The Fed funds rate is the rate at which the Fed lends money to banks, and banks lend money to each other, NOT the rate that consumers borrow at.

When the Fed raises the Fed funds rate, it is generally to fight inflation.  Beginning in early 2022, inflation began to skyrocket, and throughout 2022 and so far into 2023, the Fed has consistently raised their rates to curb inflation.  While inflation has slowed, recent data points to inflation being higher than the Fed’s target rate, and for this reason, rate hikes have continued into Q2 2023.  Future rate hikes will depend on the direction of inflation from here.

It’s important to note that mortgage rates are not directly tied to the Fed’s actions.  Since high inflation results in high mortgage rates, the Fed rate hikes often help bring mortgage rates down, since reductions in inflation lead to reductions in mortgage rates.  Some other financial products are, however, tied directly to the Fed funds rate.  The “Prime rate” for example, moves in direct correlation with the Fed funds rate, so credit card rates will move up in line with the Fed funds rate.

Since early 2022, the Fed has raised their Fed funds rate by a total of 5%.  That means credit card debt has become 5% more expensive for consumers to carry, and other types of debts have become more expensive as well.  Mortgage rates, though, have come down substantially since their highs seen in October 2022, despite additional Fed rate hikes.

The Fed has signaled that they’ll rely on data and economic figures to determine the future direction of the Fed funds rate, but most forecasts predict the cycle of rate increases is either at or near it’s end, as inflation numbers and economic conditions seem to be shifting.

Mortgage rates improved on the day, and have come down substantially from October highs and another recent spike in February.

For questions about the Fed rate hike, mortgage rates, or anything else housing or mortgage related, you can ask an expert here and get answers instantly!

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The most recent rate hike brings the Fed’s target funds rate (the rate which banks borrower from the Fed and each other) to a range of 3-3.25%, a full 3% higher than 0-.25% range we saw prior to inflation kicking in late last year.

This also moves the “prime rate” (a very important metric to the overall economy) up to 6.25%, also 3% higher than last year’s lows as the prime rate, unlike mortgage rates, does more in direct proportion to the fed funds rate.

What does this mean for mortgages and home financing?

The Fed’s moves are closely watched by mortgage bond traders (and mortgage bonds, or mortgage backed securities, are what directly influence our rates), and just as important as the Fed’s move on rates is their commentary after announcing their rate decision.  The market reaction to this Fed move was mortgage interest rates moving initially higher (opposite to the market reaction of the last Fed rate hike of the same amount back in June!), as the market’s seem to doubt the Fed’s ability to reign in stubborn inflation.

Historically, though, Fed funds rate increases are usually followed (sometimes quickly) by recession, which historically has brought rates back down to earth.  While no one has a crystal ball, with pending recession grabbing more headlines, it seems like history may repeat itself, but that remains to be seen as the Fed’s rate hike will typically take a few months to be absorbed and show it’s impacts in the broader economy.

As the Fed funds rate increases, recession typically follows (indicated by the gray areas)

What Does The Fed Rate Hike Mean For the Broader Economy?

With a Fed rate hike, the ‘prime’ rate increases, and many household financial products are tied to prime, most often credit cards and home equity lines of credit (HELOCs).  So these products will get more expensive and will likely be the biggest direct impact households will immediately see & feel.

Higher borrower costs tend to mean less borrowing and a slowdown to the broader economy, so over time the Fed rate hikes should reduce inflation, which is a good thing!  The negative side of the equation is that while reducing inflation, the economy usually slows and often ends up in recession.  With inflation hitting so many households in the wallet this year, though, the Fed’s primary concern is to reign in inflation and lower costs for US households.  If their actions do cause a recession and a spike in unemployment numbers, their focus will shift, but for now, we can expect the Fed funds rate to continue to increase and remain at higher levels until we start seeing inflation numbers come down.

Is Housing a Concern?

Housing is certainly seeing a shift in 2022 from the insanity of quickly appreciating values in 2020-2021, but inventory is still below historical levels, so the market has some room to absorb reduced demand without a huge impact.  Again, while no one has a crystal ball, the numbers seem to support strength in the housing market, even if we do see a slowing in appreciation or some slight depreciation in some markets.  The greater concern for the housing market is interest rates, which have hurt affordability in housing, as even with rising prices, low rates can keep housing payments down.  If we see rates drop as inflation comes down, it could bring more home buyers to market.

