Why Mortgage Rates Are Down as Fed Raises Interest Rates

Category: Rules and Regulations

The Federal Reserve continues a policy of gradual interest rate hikes, yet mortgage rates are falling, reports Time’s Money Magazine. While much of the focus of mortgage lenders centers on the actions of the Federal Reserve’s Federal Open Market Committee (FOMC) and its policy decisions regarding interest rates, other factors are at play.

Mortgage rates say “very little” about housing

“Mortgage rates say very little about the housing market,” Ralph McLaughlin, chief economist for Trulia, told the news outlet. “It says more about what’s going on in the bond market.”

Indeed, the article notes that as the Fed prepares to announce this week what is likely to be the third quarter-point rate hike since December of 2016, mortgage rates have reportedly deflated to a near seven-month low, from 4.32 percent, on average, at the end of December to 3.89 percent, on average, in June.

Global investors seek “safe haven”

The article continues by explaining that multiple interest rates govern the economy, and not just the federal fund’s rate target set by the FOMC. Mortgage rates are more heavily influenced by the yield on the 10-year U.S. Treasury notes, which the Fed does not directly control.

In the economy, when global investors seek a “safe haven” to “park” their cash, says the news outlet, they buy longer-term Treasury debt. Prices therefore increase, while Treasury yields fall, as they have an inverse relationship. With falling Treasury yields, so too have longer-term mortgage rates dropped.

Good news for summer homebuyers

The article reports that coupled with slow growth, the recent political uncertainties, both domestic and abroad, have been good news for bond prices. Consequently, the 10-year Treasury yield has shifted from a high of 2.62 percent in March to just 2.13 percent in the first week of June. For summer homebuyers, this is also good news, as the cost of borrowing could likewise continue to stay near historic lows.

Posted on: Wednesday, June 14, 2017