Mortgage Rates Not Related to the Federal Funds Rate
By Shailesh Ghimire, September 25, 2007 at 2:36 pmThere is a lot of confusion regarding interest rates. I received a few e-mails and some phone calls asking if it was now a good time to buy real estate since the Fed cut interest rates. I replied that the Fed rate doesn’t affect home mortgage rates. The two are completely different animals. In fact this week home mortgage rates went up after last weeks rate cut.
To make my point I have plotted the 30 year mortgage rate and the federal funds rate on the same graph. (Red = Federal Funds Rate, Blue = 30 Y Mortgage Rate)
The only way the federal funds rate affects home mortgage rates is via the general economy. There is no one-to-one effect, neither is there an implied effect. Any effect you may see on this graph is the result of economic factors rippling through the market as the Fed changes the federal funds rate.
As you can see (on graph) there is no direct relationship. It’s not like you can increase one and the other automatically goes up or down. In the early 1970s there is a lot of back and forth movement. You may say that recently there is more of a relationship, but if you were to dig deeper you would see that no statistical relationship exists. We may see some kind of broad pattern but that is a function of overall economic conditions (which effects both rates) than the federal funds rate directly influencing home mortgage rates.
Just so you are aware, home mortgage rates are determined by Mortgage Backed Securities.
Welcome to the Arizona Mortgage Guru blog, a great resource for all your home financing needs. If you're new here and like the content, you can subscribe to my RSS feed to get regular updates on all things related to mortgages. Thanks for visiting.
Rate Cut: Federal Reserve Slashes Rates by 0.50%
Fed Cuts Rate And Mortgage Interest Rates Rise
Federal Reserve Meets Tomorrow (Aug. 7th)
8 Responses to “Mortgage Rates Not Related to the Federal Funds Rate”
Great blog entry! I think too many assumed that mortgage rates were going to drop as a result of the rate cut. The cut just motivates the economy to spend!
I totally agree with your view. This a great article, clearing up the confusion.
Excellent analysis Shailesh! I swiped the chart and posted it (with appropriate linkage), but let me know if you want me to pull it.
[...] Ghimire presents Mortgage Rates Not Related to the Federal Funds Rate posted at Arizona Mortgage [...]
[...] Ghimire presents Mortgage Rates Not Related to the Federal Funds Rate posted at Arizona Mortgage [...]
[...] federal funds rate is not to be confused with your mortgage rate. The two do not directly effect each other. However, the prime rate (which is the federal funds rate plus 3%) is directly related. Many people [...]
[...] 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 [...]
[...] Mortgage Market Guide to get some mortgage specific analysis, the advice was to lock. That price of Mortgage Backed Securities was falling (rates were hence rising) and there was no telling when lenders would issue a intra-day [...]
Care to comment?