The Fed has states they plan to continue to raise rates until inflation shows sustained improvements, and they have made fighting inflation their primary focus for the short term.  What the overall impacts will be and the direction of the economy as a result of their actions remain to be seen, we’ll be sure to provide up to date info on the state of housing, rates, and how the Fed’s actions are impacting our markets.

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For mortgage rates

There’s a common misconception that the Fed raising rates with a Fed rate hike leads to higher mortgage rates, but it’s important to understand what drives mortgage rates.  The price of mortgage backed securities (MBS) are the only thing that directly move mortgage rates, and MBS often see an improvement (improving rates, aka bringing them down) when there’s a Fed rate hike.  Today was no exception.  The reason for this is that the Fed rate hike is a measure implemented to slow down the economy and to fight inflation.  High inflation is a major cause of increasing mortgage rates (and is one of a few reasons we’ve seen mortgage rates go up so much in 2022!), so the Fed’s actions should theoretically reduce inflation, helping mortgage bonds, and thus lowering mortgage rates.

In fact, since the Fed’s last rate hike in June, mortgage bonds have improved substantially, and mortgage rates have come down from their highs.

For other debts

Some debts are directly impacted by a Fed rate hike.  Home equity lines of credit (HELOCs), for example, are often tied to the prime rate, which moves in step with the Fed funds rate.  Because the prime rate goes up and down with each Fed rate hike, HELOC rates will move as well, and for that reason, rates on HELOCs will immediately go higher on the Fed announcement.  Other debts tied to the prime rate will do the same.  For this reason, consumers can expect their credit card payments to increase as most credit cards have their interest rates tied to prime.

For the broader economy

Fed rate hikes historically precede periods of recession.  The Fed’s action reduces inflation, but it also makes borrowing costs of financial institutions more expensive.  This tends to slow down borrowing and spending, which in turn slows down the economy.  In today’s marketplace the Fed has made it clear that fighting inflation is their #1 objecting, and the broader economy, while of concern, is being focused on less than reigning in stubborn, persistent inflation that was once thought to be “transitory”.

The Fed rate hike has many implications, but it’s very important to know that the Fed is NOT raising mortgage rates, and in fact, their actions typically lead to lower rates.  That’s important to understand today, because with mortgage rates spiking in early 2022, we’ve seen an increase in inventory on the market as many buyers have been forced to the sidelines.  Interest rates coming down could present a great opportunity for many buyers who now have less competition in the market and more inventory to choose from.  The Fed has also made it clear that their expectation is for more rate hikes throughout 2022 and beyond, so if the markets behave as expected, we may see some great opportunities with lower rates in the mortgage space in the months ahead.

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There’s a lot of economic jargon being tossed around in headlines these days, and one of the hot topics out there is inflation.  To start, it’s important to understand what inflation is.  When the value of a currency diminishes, the result is inflation – basically, you get less for the same or more.  The cost of goods and services increase, costing more money for the same (or worse, less) products or services.  There are many causes of inflation, and it’s a pretty complicated economic phenomena that has caused hardship for many people, and in the worst cases of hyperinflation, has even destroyed currencies throughout history.  The biggest question on many people’s minds today is ‘will inflation go down?’, often followed by ‘when?’.

Will Inflation Go Down?

Inflation is typically analyzed within 2 economic reports – the CPI (consumer price index) and PPI (producer price index).  Both gauge inflation, but PPI excludes volatile energy and food prices.  Each report is analyzed for month-over-month changes, and these month-over-month changes are added together over a 12 months cycle to determine an annual rate, which is usually the metric shared when discussing “inflation”.  For example, if we started with 0% inflation, and each month for the next 12 months, there was a monthly increase of 1%, inflation at the end of that year would be 12%.  This is important because current inflation is important, but it’s equally important to recall the months current readings are being compared to (each month replaces the same month’s reading from the previous year).

