Mortgage Interest Rates

[vladymir]

I am confused….The Fed has (over the last 2 years) raised interest rates significantly. If it costs lending institutions more to lend, why has there not been a corresponding increase in mortgage rates? (I realize that mortgage rates have increased some, but not nearly the same increase as fed funds or prime).

[hipmatt]

The fed affects short term rates, the fixed rate loans are based on other things,

Understanding why mortgage loan rates fluctuate can be difficult, but there are some basic factors that come into play when banks decide their current rate offerings.

* Bonds. If you’re ever at a party and a hot girl or guy asks you to tell him or her why interest rates rise and fall, just smile, run your fingers through your hair, and say, “Because of bond prices. Now let’s make out.” Sure, it’s a bit more complicated than that, but higher bond prices typically mean lower mortgage rates and vice versa. To make a long story short, when you get a mortgage loan from a bank, the bank will turn that loan into a bond for investors to buy. When the bond market is hot and investors are willing to pay more for those bonds, the banks can afford to drop their rates. But when the bond market fizzles, they’ll need to bump up the rates on your loan (and, thus, on the resulting bonds) in order to attract investors again. And in case that explanation is too long: bond prices go up, mortgage rates go down.
* Inflation. When inflation is high, you’re going to be paying more money for things. Rampant inflation typically means the economy is growing very quickly, so the Federal Reserve steps in to raise interest rates and stop the economy from growing too quickly. So until inflation and prices get back under control, mortgage rates will typically rise with other interest rates. And when the economy slows, inflation drops and so do mortgage rates.
* Demand for mortgage loans. If lots of people want to buy homes or refinance, then most of them will need mortgage loans. And when people are climbing hand over fist to get a loan, lenders can get away with jacking up their rates. Similarly, a low demand for mortgages means lenders must cut their rates in order to intice people to apply for them.
* Housing prices. Higher home prices typically mean that people will need to borrow more to buy them. And if interest rates are too high, they can’t afford to get a loan for those super-expensive houses. Thus, as housing prices climb, interest rates usually come down to compensate.
* Value of a dollar. If the value of the U.S. dollar (or whatever your country’s currency is) goes up, that’s a good sign that inflation is falling. And as I mentioned earlier, inflation typically takes mortgage rates in the same direction.
* Many other economic factors, but to lesser degrees. In a way, every transaction involving money anywhere in the country will have some sort of an effect on the economy and a resultant effect on mortgage rates. A single positive earnings report from a big company could push stock markets higher which would temporarily draw investors away from bonds, sending mortgage rates higher. A slew of other factors, such as personal income and spending, housing starts, retail sales, gas prices, and even the political climate can have some sort of an effect on mortgage rates. To put it simply, anything that can affect the economy can also affect mortgage rates.

[(former)FormerSanDiegan]

There was a significant increase in mortgage rates … at the short end of the curve (e.g. 1 year-ARM, 3-year ARM, etc). The FED only exerts influence directly on very short term rates. Longer term rates (e.g. 30-year fixed) are set by the market, which responds to a variety of factors including anticipation of future inflation, direction of the economy, relative exchange rates, interest rate velocity, economic shocks, etc.

I’m no expert, but sometimes the market gets the opinion that the FED has tightened sufficiently (or too much) and this suppresses the longer term rates. For example, currently the market believes that the economy is slowing, that inflation is not a threat and demand for longer-term bonds suppresses their yield, relative to the short-term bonds.

If you can make sense out of the bond markets you can make a lot of money. But many times it appears to have a life of its own and follows its own rules.

[hipmatt]

BTW, historically speaking rates are still VERY VERY low. I don’t know if the fed can lower rates again, or if it will even matter..

[img_assist|nid=2959|title=Rates Chart|desc=|link=node|align=left|width=466|height=257]

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