The Federal Reserve and Mortgage Rates

By
Real Estate Agent with Better Homes & Gardens Kansas City Homes

 

I have a lot of clients asking me about how the Federal Reserve lowering rates will affect the rates they receive for their mortgage.  I thought I would post my response on my blog to hopefully provide some clarity for anyone else who may have questions about what they hear on the news about interest rates getting slashed.  The Federal Reserve raises and lowers the Federal Funds Rate (basically the interest rate 2 lending institutions lend balances to each other, usually overnight). This has a direct affect on the Prime interest rate among other things. Your long term interest rates (15 year, 30 year fixed mortgages) are not directly affected by this movement, this movement affects the adjustable rate mortgages tied to prime and alot of home equity lines and 2nd mortgages. The long term rates are more tied to the markets perception of the long term outlook, especially on inflation. One misconception is that when the Fed lowers the Fed Fund Rate, then the 30 year mortgages will go down as well. More times then not the opposite happens. The Fed Rate Cut acts as a stimulate to the economy which can causes inflation which then causes the long term rate to rise.  SO next time you hear that the federal reserve is slashing interest rates, remember that the risk of inflation will most likely raise long term rates. 

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Rainmaker
464,231
Michael Eisenberg
eXp Realty - Bellingham, WA
Bellingham Real Estate Guy
Rates go down, then back up, hope they go down and stay awhile
Jan 24, 2008 03:59 PM #1
Rainmaker
67,180
The Michael Pierce Team
Better Homes & Gardens Kansas City Homes - Leawood, KS
Kansas City Real Estate Experts

It definately does'nt hurt our business when long term rates are low that is for sure but we are at historical lows for the 30 year fixed and I would'nt be suprised to see the long term rates start to climb by the 3rd quarter of this year.  I believe in the next 6 to 12 months we will see the yield curve begin to get back to normal which will cause more people to again start looking at 3 and 5 year arms as an option. While right now there may be recession concerns, I think there will be inflation concerns later in the year which will cause the long term rates to start to rise. 

Kansas City Real Estate

 

Jan 25, 2008 12:52 AM #2
Rainmaker
206,470
Chuck Mixon
The Keyes Company - Cutler Bay, FL
Cutler Bay Specialist, GRI, CDPE, BPOR

I think tthat you will find two other factors in volved also. It was my prediction that the spread between what the Banks borrow the money at from the US Government and what they lend it out to the general public will widen. When it widdens it means larger profits for the banks, they needed these profits to stay afloat in the sea of red ink from the sub prime problems.

The second reason i felt that mortgage rate would go up is pure and simple lack of faith in the mortgage markets. Untill that fear goes away no one want to invest in commercial paper, in turn there is less money to lend, supply and demand say that prices will go up, meaning the rates will rise.

I think we are begining to see a bottom, even if it is a soft bottom. A soft bottom means that the declines will slow and the up turn maybe awhile in developing. I expect to see the return of prices with another bout of inflation.

Chuck Mixon, in the heart of the South Florida Real Estate Market

Mar 04, 2008 02:15 PM #3
Rainmaker
67,180
The Michael Pierce Team
Better Homes & Gardens Kansas City Homes - Leawood, KS
Kansas City Real Estate Experts
I agree Chuck, the yield curve is getting back to a more "normal" level as well.
Mar 05, 2008 01:53 AM #4
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