It’s important to understand how inflation is calculated to have an idea of when it may go down.  For example, summer of 2021 saw a small dip in inflation, and with inflation currently on the higher end of the spectrum, lower 2021 numbers will likely be replaced by higher numbers for the same months in 2022, making it unlikely that inflation will see a dip this summer.  However, because of the Fed’s rate hikes (an attempt to reign in inflation by making borrowing more expensive) and the fact that inflation was high in the fall months of 2021, it’s very possible we’ll see inflation numbers start to get some relief in the fall.  You can see how inflation has ebbed and flowed in the chart below, so when you see inflation numbers in future months, you can see the month’s being replaced, too, to determine overall inflation.

Will inflation go down? We’ll need to see lower month over month numbers than last year to see overall inflation dip, and summer 2021 saw relatively low inflation compared to fall 21′

This helps to answer the question “when” inflation might go down.  Assuming the Fed can reign in some inflation with their rate hike plan, and also assuming supply chains begin to normalize, you can see above inflation numbers were at a recent low in July-August 2021, so while month-over-month readings in 2022 are replacing these relatively low numbers, year over year inflation is likely to remain high.  Once new numbers begin replacing the higher numbers of late-2021 and early-2022, that year-over-year number, or the annual inflation often presented in headlines, may see some relief.

How does this relate to your mortgage or home buying plans?

A phrase we like to use is “you date your mortgage, you marry your house”.  Since inflation has a relationship with mortgage rates (all else being equal, higher inflation = higher mortgage rates and vice versa), it means mortgage rates may be set to remain on the higher end this summer, with some relief in the not so distant future!  For home buyers, higher rates have pushed some buyers out of the market, and with increases in home inventory in many markets, there may be a great buying opportunity.  And while no one wants a higher rate, if you consider most higher rates equate to higher payments in the ‘hundreds’ of dollars, the reduction in buyer competition and increases in home inventory may mean offers on homes don’t need to be ‘tens of thousands’ over list price as we’ve seen in many markets over the past 2 years.  And if & when rates dip, today’s home buyers may have a refinance opportunity to reduce their payment.

For anyone trying to time the market, it’s a tough task – when we look at charts, data, and history, it’s easy enough to make predictions, but there is still uncertainty over the supply chain, COVID-related issues in many export-heavy countries, and geopolitical issues that are tough to predict.  Our advice is that if you’d like to buy a home and you can afford the payment, it’s a good time to buy!  We recommend contacting a MasonMac Loan Officer before you begin your home search so you’re prepared and informed of the current market, and can be in the best possible position to begin to enjoy the benefits of home ownership!

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Today the Fed increased their Fed Funds rate by .75 percent.  While on the surface that doesn’t seem like too big a bump, this is the largest single-day increase to the Fed funds rate since 1994, signaling a serious attempt at Fed members to reign in inflation.  The move comes on the heels of last weeks surprisingly high inflation report which shook up the markets and led to losses in equities markets and steep and fast increases to mortgage rates.

There is often a lot of confusion around the Fed Rate Hike and how it actually affects the mortgage market, so we hope to clear up some of the common misconceptions.

1. No, mortgage rates do not go up when the Fed Rate Hike happens

Mortgage rates are influenced by many things, but one of the biggest factors in the percentage rate offered to mortgage applicants is inflation.  When inflation is high (as it has been for all of 2022 thus far), mortgage rates are higher.  When inflation is reduced, mortgage rates usually come down with it.  Since the Fed rate hike is intended to reduce inflation, the result is often reduced mortgage interest rates, though sometimes it takes time for rates to come down a noticeable amount.  Today, however, the mortgage bond markets gained huge ground upon the Fed rate hike announcement and commentary, so improvements in rates were felt almost immediately for mortgage applicants.

2. Other debts will get more expensive, immediately.

The “prime rate” is tied directly to the Fed funds rate, and many of the most common types of debt are tied to prime.  Credit cards and home equity lines of credit are two of the most common debt vehicles that do go up and down based on the Fed movements, so with the latest Fed rate hike, it can be expected that credit cards and home equity line of credit rates will see an identical .75 percent increase in their cost.  Since more fed rate hikes are expected throughout 2022 as the Fed continues to fight inflation, it can be expected that this revolving debt will continue to get more expensive on a monthly basis for anyone carrying this type of debt.

