Friday, January 20, 2023 / by Amy Brown
Mortgage interest rate behavior explained
Monetary policy and its affects on the housing market can be a bit confusing as of late especially with the volatility of the stock market and bouncing mortgage interest rates. So let's take a moment to look at what the data means in simplistic terms and where that is leading us financially in 2023.
The Federal Funds rate explained:
The federal funds rate is currently at 4.25-4.5%. This rate, in its simplest form, is the cost of money. When you make a deposit into your bank, the bank uses that money to provide loans and other forms of credit to its customers. Federal regulations require that banks keep a certain amount of money always in reserve to guarantee stability and solvency. When that reserve runs low, banks borrow money from each other to meet that regulatory requirement at the federal funds rate.
The Federal Reserve and its central bank's main job is manage the supply of money running through the economy in order to keep it stable. They do this by raising or lowering the fed funds rate. When the rate is increased, it reduces spending because the cost of borrowing money is now more expensive. This, in turn, causes consumers to buy less goods at the higher price, therefore, dropping the price of products slowly in order to induce spending again. This is how inflation is controlled.
Projections:
The target percentage for the federal funds rate is supposed to peak at 5.1%. According to Reuters, we should expect to more rate increases in 2023 at .25% each; one occurring at the end of January and the second at the beginning of March bringing the rate to its target benchmark of 4.75-5.0%.
How this affects mortgage rates:
While the Federal funds rate controls monetary policy of the economy as a whole, mortgage rates are affected by the stock market, but mainly by two things; the 10-year Treasury rate and the secondary market. The 10-year Treasury rate controls your 30 year fixed rate mortgages, or your long-term loans. As this rate goes up and down on a daily basis, so do mortgage interest rates for a 30 year conventional mortgage. Mortgage rates are also affected by the secondary market where mortgages are bundled and sold to investors. When investor demand is high, mortgage rates are lower, and when demand is low, mortgage rates are higher. The secondary market affects more of the 15 year mortgages, FHA, and USDA rates.
This is why it is so important to "shop" your mortgage rate and to look for a mortgage broker rather than your personal financial institution. Sometimes, but not always, they can find you a better rate.
Why are rates lowering when the federal funds rate is increasing?
This is a great question! As the Federal funds rate increases, making the cost of money more expensive to borrow between banks, banks pass this added expense on to their customers. However, banks are a consumer industry and are only profitable when they are able to sell loans and make a profit on the interest premiums. If spending (borrowing money) slows too much, then banks incentivize their customers to continue to borrow by reducing the rates. It is simply a matter of supply and demand!
Here are yesterday's rates:
And here are today's rates:
I hope this helps in your understanding of market volatility, how rates are controlled, and why they vary. Just know that we are in a downtrending pattern due to declined consumer spending and should see rates remain relatively stable until Spring and then start to make a slow decline.
Have a wonderful day and stay tuned for more valuable real estate information on a daily basis right here or on my blog at www.ashevilleareahomefinder.com.
The Federal Funds rate explained:
The federal funds rate is currently at 4.25-4.5%. This rate, in its simplest form, is the cost of money. When you make a deposit into your bank, the bank uses that money to provide loans and other forms of credit to its customers. Federal regulations require that banks keep a certain amount of money always in reserve to guarantee stability and solvency. When that reserve runs low, banks borrow money from each other to meet that regulatory requirement at the federal funds rate.
The Federal Reserve and its central bank's main job is manage the supply of money running through the economy in order to keep it stable. They do this by raising or lowering the fed funds rate. When the rate is increased, it reduces spending because the cost of borrowing money is now more expensive. This, in turn, causes consumers to buy less goods at the higher price, therefore, dropping the price of products slowly in order to induce spending again. This is how inflation is controlled.
Projections:
The target percentage for the federal funds rate is supposed to peak at 5.1%. According to Reuters, we should expect to more rate increases in 2023 at .25% each; one occurring at the end of January and the second at the beginning of March bringing the rate to its target benchmark of 4.75-5.0%.
How this affects mortgage rates:
While the Federal funds rate controls monetary policy of the economy as a whole, mortgage rates are affected by the stock market, but mainly by two things; the 10-year Treasury rate and the secondary market. The 10-year Treasury rate controls your 30 year fixed rate mortgages, or your long-term loans. As this rate goes up and down on a daily basis, so do mortgage interest rates for a 30 year conventional mortgage. Mortgage rates are also affected by the secondary market where mortgages are bundled and sold to investors. When investor demand is high, mortgage rates are lower, and when demand is low, mortgage rates are higher. The secondary market affects more of the 15 year mortgages, FHA, and USDA rates.
This is why it is so important to "shop" your mortgage rate and to look for a mortgage broker rather than your personal financial institution. Sometimes, but not always, they can find you a better rate.
Why are rates lowering when the federal funds rate is increasing?
This is a great question! As the Federal funds rate increases, making the cost of money more expensive to borrow between banks, banks pass this added expense on to their customers. However, banks are a consumer industry and are only profitable when they are able to sell loans and make a profit on the interest premiums. If spending (borrowing money) slows too much, then banks incentivize their customers to continue to borrow by reducing the rates. It is simply a matter of supply and demand!
Here are yesterday's rates:
And here are today's rates:
I hope this helps in your understanding of market volatility, how rates are controlled, and why they vary. Just know that we are in a downtrending pattern due to declined consumer spending and should see rates remain relatively stable until Spring and then start to make a slow decline.
Have a wonderful day and stay tuned for more valuable real estate information on a daily basis right here or on my blog at www.ashevilleareahomefinder.com.
