Mortgage Rates Lower This Week Despite Fed Hike

Good Saturday Morning.  Hope you have all your Christmas shopping done (gotta love Amazon) and you are all settled in for a merry holiday season. Now if we could just blow out all this smog and get some of the white stuff!.

Bonds UP and Rates Down How does that work?

Mortgage rates might be unpredictable sometimes, but general trends are fairly consistent. Here is a 1 minute primer written by “yours truly” on how to understand the factors that move the market.

How one views mortgage interest rates is all about perspective:

For the home buyer (our clients) the perspective is very short term and very specific, “Do you think we can time my lock just perfectly to catch it at

it’s lowest THIS WEEK?”.
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For the Real Estate Agent, Builder and Mortgage Originator the perspective is more about the upcoming year, “I wonder what will happen over the course of the year, some of my clients are right on the bubble? Rate hikes could knock a lot of them out of the market.”.
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For the Millennial, “WHAT? rates are up in the 4% range? What happened to those 3’s?”
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For the “seasoned” home owners and agents, “WHAT rates are in the 4’s?  I remember the days when people were thrilled to get double that!”
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Then again it’s PERSPECTIVE that makes the World go around when it comes to finance markets.

There are three simple rules to remember about mortgage interest rates:

 

1. Anything that you know about is already factored into the rates.  This week, a client asked one of my agents how much the rates would increase after the Fed made their announced increase in overnight rates official. The answer is it’s already baked in. When the FED announces way in advance that they will be easing off on bond purchases or that they intend to increase the bank overnight rate, the bond market (the source of funds for mortgage funding) has already factored it in.  The FED usually telegraphs what they are going to do because they don’t want sudden and jerky.  It’s only THE UNEXPECTED that moves the market quickly. By definition, the unexpected is hard to predict.  The largest one day increase in recent history was Nov 9th, the day after Trump’s electoral college victory. Unexpected.
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2. Generally, what’s good for the stock market is bad for interest rates. The money to fund mortgages comes from the bond market. The lenders (think Fannie Mae, Freddie Mac, Ginnie Mae, big quasi governmental agencies) sell bonds to investors. Bonds are seen as a relatively “safe haven” to park cash. So when the stock market is “iffy” investors pull their money from stocks and park it in bonds. This is the so called “flight to safety”.  Interest rates are tied to the yield on the bond. If you pay face value for a 3.5% yield $1000.00 bond you’ll make 3.5%, but if you pay $1,100 (110% of face value) you still only get paid $35.00 (3.5% of face value) but since you paid more the effective yield is less than 3.5%, in this case the effective yield drops to about 3.2%.. That is how interest rates offered to mortgage borrowers goes down. In “iffy” times, investors are willing to accept less than face value return for their investment in return for “safety”.  This is why you always hear that phrase, “the price of the bond has an inverse relationship to interest rates”.  When the stock market is more attractive just the opposite happens. With a higher return potential from stocks investors start pulling money out of the bond market to chase higher returns in the stock market, and those that remain in bonds want a better yield.  The price of the bonds falls and you guessed it, interest rates go up.
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3. THE FED is a good thing.  The goal of the Federal Reserve is to use all the tools at their disposal to help the economy grow at a sustainable rate without creating bubbles, rapid fluctuations, out of control inflation or stagnation.  The residential real estate market is one of the largest factors in economic growth, which is why the Fed pays so much attention to the housing market. That is why it is so important for the Fed to be and act as a non partisan, non political organization, (which generally speaking as much as possible, it does)  It’s a fine line they walk and they don’t always get it right, but the intent of the Fed is to keep things growing at a slow, steady and sustainable pace.  One of the biggest factors that influences the decisions made by the fed is INFLATION.  If prices and wages are going up to quickly (they look at reports like the Purchasing Managers Index and Non Farm Payroll) they pull strings to slow down the economy, and of course just the opposite is true when the economy is more stagnant.
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That’s probably as much or more than you want to know about the Federal Reserve and the Mortgage Backed Securities (bonds) market. But now you know

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