The Federal Reserve cut the Fed Funds Rate last week. Many of my referral partners and clients often ask me after the fed cuts rates how this will affect mortgage rates. There are many misconceptions surrounding this issue. I will attempt to clarify.....
First lets look at the definition of the Fed Funds Rate.......
The definition of Fed Funds Rate from the Federal Reserve:
The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. The target federal funds rate is set by the Federal Open Market Committee (FOMC).
Notice that the words "consumer" and "mortgage" are nowhere to be found. That's because the Fed has nothing to do with them.
The Fed lowered the Fed Funds Rate by 0.250% on Oct 31, 2007. The widely-expected rate decrease was well-received by stock markets to the detriment of mortgage bonds. Mortgage rates climbed higher shortly after this as demand for mortgage bonds waned.
This illustrates that the Federal Reserve does not control mortgage rates. The FFR fell; mortgage rates rose.
Because it is tied to the Fed Funds Rate, Prime Rate fell by 0.250%. Holders of home equity lines of credit and credit card debt will benifit from the change and will see lower interest costs in next month's statements.
Again, the Fed does not control mortgage rates.
Mortgage rates are determined by the prices of mortgage bonds; this, we've covered before. As bonds prices go up, bond rates come down.
And the price of a mortgage bond is a matter of Supply and Demand.
The greater the demand for a bond, the higher its price. High demand for bonds is one reason why mortgage rates remained relatively low for the period spanning the last few years.
If all of this sounds complicated, remember that, like the price of a stock, mortgage rates are not divined from thin air. Rates come from the price of mortgage bonds -- nothing else. And those prices are determined by simple Supply and Demand.
Call or write me or email me with any questions,
David Lukas, CMPS
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