July 2, 2018
Just because the Fed rate went up 0.25% last month doesn’t mean the 30-year fixed-rate mortgage rate will go up 0.25%.
The Federal Reserve increased the federal funds rate and currently the general expectation is they’ll increase the rate another 0.5% by the end of the year. Our broker’s clients see in their news feed a headline that says, "The Fed raised interest rates 0.25%," most will think the 30-year mortgage rate went up 0.25%. But Orion’s experienced brokers know that historically there is a surprisingly weak relationship between the federal funds rate and the 30-year fixed-rate mortgage interest rate.
Certainly, when the Fed increases short-term rates, mortgage rates tend to increase. And when the Fed lowers rates, mortgage rates tend to fall. But these trends are not a guarantee. From the summer of 2004 to the summer of 2006, for example, the federal funds rate increased 4.25 percentage points, but the 30-year mortgage rate increased less than 1 percentage point.
Theoretically, higher interest rates are supposed to slow down markets, but in the real world, when higher rates cause people to expect even higher rates in the future, the higher rates have the opposite effect in the shorter term. Our brokers are seeing buyers that want to buy now before interest rates increase more and that causes the market to speed up. Increasing the Fed Funds rate may eventually slow the real estate market a bit, but until then it will most likely make home buyers expect future mortgage rates to be higher and that expectation will make buyers want to buy sooner. More people wanting to buy now puts upward pressure on home prices.
When the Fed moves to stabilize the general economy they often destabilize the housing market. Many of Orion’s brokers remember that its too-low-for-too-long rates from 2004 to 2006 were a big part of that monster real estate bubble. It would be nice if the Fed could figure out a way to stabilize the general economy without destabilizing the interest rate sensitive housing market…You know, that market where most American family wealth is located!