Federal Funds Rate Drop v.s. 30 Year Fixed Rate Mortgages

By
Real Estate Agent with RE/MAX Executive Realty 91362

 One of the biggest misconceptions in the mortgage and Real Estate industries is the fact that the when the Federal Funds Rate is dropped that it also means there will be a corresponding rate drop in 30 year fixed rate mortgages. People wake up - It does NOT! In fact many times the exact opposite occurs.

I can't even tell you the number of times I have been hearing lately people making the comment "Hey the Fed is thinking of dropping the rates again...Mortgage rates should be heading down". What can be even more shocking is when Realtors don't realize how things work either! A good Real Estate agent should have at least a basic understanding of how the mortgage market works - Many do not!

The underlying belief is that lower 30 year fixed rates stimulate sales. This of course is true but there is a disconnect between this happening when the government cuts the Federal Funds Rate.

Since January the Federal Funds Rate has been cut a number of times. In January of 2008, 30 year fixed rate mortgages stood at around 5.5%. In March they have been moving around between 6.25% and 6.5%. So since January when the Federal Funds Rate was cut longer term interest rates have moved up between 3/4% to 1%. This is the perfect illustration of why there is no connection.

The Federal Funds Rate helps determine what banks charge each other for over night loans. Long term rates (30 year fixed) are mostly tied to the ten year treasury yield which is determined by bond traders. Inflation drives long term mortgage rates.  When bond traders demand higher long term rates it drives up long term mortgage rates too.

There is a much bigger correlation between The Federal Funds Rate and short term mortgage vehicles know as adjustable rate mortgages (ARMS).

These rates tend to move closer in step to the Federal Funds Rate. The adjustable rate mortgage market is influenced by a number of measures including the one year treasury yield and the International Libor.

So the next time you hear "The Fed is dropping rates" Do not assume that 30 year fixed rates will also drop!

___________________________________________________________________________________________________________

The above information regarding the Federal Funds Rate & fixed rate mortgages was provided by Bill Gassett, the team leader for the #2 RE/MAXRE/MAX Executive Realty Hopkinton MA Team in Massachusetts in 2006.

Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of Hopkinton Massachusetts and other Metrowest towns for the last 23 Years. Bill's office is conveniently located in the center of Hopkinton MA at 77 Main Street.

I have a passion for Real Estate and love to share my marketing expertise! I would welcome the opportunity to earn your business.

Selling your home in Metrowest Massachusetts see Metrowest Massachusetts Real Estate. Want to have MLS access to beat other buyers to your dream home? Sign up with no obligation at my MLS Property Finder Site.

I service the following towns in Metrowest MA: Hopkinton, Milford, Upton, Southboro, Westboro, Ashland, Holliston, Mendon, Hopedale, Medway, Grafton, Northbridge, Uxbridge, Douglas, and Framingham MA.

Click here to view Bill Gassett's Metrowest Real Estate profile

 

 
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Posted by

Bill Gassett is a thirty-two year veteran to the real estate industry. He enjoys providing helpful information to buyers, sellers and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame and others.

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Re-Blogged 4 times:

Re-Blogged By Re-Blogged At
  1. Charles McDonald 08/12/2008 06:43 AM
  2. Leslie Stewart 09/12/2008 11:32 AM
  3. Steve Homer 09/16/2008 03:25 AM
  4. Aaron Abed 11/10/2008 05:30 AM
Topic:
Lending / Financial
Location:
Massachusetts
Groups:
Realtors®
RE/MAX Active Rain Bloggers
The Lounge at Active Rain
New England Professionals
Posts to Localism
Tags:
metrowest ma real estate
metrowest ma realtors

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Show All Comments
Rainmaker
1,049,106
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate
Chris I can see where this would create a dilema for you as well. Unfortunately many home sellers believe the same thing. They hear the fed is dropping the fed rate and expect that long term rates will drop creating more demand for their properties.
Mar 26, 2008 03:55 AM #41
Rainmaker
1,049,106
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate
Mike agreed. We don't need to have the same in depth knowledge as a banker but we should know the basics.
Mar 26, 2008 03:57 AM #42
Rainer
7,769
Alan Robinson
PTE REAL ESTATE GROUP - Phoenix, AZ
Thanks for the input. Sometimes information like this slips away or is never learned. Keep on trucking! 
Mar 26, 2008 01:29 PM #43
Rainmaker
1,049,106
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate
Your welcome... thanks for dropping in and adding your comment Mike.
Mar 26, 2008 02:16 PM #44
Rainer
21,591
Megan McGonigal
Integrity Real Estate - Northeast, MD
CRP - Cecil County, MD & Harford County, MD Real Estate

Hi Bill, I have had a lot of people say the same thing about mortgage rates will be going down because the fed is dropping the rate. Good post.