3.  Does a Fed rate hike mean recession?

Recession has been a hot headline recently, and for good reason.  Many economic indicators currently point toward the US being in or heading toward a recession, however Fed rate hikes don’t necessarily mean recession.  It’s important to note though, that rate hikes usually lead into recession.  The reason is that higher rates cool off a hot economy by making borrowing more expensive.  When borrowing is more expensive, there tends to be a ripple effect in the economy that often hits the job market (leading to increases in unemployment), and slows inflation, cooling the GDP and often leading into consecutive quarters of negative economic growth, which is the technical indicator of recession.  Since we don’t know we’re in recession until we have 2 consecutive quarters of negative GDP, it’s impossible to say if we’re in a recession or will be soon, but it’s likely the Fed rate hike (and subsequent rate hikes) could point toward recession sooner than later.

4.  Does the Fed rate hike impact other rates and payments?

Through the same ripple effect, the Fed’s actions indirectly affect many aspects of the economy, but what the Fed funds rate actually is, is nothing more than the rate banks borrow from each other and from the Fed.  When banks are borrowing for free or nearly free, as we’ve seen over the past several years, it allows them to offer lower rates and still profit.  When their borrowing costs go up, to maintain the same margins of profit, the rates they offer consumers also have to increase, which is why borrowing becomes more expensive almost across the board.  Mortgage rates are somewhat of an exception because of the impact Fed rate hikes have on inflation that we noted above.

5.  How low will mortgage rates go?

No one has a crystal ball when it comes to mortgage rates, but historically in times of a Fed rate hike, and moreso in times of recession, interest rates decline.  2022 has brought some of the steepest increases we’ve ever seen in terms of how quickly rates have risen, and it remains to be seen if a decline could be just as steep, especially considering the weird market conditions related to COVID-19 that brought us the historically low rates of 2020 and 2021.  If you’re considering applying for a loan, your best bet is to talk with a MasonMac loan officer to determine which options are presently available, and what type of loan product and rate best fits your financial needs!

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Yesterday, March 16, 2022, was the date of the first Fed rate hike in 3 years, and is the first of an expected 7 total for the year 2022.  This rate hike is an effort to fight off the inflation once deemed “transitory” but has proven to be a larger than initially anticipated problem.  There is a lot of confusion around the Fed’s rate decisions and movements, because their moves do have a direct impact on some loan products, with more indirect impacts in other areas.  One area that has an indirect impact is mortgage rates.

First, it’s important to understand what does have a direct impact on mortgage rates.  The sale of mortgage backed securities, or MBS (investment vehicles that include many loans bundled together), are what drive mortgage rates up and down.  When the price of MBS increases, mortgage rates associated with those securities go down.  When the price of MBS declines, interest rates go up (rates rise to attract more investment money).  The Federal Funds Rate, or the Fed rate, is simply the rate set by the Fed at which banks borrower from the Fed.  It is not a rate paid by consumers.

Some things impacted directly by the Fed funds rate are financial products tied to the ‘prime rate’ – since the prime rate correlates with the Fed funds rate, when the Fed makes rate decisions, it has a direct impact on products like Home Equity Lines of Credit (HELOCs) and credit cards, since both are tied to the prime rate.  Mortgage rates, however, being driven by MBS, are influenced by a variety of factors.  One of the biggest impacts to mortgage rates comes from inflation.  In an inflationary environment, we see interest rates increase (as we’ve seen since the start of 2022).  Since the Fed increases rates as a way to fight inflation, it frequently occurs that when the Fed raises their funds rate, mortgage rates actually go down as an immediate result.

With the Fed funds rate increasing, money becomes more expensive for banks, and the impact is often felt in market liquidity.  Due to a variety of reasons, a Fed rate hike is often a precursor to a recessionary environment, another financial environment that is usually tied to a reduction in mortgage rates.  So often, while the impact is not directly related, when the Fed raises the Fed funds rate, mortgage rates often trend downward.  You can see in this chart that after the Fed has increased the Fed funds rate historically, it’s generally been followed by a dip in 30 year fixed mortgage rates, and many times has also been a precursor for recession.

When the Fed raises the Fedral funds rate, we often see mortgage rates go down

There are many factors that influence mortgage rates, and while the Fed funds rate direction has an indirect impact, it is only a piece of the puzzle when it comes to the direction of rates short- and long-term.  While it’s a near certainty that rates on things like HELOCs and credit card rates will increase in 2022 along with the Fed funds rate, the direction of mortgage rates will be subject to many other factors, including recession numbers, the overall economic picture, geopolitical affairs, and other markets (such as the stock market) competing for investor dollars.

