It's a common misconception that when the Federal Reserve cuts the Fed Funds rate, mortgage rates will also go down. While there is a correlation between the two, you should not expect them to move together.
Understanding the Disconnect
To grasp why this happens, it's essential to understand how the mortgage market functions. Mortgages are bundled together and sold to investors. These investors, not the Fed, ultimately determine the price they're willing to pay for these mortgage-backed securities, which directly impacts mortgage rates.
The Role of Economic Indicators
While the Fed's actions can influence market sentiment, other economic factors like inflation, employment rates, and global economic conditions also play a significant role. When the market anticipates a rate cut or other economic changes, it often prices these expectations into mortgage rates beforehand. As a result, any actual rate cuts or economic data releases may have a minimal or even negative impact on mortgage rates if an unexpected trend appears.
Historical Perspective
A look at the past two decades further illustrates this point. During the period between 2009 and 2016, as the economy recovered from the financial crisis, the Fed kept the Fed Funds rate near zero. However, mortgage rates fluctuated significantly. This occurred because investors were still cautious about the housing market and adjusted their pricing accordingly.
In their article, "No, Your Mortgage Rate Won’t Go Down With the Fed Rate Cut – Debunking the Myths" U S News and World report points out that of the last 20 Fed funds rate changes, mortgage rates have moved in the opposite direction 8 times!
The Myth of High Rates
Another common misconception is that current mortgage rates are unusually high. Historically, the average 30-year fixed mortgage rate since 1971 is 7.73%. While recent rates have climbed above historical averages, it's important to maintain perspective. The low-rate environment of the past decade was an anomaly, not the norm.
What to Know
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While the Fed's actions can influence mortgage rates, they are not the sole determinant. A complex interplay of economic factors, investor sentiment, and market dynamics ultimately shapes mortgage rates. Trust a mortgage professional to help you understand which way rates are likely to move rather than just getting all your information from the media. By understanding these factors, borrowers can make more informed decisions and avoid falling victim to common misconceptions.
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Mortgage rates are still slightly below average. We aren't likely going to see 3%- 4% mortgage rates anytime soon. "Waiting for rates to go down" to buy will result in missed opportunities.
