If the Fed cut rates by 50 points, why are 30 fixed mortgage rates still going up?

Question

My closing is in October and locked in, but my lender said if rates drop by .375, we can probably renegotiate.

Answer 1

Unlike the sophmoric wisdom given in some of the previous answers, ALL interest are tied together via the forces of arbitrage. However, the comparison that you are trying to make is like comparing the global price of steel and the price of a can of corn in your local grocery store. And while there are forces that affect both, it if rediculous to think of the two as substitutes. As an example of a common force, suppose global incomes rise. This will cause demand for both steel and cans of corn to increase- assuming they are both normal goods. However, their prices will not change by same amount or percentage nor at the same time because there are an infinite number of variables that affect the two (i.e., local demand, price of corn, prices of substitutes, taxes and tariffs, etc.)

Comparisons between different interest rates are similar. Lets compare 30 year fixed rate mortgages and the fed funds rate. The former is a long term rate, it is secured by illiquid real property, have individuals as the borrowers. The latter is a very short term (measured in days), secured by high quality financial instruments (i.e., treasury bills), and have regulated financial istitutions are obligors.

While there is a relationship between the fed funds rate and the 30 year mortgage rate that is caused by the demand for savings, financial investments, fixed income instruments, and short vs. long term instruments / secured vs. unsecured instruments- in particular, they can move by different amounts or in different directions. For example, if there are changes in expectations of long term rates- these affect mortgages, but not fed funds because of their relative maturities. Differences can also arise if there are changes in the quality of collateral (houses vs. t-bills) or their liquidity. Differences can arise is there is a relative change in demand for particular instruments. For example, investors might pull money from the mortgage market to put into stocks. This will cause mortgage rates to rise, while stock prices rise, even though fed funds might increase, decrease or stay the same. Changes in the quality of obligors (ie, home owners vs. the US government) will cause interest rates to deviate.

Answer 2

The Fed does not control 10 year Note rates.

Only short term rates.

The Fed lowering rates was to bail out the money center banks.

It had very little to do with housing.

P.S. Once the Fed announced the rate cut, the dollar TANKED.

P.S.S. Expect to pay A LOT more for the things you need every day to live in the future. Insurance, food, gas, clothes, etc.

Terry S.

Answer 3

There are different rates and the mortgages are tied to indexes of those rates. A thirty year fixed mortgage is not greatly effected by the lowering of overnight rates or short term rates.
If you borrow money for one week, your interest rate is likely lower than if someone has to take the risk of assuming you will be able to pay a loan back over thirty years...in the bond market the length of the loan and thus the risk involved is called duration.

Answer 4

It would not. in fact, bonds & mortgages are rather turning out to be perfect now, as people are advertising debt to purchase shares. it variety of feels that many of the time, first loan costs go interior the different process the Fed, a minimum of interior the fast term.

Answer 5

in essence, the interest rate on 30 year fixed rate mortgages consists of three parts -- part a is the return on 10 year US Treasury notes (which has been going up not down -- money is flooding out of bonds and into stocks), the general risk level the market perceives attaches to mortgages (which has been going up), and the specific risk level associated with your case (which has also been re-evaluted as higher unless you are a prime credit).

10 year rates going up instead of down suggests that investors believe we will have higher inflation in the future. This seems reasonable since the value of the dollar is falling and thus the cost of many imported items will soon rise which will increase the cost of living (inflation).

oh.

Answer 6

Fixed mortgages are not tied to prime rate, that's why.

You will see a small drop in only things that are tie to the prime rate like adjustable mortgages, home equity line of credit, savings, credit cards, etc.

Answer 7

The Fed cut short term rates. A 30 year mortgage is not short term, thus not affected.

Answer 8

Fed cut certain rates by 50 basis points.

Mortgage rates are driven by market forces, not Fed rate cuts.


Econ 101.

Answer 9

mortgage rates are tied to bond market not the Fed rate that was cut