Curious about where rates currently sit and what options may exist for your mortgage?  Reach out to your MasonMac loan officer today for up to date information on current rates!

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So let’s look at an example.  In 2006, we’ll take a home worth $300,000.

Price: $300,000
Rate: 6%
Monthly Payment: $1,800

Household income: $6,000/month
% of monthly income that goes to the mortgage payment: 30% 

Now let’s look at that same home in 2021

Price: $423,000 (up 41%)
Rate: 3%
Monthly payment: $1,783

Household income: $9,300 (up on average 55% since 2006)
% of monthly income that goes to the mortgage payment: 19%
These are the averages nationwide, and of course numbers will be different for every person, situation, and things vary by region, but on average, the market is about 11% more affordable today than it was in 2006.

Further, housing still has room to go – with supply lagging far behind demand and a generation of first time buyers coming of age, nearly all forecasts point to further home appreciation.  Add in supply-chain issues, inflation, and many other metrics and signs point to affordable housing being a very realistic thing.  That means today is a great time to buy, despite steep competition and high price tags.  To see what options you have in your area, you can contact your MasonMac loan officer, or contact us with questions by asking an expert here!

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With the final quarter of 2021 under way, we expect to see a lot of forecasts and announcements around changes as we head into another new year.  Over the next month, 2022 loan limits will be announced, lenders will begin to make a final push to finalize their loans needing to close before year’s end, and planning and speculation for the new year will begin.  Much of that speculation and forecasting is already underway.

One forecast that is consistent across many economic experts is one showing home appreciation forecast to increase through 2022.  With 2021 being a tremendous year for appreciation and supply & demand metrics out of whack and heavily favoring sellers in most markets, it’s no surprise appreciation is expected to continue.  With many markets in 2021 seeing nearly 20% appreciation rates, 2022 is expected to be another big year, with forecasts coming in from Goldman Sachs with an expectation of 16% appreciation.  With the median US home price around $300,000, that would mean purchasing a home at $300k today would have a home worth $348,000 at the end of 2022!

Not all forecasts are quite as optimistic though, with Zillow’s forecast model predicting a jump of 11%, and Corelogic much lower at 2.2%.  It should be noted though, that Corelogic has pretty consistently missed the market on home value forecasts, actually forecasting a drop in home values for 2021.  A few other economic hubs have forecasts in between Zillow & Corelogic’s guesses.  Bottom line, though, is that just about everyone in economic circles believes home prices will continue to rise in the new year.

What Does This Mean For You?

If you’re a homeowner, it means you’ll enjoy a nice bump to your home equity position and have some options if you need to access home equity for things like renovations or to pay off other outstanding debt.  If you’ve recently purchased and have PMI, it may also mean you’ll have an opportunity to reduce your PMI or get rid of it altogether should your home appreciate enough!

If you’re a potential home buyer, it means that acting sooner rather than later is in your best interest.  Homes will likely be more expensive as the months go on, and with supply chain troubles still occurring, odds are that there will not be nearly enough supply of new homes coming to meet current demand.  This could mean another year of limited inventory and competitive situations, but the upside is that once you own, the appreciation begins to work for you, and no longer against you.  With rates on mortgage loans also expected to rise in 2022 (the MBA has forecast that rates will approach 4% in the new year), making a purchase with rates still near historic lows and with values where they sit currently, savings could be substantial for those who buy early in the year rather than waiting.

How We Can Help You

At MasonMac, we’ve invested in modern tools and have access to data nationwide, so we can look at data down to the zip code to provide you with solid advice and show you what home values are likely to do in a specific area.  We also have no- and low-down payment mortgage options so that even while home values climb, we can offer loan products that don’t require breaking the bank to get into a new home.  With tools like our “cost of waiting”, “buying power”, “rent V buy”, and “bid over ask” platforms, we can show you how to be a savvy buyer and structure a great offer to increase your odds of getting your home in a competitive situation.  And with full underwriting approval available before you find a home, you can rest assured you’re in the best possible position to become a home owner.

How else can we help you?  Contact us today with any questions, or if you’d like to see market data for your area (or any area in the US!) or be connected with a loan officer that can guide you down the path to home ownership.  In 2022, owning a home is forecast to be solid ground financially, and will be another year of proving that your financial security begins at home!

