Article written by FCM CEO Keith Canter for NASDAQ
Lenders, economists, investors, and consumers closely follow the Federal Reserve’s decision-making, and at its meeting in September, the Federal Reserve Open Market Committee (FOMC) voted to hold interest rates for now. What gives? And what should anyone seeking a mortgage know about the Fed and its action or inaction?
Well, rates generally increase during a good economy, declining when the economy cools. So, FOMC giving a nod to the eventual tapering off of its near-daily purchases of fixed-income securities showed the markets that the U.S. economy is indeed “picking up some steam” after reeling for much of the pandemic. Many metrics have been improving, and with signs of improvement come talk of less need to support low-interest rates.
But what to watch…?
Mind you, the Central Bank (the Federal Reserve) does not set mortgage rates. It sets the overnight Fed Funds rate and buys mortgage-backed securities (MBS). Still, the same things that normally lead the Fed to change the overnight rate also drive changes to other interest rates. And, yes, this includes mortgage rates. And recent signs show an improving economy, which doesn’t necessarily lead to the FOMC increasing rates, just as taking one’s foot of the brake doesn’t mean the same as accelerating the car.
Since the “Financial Crisis” of the latter 2000s and since the Fed’s last increase, it has rethought its course in the wake of a slower economy and concerns of a trade war with China. It is best known for setting and buying billions of dollars of Treasury and mortgage-backed securities (MBS). That does not directly affect mortgage rates, but some of the same factors that drive one may drive the other. And recent signs show an improving economy, which doesn’t necessarily lead to the FOMC increasing rates, just as taking one’s foot off the brake doesn’t mean the same as accelerating in a car.
Historically, rate reductions stanch rising borrowing costs, from your mortgage or HELOC to student loans, credit cards and car payments. Since the end of 2019 mortgage rates have been substantially lower. Plus, long-term fixed mortgage rates reflect U.S. Treasury note yields. As I write, rates have moved up to where they were in June of 2021 but are still low by historical standards. In fact, home lenders’ rates are still very good, and anyone who has not refinanced their mortgage within the last few years is advised to contact a lender to see how their rate compares to current lending.
Rates matter, but how?
Rate movement on smaller credit “buys” like car loans and credit cards may not be reflected as readily. For one, some loans like student loans are mostly Federal loans at fixed rates. So only students who use private loan sources may see variable rates. Even so, a small rate adjustment, like a quarter of a percentage point, is going to impact a loan of $20,000 minimally, unlike the effect it would have on a more sizeable home loan. Another factor: Some of these other fixed or variable rates may be tied to Constant Maturity Treasury (CMT), prime or T-bill rates.
Consumers should know that any increase in interest rates, when it eventually comes, will impact their bank accounts. Namely, savings rates that banks pay consumers on their money haven’t moved much for quite some time but could increase with a move to higher in rates. Remember that until rates fell last year due to the pandemic, the Fed had been since 2015 increasing its benchmark rate. That means, if rates move higher, savings can earn more than the current rate of inflation.
In terms of mortgage applications, the Mortgage Bankers Association publishes a weekly gauge of activity from the prior week. Moves in rates are reflected quickly and efficiently in the MBA’s application data, and sure enough, with interest rates in general shifting higher, application numbers have dropped. Many homeowners who could refinance already have, and those who have not are advised to check with a lender to compare their existing rate versus current rates.
Along those lines, potential homebuyers who have been “sitting on the sidelines” waiting may be prompted to renew their interest in looking for a home to purchase. Although the inventory of available homes for sale has been low (there are more Realtors than there are homes for sale in the United States!), there are still “For Sale” signs out there. Historically the late autumn, winter and early spring have been slow times for home sales, but perhaps this year will be different, especially if the threat of higher rates nudges some buyers to act.
Reflections of trusted sources
Much of what is considered here may sound like doublespeak – it matters, it doesn’t matter, it only impacts this but not that, and so on. Still, the lesson holds: Stay abreast of action by the Fed. For every action it makes, a lot of smart pundits will cuss and discuss the potential results. If you follow a diversity of credible news sources who report on such, you should be able to parse if any Fed action will impact your borrowing or potential borrowing.
All told, many factors influence money markets and all that they entail, from saving to home lending, and rates are just one of those puzzle pieces. When in doubt, turn to a known, trusted source of mortgage and housing information for their take on any rate activity.
Read the original article here.
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