The Federal Reserve did it — they raised the target federal funds rate a quarter point, its first boost in nearly a decade. However, this does not necessarily mean that the average rate on the 30-year fixed mortgage will be a quarter point higher as a direct result of this move. That’s not how mortgage rates work.
Mortgage rates follow the yields on mortgage-backed securities. These bonds track the yield on the U.S. 10-year Treasury. The bond market is still sorting itself out right now, and yields could end up higher or lower by the end of the week.
The bigger deal for mortgage rates is not the Fed’s headline move, but five paragraphs lower in its statement:
“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way.”
When U.S. financial markets crashed in 2008, the Federal Reserve began buying billions of dollars worth of agency mortgage-backed securities (loans backed by Fannie Mae, Freddie Mac and Ginnie Mae). As part of the so-called “taper” in 2013, it gradually stopped using new money to buy MBS but continued to reinvest money it made from the bonds it had into more, newer bonds.
In other words, all the income they receive from all that MBS they bought is going right back into buying more MBS. Over the past few cycles, that’s been $24-$26 billion a month — a staggering amount that accounts for nearly every newly originated MBS.
At some point, the Fed will have to stop that and let the private market back into mortgage land, but so far that hasn’t happened. Mortgage finance reform is basically on the back-burner until we get a new president and a new Congress. As long as the Fed is the mortgage market’s creditor, rates won’t move much higher.
Also important is the continued popularity of US Treasury investments around the world, which puts downward pressure on Treasury rates, specifically the 10-year bond rate, which is the benchmark for MBS/mortgage pricing. Both are much more significant than any small hike in the Fed rate.
Still the news is likely to be of concern to those actively looking or contemplating the purchase of a home in the near future, especially young consumers, if mortgage rates inch up even slightly. That is because apparently they don’t understand just how low rates are. Sixty-seven percent of prospective homebuyers surveyed categorized the level of today’s mortgage rates as “average” or “high.”
The current rate of 4 percent on the 30-year fixed is less than 1 percentage point higher than its record low. Fun fact, in the early 1980s, the rate was around 18 percent.
The Fed is seeing more people going back to work, and with the expectation of job growth for America it feels comfortable with its intent to raise rates. But the reality is that an entire generation of first-time buyers has never experienced a meaningful rate increase. This is a new and unfamiliar phenomenon to them.
An increase from the current 4 percent on the 30-year fixed to 4.25 percent on a loans ranging from $200,000 to $300,000 would amount to less than the average borrower probably spends at Starbucks every month. Still, a majority of respondents to the survey, which was mostly millennials and Gen Xers, said rising mortgage rates would make them “anxious” about their current financial situations.
Another real estate survey appeared less dire, reporting buyers were unfazed by the prospect of rising rates. Just 6 percent, according to the report, seemed to care at all. They were far more concerned with rising home prices and the very tight supply of homes for sale.
The exception, of course, was among what was referred to as “budget-conscious buyers shopping for the least-expensive houses.” These buyers were categorized as those looking at homes priced $250,000 or less. Seventy-one percent of them said they were concerned.
Interesting, given that the median price of an existing home sold in America in October was $219,600, according to the National Association of Realtors.
In fairness, Zillow, a real estate listing company also based in Seattle, put out a report this week claiming 70 percent of potential homebuyers it surveyed nationwide said they would not abandon their buying plans if mortgage rates were to hit 4.5 percent.
Suffice it to say, home buying is the most emotional financial investment most people will ever make. Whether or not every penny matters, the prospect of every penny lost or gained matters.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235