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In today’s world of competitive markets, short inventory, and rising purchase prices, things are tough for home buyers (and sellers, too!).  With sharp appreciation and bidding wars becoming more common, it seems the market is unaffordable, but when diving into the data, it appears that throughout the US, most markets are still very affordable based on wage growth and overall economic factors.

This is, of course, based on a certain definition of housing affordability.  Homes have appreciated in many markets in the 10-12% range recently, and this is the reason many people find things “unaffordable”.  What cannot be discounted though, is wage growth, which is averaging 7% year over year at the moment.

Homes appreciation 10-12%?  Wages increasing 7%?  Sounds unsustainable, right?  Wrong!  Taking a quick glimpse, it appears that things can’t continue this way, but wage growth was near stagnant for a decade, and recent increases leave a lot more room for home prices to continue to climb – great news for home buyers, better news for home owners, and bad news for those “waiting for the dip”.

Let’s take a look at a scenario for a $500,000 mortgage, for a customer making $6500/month income.  We’ll assume, just for math’s sake, the mortgage is at a rate of 3.5%, and the buyer is using a 10% down payment.  Since our loan is $500,000, this makes the home price $555,000. The mortgage payment in this scenario (principal + interest) would be $2245/month.

Home prices at $555,000 and 10% appreciation would make the price after 1 year $610,500.  Someone buying that home with 10% down would have a mortgage of $549,450, and at the same interest rate, the monthly payment is $2,467, or $222/month MORE than the same home the year before (again, assuming a 10% appreciation rate).

Let’s also take a look at the very important income figures – that $222/month increase in mortgage payment is actually only 3% of the $6500/month earnings of our example borrower.  With wages increasing an average of 7%, the average earnings of a $6500/month employee would be expected to be $6955/month with wage growth of 7%, or $455/month more year over year.  And that $455/month more than covers the $222/month increase in mortgage money in this scenario.

Even with home prices going up, in today’s market of increasing wage growth, homes are still affordable.  In fact, today’s market represents the 7^th most affordable market in history, statistically speaking.

Even though housing affordability is still statistically reasonable, it does take some work to get an offer accepted, and there’s certainly a line where the price of a home is “too much”.  We offer our customers a glimpse at the local market using state of the art data tools that are specific to your local market, so if you have questions on how much you can qualify for, how much payments would be, or what the overall health of your local real estate market is, we can help!

Reach out today and we can help you determine your best path to home ownership!

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The Fed rate cut is a small piece of the big economic picture, but it does NOT have an immediate impact on mortgage rates as many people believe

Well, the Fed funds rate is the rate banks borrow from each other.  When the rate is cut, it is done to help stimulate the economy and increase inflation.  The Fed funds rate is NOT directly tied to mortgage rates or most other fixed rate loan instruments.  What IS directly tied to the Fed funds rate is the prime rate (the rate credit card variations are based on), so you may see rates on credit cards and other similar debt move in correlation with the Fed funds rate, but mortgage rates don’t move based on what the Fed does.

In fact, the market has already absorbed the forecast for a rate cut into current conditions – mortgage bond traders (and traders in every other market) forecast cuts or increases to rates well in advance of the actual decision/announcement day by the Fed.  The only time the Fed announcement has a large impact is when their decision differs from what the markets expected (for example, if the market expects a .25 CUT and the Fed announces a .25 INCREASE, you can bet there’d be some immediate market craziness).   So rates today won’t move as the Fed delivered exactly what the market was expecting.

But what about the bigger picture?  Long term, Fed rate cuts are indicative of an economy that needs a boost.  In a recessionary environment, inflation is generally low, and this is a positive for the bond market.  Because of this, when the Fed cuts rates, it’s usually a signal that mortgage rates are in a downward trend, but the rates don’t move down because of the Fed rate cut.  And the impact is certainly not immediate.

So if you’re locked into a mortgage loan today, your rate hasn’t changed for the product or loan program you’re applying for.  In today’s market, your timing is quite good – rates are near their historic low, and while there may be an opportunity to obtain a lower rate down the line (the changes to rates based on economic conditions generally move over weeks and months, not days), today’s rates are amazingly low when looking at the history of mortgage debt.

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