer investment and money stayed and poured into the bond market. Fast forward one day and the whole story changed. As the stock market started its rally the sell of in bonds began. We have seen rates rise about .5% in the last 36 hours. The price changes are continuing to flow in as the sell off in the bond market continues. Imagine trying to write an offer on a house and the asking price continues to change about every 15 to 30 minutes. Next week promises more of the roller coaster ride with several economic reports due including a fed meeting on Wednesday .... Buckle your seat belts.