Mar 26, 2008 02:45 PM #45
Rainmaker
1,049,106
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Megan it really is a wide spread misconception amongst the general public. We just need to continue to educate.

Mar 26, 2008 11:30 PM #46
Anonymous
Anne

Hey Bill,

Yes real estate agents do need to have basic information about real estate motgages. I meet many who do not  know about any type of product

Mar 27, 2008 01:05 AM #47
Rainmaker
1,049,106
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate
Anne you are correct. Realtors should have a basic understanding of how things work but unfortunately many do not.
Mar 27, 2008 01:16 AM #48
Rainmaker
537,158
Karen Rice
Davis R. Chant, REALTORS - Hawley, PA
Northeast PA & Lake Wallenpaupack Home Sales
Excellent information.  There are a lot of misconceptions out there.  I have a difficult time keeping up and I prefer to refer my clients to a good mortgage specialist as opposed to try and know all the ins and outs myself.
Mar 27, 2008 02:58 AM #49
Anonymous
Brad Rivers
This is excellent. I must admit I never quite understood the difference between the federal funds rate and actually mortgage rates. This clears things up for me. Great concise work!
Mar 27, 2008 09:06 AM #50
Rainmaker
35,764
Ronell Moore
180 Degree Floors - Nashville, TN
Transforming your Flooring into a work of Art.
Only if they advertised this on TV.
Mar 27, 2008 11:35 AM #51
Rainmaker
1,049,106
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Brad thank you! I appreciate you stopping by and commenting.

Ronnell you are right it would make a lot so sense for this to get more exposure on tv.

Mar 27, 2008 11:36 PM #52
Rainmaker
246,926
Gena Riede
Riede Real Estate, Lic. 01310792 - Sacramento, CA
Real Estate Broker - Sacramento CA Real Estate (916) 417-2699
Bill, good explanation. Now perhaps, everyone will understand 30 year fixed rates and how they are determined.
Mar 31, 2008 05:08 PM #53
Rainmaker
1,049,106
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate
Gena - Thanks. I am sure this misconception will hang around. It would be great if the media explained things better! Why don't you ever hear the truth on TV about this subject?
Apr 01, 2008 12:37 AM #54
Rainmaker
416,376
Mesa, Arizona Real Estate Mesa Arizona Realtor
Homes Arizona Real Estate LLC - Mesa, AZ
AzLadyInRed

Bill, great explanation of how the drop in Fed rates "really" works! ;-)

Pepper

 

Apr 08, 2008 09:14 AM #55
Anonymous
Frank West

Bill great explanantion on the diiference between a Federal Funds Rate drop and long term mortgage rates. I agree most people think they are the same.

Jul 15, 2008 05:30 AM #56
Rainmaker
1,049,106
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Frank - Thanks. This is one of the biggest Mortgage/Real Estate misconceptions floating out in the public.

Jul 15, 2008 05:34 AM #57
Anonymous
Ben Ricardi

Bill this is excellent information on mortgages. I must admit I was confused about this. You have explained this subject well.

Sep 09, 2008 02:22 PM #58
Rainmaker
1,049,106
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Thanks Ben I know there is a lot of confusion when it comes to The Federal Funds Rate and how it pertains to 30 year fixed rate mortgages.

Sep 09, 2008 02:47 PM #59
Rainer
150,370
Steve Homer
The HBH Group (Keller Williams affiliate) - Round Rock, TX

Bill:  Great post that reinforces many of my posts on my BLOG.  As a result, you earned a RE-blog from me!  Thanks for the great content and for clarifying an issue that many buyers AND agents are confused about!

Sep 16, 2008 03:57 AM #60
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Bill Gassett

Metrowest Massachusetts Real Estate
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