Fed Cuts Rate And Mortgage Interest Rates Rise
By Shailesh Ghimire, January 23, 2008 at 3:36 pmI’ve received a lot of calls asking about rates today. Everyone calls and wants to refinance since the Fed lowered the federal funds rate by 0.750%. I patiently tell everyone that the two rates (federal funds rate and mortgage rates) are not directly related. In fact the two are sooooo unrelated that they actually moved in opposite directions today.
As you know yesterday the Fed lowered the federal funds rate by 0.750%. The stock market rallied today in response to this Fed move and was up 300 points (after losing 323 in earlier trading).
Here is what the 30-year rates did today at CTX Mortgage (with 1% origination):
At 9:00 AM: Our rate sheet said 5.250% on purchases
At 1:00 PM: I received re-price notice and the rate jumped to 5.625% on purchases
At 2:47 PM: Another re-price notice and this time the rate jumped to 5.875% on purchases
Notice that as the stock market rallied in response to yesterdays rate cut, mortgage rates got worse. So, why is this?
At the technical level, when stocks rally, money moves from bonds to stocks and this lowers bond prices and increases yield. Mortgage rates are the yeild on mortgage backed securities (mortgage bonds). At the fundamental level, the Fed move is inflationary. Inflation is the bond markets worst enemy. So, bond prices fall again and increase yield. So, today we saw a double whammy!
I will venture to say that if the Fed lowers short term rates another 0.50% next week (as some expect), 30 year fixed rates will inch higher and higher through the spring and summer of this year. Only time will tell, but if you’re on the fence, now is the time to lock in the rates and move on with your transaction.
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Tags: federal reserve, funds rate, Interest Rate
Categories: Economics, Interest Rate, Mortgages
5 Responses to “Fed Cuts Rate And Mortgage Interest Rates Rise”
I had learned from reading other money and personal finance blogs about this very point you made. The Fed’s rate doesn’t directly affect the interest rates that us consumers care about the most–namely mortgages, credit cards, and higher rate online savings accounts.
I spent the day reading your blog archives and was starting to wonder if you would post about the Fed point decrease.
I tell all my clients that nobody knows what rates are going to do tomorrow. One expert says they go up, another expert says they go down. So if you want to gamble on rates going down, you have a 50-50 chance of winning. HOWEVER…
When rates go down, they do down very slowly - banks are cautious about lowering rates, and they probably take some extra profits on the way down. But when rates go up, they go up very quickly, as banks don’t want to get left holding the bag. So overall, you might win, but you stand to lose more than you stand to win.
If you’re happy with your home, and you’re comfortable with the payment at today’s rates, LOCK YOUR LOAN! If you want to gamble, and you can still afford the home if rates go up, then go ahead and gamble.. Good luck to you.
This is a great real-time example of how fast things can change. I’m going to star this post in google reader so I can find it again for future clients to read.
Thanks Shailesh!
Hello from north of the border and thank you for your insightful blog. As a fellow mortgage professional located in Ontario, Canada I wrote twice this week in my own blog ( http://www.yourmortgagematters.blogspot.com ) about the news that the Bank of Canada also dropped it’s overnight rate and the affect that this had on institutional rates in Canada.
Unlike your lending rate increases on news of Fed rate drops, ours declined in some cases - as it should have reacted - with other lenders chosing to leave rates alone and reap additional profits through increased spreads. Due to the fallout over investments in the US subprime market by so many of the Canadian Banks, their stock prices have been dealt serious blows and of course by increasing income by fattening spreads they are taking advantage of the borrowing public instead of looking at their policies and taking responsibility for poor decisions.
Thanks again for publishing such useful and interesting information !
[...] you think last week was a turbulent and volatile week for mortgage rates then brace yourself for the coming week. There are many important reports coming [...]
[...] believe me? Well, last week when the Fed lowered rates by 0.750%, I documented (on this blog) the rise in mortgage rates the following Thursday. Also, Jay Thompson, at Phoenix [...]
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