Well, well, well… good to see that someone was paying attention! Since January 25, 2008 rates have jumped up nearly ½% at a time when the general public expected rates to go down because the Fed lowered short term rates. Actually the fed has lowered rates 5 times since September 18, 2007 for a total of 2.25%. Yet mortgage rates have barely budged. Confusing?
Here’s the deal. Many many factors influence mortgage rates. For one thing, mortgage rates are more affected by the long term interest rate environment than the short term market.
The Fed attempts to either stimuate the economy by lowering short term interest rates or they try to slow the economy by raising short term interest rates. They do this through three different tools of monetary policy – open market operations (the fed funds rate), the discount rate and reserve requirements.
The fed funds rate is the interest rate at which depository institutions (banks) lend balances to other depository institutions overnight. The discount rate is the rate that institutions may borrow overnight funds directly from the Fed. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liablities.
Ok… now that that’s out of the way, let’s move onto mortgage rates. See, long term rates such as mortgages, react to Fed policies rather than follow them. I don’t want to oversimplify here but generally, long term interest rates move in reaction to the perception of what effect the Fed’s moves will have on the economy.
Long term bond holders are extremely concerned about an overheated economy. To a long term bond holder, inflation is a four letter word. The reason is simple – if a bond yields 6% while inflation is at 4%, the bond holder is only netting 2%. When fed policy is anti-inflationary, bond holders rest easy. Bonds become more attractive if inflation is low, less so when inflation is rising. And recent Fed policy is anything but anti-inflationary. That is one reason why mortgage rates have actually increased obver the past two weeks. Additionally, there is still turmoil in the credit markets.
The truth is that if it wasn’t for the housing industry and the mortgage market meltdown, the fed would surely NOT be lowering interest rates. In fact, I believe whole heartidly that we are in a short term upside down spike… there are way too many inflationary signs right now. Consider oil, nearly all commodities, food prices… they are all on the rise. And our government continues to spend money like never before. These rate cuts may not affect mortgage interest rates anymore than they already have. And once real estate values have stabilized and stablity has come back to the credit markets, be prepared for the fed to begin raising rates again… and swiftly.
If you are considering refinancing or purchasing a home, do it now. Do not try to time the market. Most people that do, won’t catch the bottom. Currently, you can lock in rates on a 30 year fixed below 6%. They may not go down from here. But I assure you this – next year at this time, they will be higher than they are today.