Today's blog is brought to you in part by Brian Morrow, a mortgage advisor friend of mine who helps us out with market information every so often. Today's blog is addressing the impact of the Federal Reserve decisions lately, read on for more!
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Most economists, financial players, the media and the general public expected the Federal Reserve to raise it's Overnight Banking Rate yesterday. At the same time the average person has almost no idea what that means or what it will do to mortgage rates. No one can say with 100% certainty what the long and short term effects of Fed policy on mortgage rates will be, but there are a few important details everyone in our business should be able to communicate to our borrowers and referral sources:
- What is the Fed Funds Rate? The Fed Funds Rate is the rate at which banks lend money to each other on an overnight basis.
- Does the Fed control mortgage rates? NO! Mortgage rates are tied to US Treasury Bonds.
- Does a .25 increase in the Fed equal a .25 increase in mortgage rates? NO! Wall Street is influenced by the decisions the Fed makes from a high level view on the direction of the economy, but investors buy and sell bonds based on their own economic strategy and research.
- What rates do go up when the Fed raises? The Prime interest rate is tied to the Fed Funds rate; credit cards, unsecured bank LOCs, some installment loans and most HELOCs will go up.
- What makes mortgage rates move? If we only knew this answer (and the timing of it).
Here are a few influencers to consider:
- Bond prices (and yields in inverse direction) are influenced by supply and demand like any other investments.
- US Treasury bonds are considered the most secure non-cash equivalent investment in the world.
- US Treasury bonds are the preferred "safe" investment for large investors, insurance companies, sovereign wealth funds and foreign governments with surplus cash (China!).
- The US economy is gradually getting stronger while Europe and Asia are weakening.
- European and Asian countries are increasing QE (lowering rates and currency values) while the Fed is decreasing QE
- The US Dollar is strong on the world currency market.
There will be volatility and rates will go up and down, but economists I hear from are all saying they expect US bond yields to remain relatively low for the next few years. US treasury bonds should be safe for the next several years.
If you have any questions regarding the information gathered in this post, feel free to contact Brian Morrow for all your mortgage financing needs!
Have a great Monday!
~Kelly Cranmer Valadez
Brian D. Morrow
Mortgage Advisor
P: 415-310-5586
F: 415-744-1807
NMLS#3311058
