Q: “I heard the Federal Reserve dropped the federal funds rate. Is this the same thing as the mortgage rate?”
A: The federal funds rate, which is controlled by the Federal Reserve and is a very short-term interest rate, is not directly tied to mortgage rates. This rate is the interest rate at which banks and other financial institutions lend money to each other, usually overnight. The 30-year fixed mortgage rate is more directly impacted by long-term factors, such as 10-year and 30-year Treasury yields. Mortgage rates are also determined by other factors, including the inflation rate, the pace of job creation, and whether the economy is growing or shrinking.
Therefore, while mortgage rates and the federal funds rate sometimes move in tandem, and the lower fed rate will eventually impact longer-term interest rates, it is not always possible to predict how a federal funds rate cut will impact 30-year mortgage rates in the near-term.
Q: “What does all of this mean for homeowners and buyers? Are mortgage rates going to decline?”
A: The 30-year fixed-rate mortgage averaged 3.36% for the week ending March 12, up from 3.29% the previous week. Mortgage rates will probably continue to decline as a result of continued downward movement in the 10-year Treasury yield, which normally signals downward movement in mortgage rates. The action by the Federal Reserve to purchase $200 billion in mortgage-backed securities (MBS) will also likely stabilize and then lower mortgage rates. Therefore, it is expected that mortgage rates will fall in the days and weeks to come.
However, there is a big constraint in terms of lender capacity to service loan applications. Despite trends in the 10-year Treasury note last week, mortgage rates actually increased slightly, in part because some lenders were able to raise rates to slow the number of people applying for home loans, giving them time to work through a backlog of loan applications.
Q: “Assuming mortgage rates do fall, what will be the impact on the housing market?”
A: Low and falling mortgage rates tend to be positive for the housing market, making it relatively less expensive to borrow for a home purchase. However, the relationship between home sales and mortgage rates has been atypical over recent months. Rates have been so low for so long, which means that the cost of borrowing is not what is keeping potential home buyers out of the market. Rather, an insufficient supply of inventory has had a bigger impact on the housing market than have mortgage rates. In fact, the falling mortgage rates in recent weeks have spurred unprecedented levels of refinancing activity, not home purchase activity. Increased refinancing activity could actually make it harder for would-be home buyers as more home owners decide to keep their homes off the market.
Q: “What should I tell my clients about mortgage rates?”
A: While it is likely that rates will fall further in the coming weeks, a drop is not a foregone conclusion. There may be little value in advising clients to wait to purchase a home to achieve lower rates when the bigger challenge they likely face is finding a home at all. Therefore, if your clients are otherwise ready to purchase (e.g. financially), then there does not seem to be a good reason for putting off that purchase. In fact, the economic uncertainty that is growing could have the opposite impact on rates in the future, driving mortgage rates higher.