What’s Going On With Mortgage Rates?

Mike Capelle, Broker/OwnerMike Capelle, Broker/Owner

This month on December 16th, the Federal Reserve System (the U.S. central bank—the “Fed”) hiked interest rates for the first time in nine years. In the days since the Fed move, mortgage rates actually dropped. How is this possible? What’s going on with mortgage rates? Will this trend continue?

Immediate mortgage rate reaction to Fed meeting

Most U.S. mortgage loans up to $417,000 are packaged into bonds called Mortgage Backed Securities (MBS), and these bonds trade daily in global financial markets. To a large degree, MBS investors determine mortgage rates offered to consumers. Supply and demand determine the market prices investors will pay for mortgage-backed securities. These prices feed back through the mortgage industry to determine the interest rates offered to consumers. Higher MBS prices mean that lenders make more on the mortgages packaged into those MBSes, which means they can originate loans at slightly lower interest rates. Throughout each day, mortgage rates fall when MBS prices rise, and mortgage rates rise when MBS prices fall.

Mortgage rates rose as investors sold MBS ahead of the December 16 Fed meeting. It was widely expected the Fed would hike the short-term Fed Funds Interest Rate, but without knowing how the Fed might position 2016 rate policy overall, MBS investors took the conservative stance of selling ahead of the meeting.

Then when the Fed meeting announcement actually came out, the Fed said it was only hiking the Fed Funds Rate by .25 percent, and will take a “gradual” approach to increasing rates in response to the improved economy. Bond markets reacted positively, and MBS buying resumed, pushing mortgage rates down.

Keep in mind when you hear about the Fed raising interest rates, they are not talking about mortgage interest rates. They are talking about the Federal Funds Rate charged for lending money between banks, a method used to influence the economy. The Fed does not control or determine mortgage interest rates. But, when the Fed does raise the Federal Funds Rate it can affect how investors buy and sell stocks and bonds. If investors buy more stocks and less bonds like mortgage backed securities, mortgage interest rates could rise.

Mortgage rate outlook based on revised Fed policy

Now markets are estimating the “gradual” Fed Funds Rate hikes will happen about four times in the next year, for a total of about one percent. The Fed Funds Rate is intended to influence broad rate markets overall, but not necessarily to have a direct impact on mortgage rates. As such, if 2016 estimates call for Fed Funds to rise one percent, mortgage rates probably won’t rise by that full amount. However, there is one other element of Fed policy that does directly impact mortgage rates.

In response to the financial crisis, the Fed started buying MBS in January 2009 in order to push up MBS prices and keep mortgage rates down. In recent years, they slowed their highly aggressive MBS buying, but still buy enough MBS to influence mortgage rates. The December 16 Fed statement reaffirmed they’d continue this MBS buying as they move through their Fed Funds Rate hiking cycle. This eased MBS market concerns, and should prevent a sharp spike in mortgage rates.

What does it all mean to me?

I know, it’s all a bit too much to grasp. So we turn to the experts. And given all relevant factors, market estimates call for mortgage rates to rise by about 0.5 percent by mid-2016.

A Zillow survey just showed that 70 percent of current home shoppers wouldn’t be deterred by rates rising this amount, although 45 percent of these shoppers said they might scale down their price range. If rates rose 0.5 percent, the monthly mortgage payment on a $300,000 home would increase only $88 per month.

So mortgage rates will certainly impact – but shouldn’t derail – your home buying plans for 2016.

When you are ready purchase a home, Sunset Vista Realty is ready to help. Check out our Buyer Services.

— Source: Zillow Blog

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