How Does the Fed Affect Mortgage Rates?

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How Does the Fed Affect Mortgage Rates?



     What does the Fed do to mortgage rates?  In the words of the late Edwin Starr, "Absolutely Nothin'".  Yesterday. Janet Yellen announced a .25 increase in the Fed funds rate, and those in the real estate industry seemed quick to scare the pants off of potential home buyers by telling them the Fed is eating into their buying power.


     The reality is, the Fed's rate moves have little to no actual or immediate The Fed Raises Mortgage Ratesimpact on the mortgage market.  Like so many other areas of the global economy and geopolitical environment (commodity trading, natural disasters, wars, Brexits, Grexits, and jobs reports), there is a residual and indirect impact, but that's the case with just about everything these days.  What the Fed funds rate does impact is the amount of interest charged to banks borrowing from the Fed & each other.  For this reason, the Fed move has a direct impact on the prime rate (tied to credit cards, lines of credit, and other variable rate debt instruments), so a Fed move will affect things there, but the impact is nowhere even close to the impact that would be felt if that could unilaterally increase mortgage rates by .25 with the wave of a wand.


     To illustrate this further, let's look at what happened when the Fed made their announcement.  Mortgage bonds improved more than they have in months (on a single day basis), and mortgage rates actually dropped by nearly .25.  So while fear mongering agents and ignorant mortgage "professionals" are telling people how much their buying power will be hurt, buying power actually improved immediately.  


     The problem with selling fear is that for every person that buys into it, there's another who sees right through you, and thinks you either ignorant, or worse, a crook.  So if you're spouting off these warnings with false information, which are you?  


     The reality of the marketplace is rates are heading up and it doesn't look like that trend is stopping any time soon.  So go ahead and spread the word, discuss decreases in buying power, and why it's important to buy now (if you think it is).  But don't blame the Fed.  Blame inflation.  Blame a roaring economy and jobs numbers that haven't looked so good since the 70's.  Blame it on a rolling back of regulations and a more business-friendly administration.  Blame it on something that, in reality, is having a direct effect on the rates.  But don't go fear mongering over the Fed, because in doing so, you're wrong.  Your information is wrong, and spreading it around for personal benefit makes you either ignorant, or a crook. 


Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Amanda S. Davidson 03/17/2017 11:17 AM
  2. Michael Dagner 06/28/2017 10:25 PM
Mortgage / Finance
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Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC


Great information . . . . I bookmarked your post to refer back to.

Good luck and success.

Lou Ludwig

Mar 16, 2017 08:09 PM #8
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC


Congratulation on the feature for an outstanding post.

Good luck and success.

Lou Ludwig

Mar 16, 2017 08:10 PM #9
Rob Spinosa
Guaranteed Rate, Marin County, CA - San Anselmo, CA
Vice President of Mortgage Lending, Marin County

In all but a very few cases, when a client tells me he/she is "tracking the market" to have the best shot at getting a good rate, I feel sorry for them.  Not because I want to deliberately insult their intelligence, but because it is so hard to use the news to actually know how lenders will price.  There are so many factors beyond the consumer's control and there are elements of pricing that even keep us on our toes each day.  When you add in the "yesterday's news" element of the "news" itself, it's a recipe for spending a lot of energy on a less-than-effective cause.  Like a lot of things, "leave it to the pros," but do make the choice of professional carefully.  Use your time and energy there instead...

Mar 17, 2017 06:51 AM #10
Jeff Dowler
Solutions Real Estate - Carlsbad, CA
The Southern California Relocation Dude - Carlsbad

Hi John

So glad this important message was featured so the right word gets out to those who use scare tactics to try and convince buyers or sellers to make certain decisions, or simply don't understand what the Fed's move really meant. Another case of perception vs. reality in realty!


Mar 17, 2017 07:28 AM #11
Amanda S. Davidson
Amanda Davidson Real Estate Group - Alexandria, VA
Alexandria Virginia Homes For Sale

John, I have turned my ears off to all the incorrect advice flying around this week. Thank you for publishing an accurate and well thought out post. When I talked to a couple clients yesterday they were taken back that mortgage rates had actually dropped as compared to the week before. That said, I don't think buying because of what rates are doing is ever a good idea, it's just a small piece of a really big picture. Awesome post.

Mar 17, 2017 09:43 AM #12
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

I was waiting for the pros to chime in....thank you John and Gene

Mar 17, 2017 10:30 AM #13
David A. Weaver
Peoples Bank & Trust Co. - Scottsdale, AZ
24 years helping folks finance their dreams.

