Are you a little puzzled over why mortgage rates have not skidded to all time lows? After all, Fed rates have been cut five times for a total of 2.5%, so why don't we get a downward move in mortgage rates? In fact, mortgage rates are now higher than they were before the Fed began cutting rates.
The Fed controls the Discount Rate and the Fed Funds Rate; this is quite different from mortgage rates. Mortgage rates are based on mortgage-backed bonds known as Mortgage Backed Securities. Bonds that are issued by Fannie Mae and Freddie Mac and how those bonds perform when traded give us the rise and fall of mortgage rates.
Inflation will always be a big negative for any long-term bond because inflation eats away at the future return of the bond. Another piece in this puzzle is the performance of the NASDAQ and broader stock market.
As bond prices rise, interest rates fall. As bond prices fall, interest rates rise. As the NASDAQ moves higher, bond prices move lower which causes interest rates to rise. Conversely, as the NASDAQ declines, mortgage bonds benefit which causes mortgage rates to fall.
Fed rate cuts have had virtually no direct effect on mortgage rates. As the Fed cuts rates this impacts and typically stimulates the NASDAQ which then has a negative effect on mortgage rates.
Confused yet? Is there any good news? The biggest beneficiaries of the cuts are those home owners that have resets on their adjustable-rate mortgages. That's because the rate on many of adjustable-rate-loans is pegged to the rate on the one-year Treasury bill; it tends to move down after Fed rate cuts. Fixed-rate mortgages are typically tied to the rate on 10-year Treasury notes, so they are affected more by conditions in credit markets and inflationary moves; Fed cuts have little affect on long-term fixed mortgages.
The good news is that rates still are historically low when you look back over the past 40 years. One local bank just quoted me 6% for a 30-year fixed-rate mortgage....not bad!
The temps are warming up and the blue skies and bright sun certainly are a welcome site. The moon was bright last night and still beautiful at 6:00 am this morning....Life is Good....Enjoy!
Gary Nathan
Amanda Mavis
Woodland Dev. & Realty
15617 Railroad St.
Hayward, WI 54843
715-699-4040
nathan@garynathan.com
http://www.garynathan.com/
