The emails started arriving immediately; the Federal Reserve raised interest, now is the time to purchase a home before interest rates go up even higher. I guess some agents have a better crystal ball than I. This whole notion that the Fed raising rates is a direct correlation to long-term fixed instrument’s interest rates needs to stop. Let’s take a look at the facts.
The Federal Reserve controls short-term interest rates for loans to its’ member banks. The key word is short term, like in overnight. Mortgages are 15 to 30 year in duration. So it would stand to reason that the controlling factor for mortgages would be something longer.
Mortgage rates react more closely to the interest rates on 10-year treasuries, ten year Freddie Mac bond and the demand for mortgage-backed securities. In the bond world when the price goes up, interest rates come down, and when the price of bonds come down, and there is less demand, the interest rates goes up to spark interest for buying the bond. Demand is the key. The Federal Reserve, in a round-about way, purchase mortgage-backed securities in the billions each and every month since the banking crisis. They buy from the same banks they provide short term loans. I read that the Fed last month purchased 50% of all sold mortgage-backed securities. So demand remains high–price goes up, interest rate comes down.
So, the next time the Federal Reserve announces a rate hike don’t rush out thinking mortgage interest rates are going to increase. Last week’s increase on Wednesday resulted in Friday’s 30 year fixed rates retreating by seven basis points and 15-year rates retreating 6. That same Fed report indicated they still are going to be aggressively buying mortgage-backed securities. The New York Fed publishes their intent in purchasing mortgages for the coming month. You can find it here.
Not all mortgage types go unscathed. Notes tied to the prime can and most likely will go up–variable interest rate and HELOC (home equity lines of credit) loans. The prime interest rate does move with the Fed.
Still, a 4.10-4.25% for a 30 year amortized loan is tough to top. The website, YCharts, shows that the average interest for a 30-year mortgage the last 30 years is 8.23%, double, the current rate. So stay calm, don’t let all the noise be a catalyst for making a poor decision. A mortgage pro advised me, keep your eye on bonds and the demand for mortgage-backed securities. Doing so should keep you ahead of the curve.
Updated on July 25, 2018
To illustrate the point I found the following chart to show the relationship between the 10 year note and fixed rate mortgages. I thank the First Tuesday Journal for producing.
Good luck and be smart.