Rates have never changed, they are the fractions used to calculate the payment!!!!  I'm still using the same fractions I used when I started in real estate 40 years ago.  What changes is the cost in points to buy a specific rate for a specific lock period.  That is what the public needs to be educated on, i.e.: the movement of the cost of funds.  As the cost goes up the equilivant rate on the scale goes up and vice versa.  You mentioned it but didn't quite drive it home, in my humble opinion.   When the bond price dropped the cost of funds dropped so as a borrower the par rate was lower on the scale.  The higher rate is still there on the rate sheets, but now it shows a "Lender Credit" instead of "Par" or "Discount" pricing.  Jimmy Carter era rates are still on the rate sheets in secondary, but we sure aren't paying that cost of funds, thank goodness.   Good post in many, many respects. 

Mar 17, 2017 11:25 AM #14
Kathleen Daniels
KD Realty - 408.972.1822 - San Jose, CA
San Jose Homes for Sale-Probate & Trust Specialist

So much misinformation out there ... and so much misunderstood information out there.  

Mar 17, 2017 11:35 AM #15
Kathy Streib
Room Service Home Staging - Delray Beach, FL
Home Stager - Palm Beach County,FL -561-914-6224

John -well-deserved feature, John!!! Thank you for this very well written explanation!!

Mar 17, 2017 04:09 PM #16
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

Great post about fed rate impact on residential mortgages, which as you stated, is absolutely nothing. When mortgage interest rates rise a quarter point, many agents feel threatened, yet how much more will a buyer pay monthly over a 30-year mortgage? Not enough IMO to scare buyers into buying homes that don't meet all of their needs.

Mar 17, 2017 05:28 PM #17
Macy Babb
Re/Max All Properties Realtor - 404-234-6166 - Cartersville, GA
Realtor, SFR, HUD/REO Certified

Great Information... rates are affected by so many moving parts

Mar 18, 2017 04:48 AM #18
Patricia Feager
Selling Homes Changing Lives

Thank you for writing this blog post! I learned a lot from you and the commentators too! Thank you for always sharing excellent information! You always win over the membership with current events!

Mar 18, 2017 05:25 AM #19
John Wiley
EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

This post is a value added explanation of the Fed and mortgage rates.

We should all be well versed in what affects the real estate market and it needs to be accurate.

Thanks for clarifying.

Mar 18, 2017 08:18 AM #20
Steven Beam
RE/MAX Alliance - Parker Colorado Real Estate. - Parker, CO
Parker Colorado Real Estate

It's a media driven psychological game that scares the crap out of younger buyers though...Sometimes it motivates them.

Mar 18, 2017 09:00 AM #21
Ron Aguilar
Continental Mortgage - Saint George, UT
Mortgage & Real Estate Advisor since 1995

Let's not forget the Feds willingness to continue buying MBS. 

Mar 18, 2017 01:42 PM #22
Dörte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear John,

Trying to spread the word to everyone. I expect a busy year as interest rates rise & people, who have been fence-sitting smell the coffee & buy a house. Not so bad for sellers in a rising market, but if you are planning to buy another house, better lock in a lower rate.

Mar 18, 2017 08:23 PM #23
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

John Meussner - just met a buyer today and shared the chart on his affordability going down with every 0.25% increase in mortgage rate!

Now many of us know the mortgage rates have many more dependencies than just the fed rate.

Mar 18, 2017 10:12 PM #24
Michael Jacobs
Coldwell Banker Residential Brokerage - Pasadena, CA
Los Angeles Pasadena Area Real Estate 818.516.4393

Hi  John -- so it's really a case of much ado about nothing?   As always, thank you for the insights you bring to this forum as well as the public who need the voice of reason.  

Mar 19, 2017 06:33 AM #25
Olga Simoncelli
Veritas Prime, LLC dba Veritas Prime Real Estate - New Fairfield, CT
CONSULTANT, Real Estate Services & Risk Management

The impact is not immediate, but it's there. To say that the Fed rate does not affect mortgage rates is a little bit like saying that snow will not cause floods in spring because when it comes down it's in solid form...

Mar 19, 2017 02:30 PM #26
Michael Dagner
Brokers Guild Classic - Denver, CO
Your Denver Homes Realty Expert

Great information and insight.  Something for everyone here!

Jun 28, 2017 10:23 PM #27
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