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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This question is one of the most common questions we see from consumers, investors, real estate agents, and many others with interest in the real estate market.  The answer is ‘yes’.  But it also depends on your specific situation, what’s important to you, and where you are financially.

The reason the question “is it a good time to buy a house” comes up frequently today is because interest rates have risen substantially year over year, making the monthly payment rise for many people considering a home purchase.  With these higher payments, many are wondering if it’s a bad time to buy a home, but it’s important to remember that with increasing rates has come a softening market – meaning buyer’s today are seeing both lower median home prices and reduced competition, allowing for seller concessions that weren’t widely available during the market craze of 2020-2021.  So while payments might be higher today, total price tags may also be lower, allowing buyers to keep more money in the bank at closing time.

Median home prices in the US have come down from their 2021 highs

The other consideration many people have when asking ‘is it a good time to buy a house’ is what will happen with home values in the future.  The real estate crash of 2010 is still fresh in a lot of minds, but it’s important to look at the economics of today’s market and compare them to the crash to see what’s likely to happen in the coming months.

One of the important considerations is one of the foundational aspects of economics and pricing – supply & demand.  If you consider the US population has continued to increase and believe that means more people will require housing, the next place to look for a clue on where home values will go is to housing supply.

Housing inventory is far below the 2007 market peak

In the image below you can see that housing supply is far below the supply of homes that was on the market in 2007 preceding the crash in home values.  While low inventory isn’t a guarantee of home price growth, in terms of supply and demand, the lack of inventory for a growing population should provide some support for home values and continued appreciation, even if that appreciation is slower than the abnormally high appreciation rates home owners saw in 2020 and 2021.  It’s also important to note that real estate is very local, and some markets have more inventory than others, along with varying populations, so examining these numbers in your local market is important!

So interest rates are up, but it appears home values have some support.  Interest rates also ebb and flow, so while you should never buy a home based on the hope that your payment will eventually get cheaper, that possibility does exist!  If rates dip, refinance possibilities may exist for home owners to reduce their monthly mortgage payment, but this is no guarantee – it would just be a cherry on top for today’s would be home buyers.  As you can see below, home prices have historically climbed on a consistent basis outside of the great recession over a decade ago, and for that reason home ownership has been a key metric in helping Americans establish wealth and grow their net worth.  For many, the alternative (renting) doesn’t offer that same level of financial security.

Home values have climbed since 1975

So while we’re a mortgage company and home ownership is in our interest (pun intended), a look at the data supports home ownership being a great idea for those who can afford their monthly payment, and those who have the financial stability to consistently make a mortgage payment.  The lack of inventory nationwide is good support for home values, and rising rates have diminished some demand, giving buyers more power and control in the purchase process than they’ve had in recent years.

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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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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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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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It’s come up a lot recently.  With unemployment at or near all time lows, a stock market rally that’s defied all odds for longer than history says it should have, and the Fed looking at potentially reversing monetary policy, it looks like our next recession is more a matter of when, not if.  With the most recent recession being the “Great Recession” that caused so many people to lose their homes, retirements, and so much more, many people are understandably frightened by the prospect of another recession.  In some cases, that fear is well founded.  Housing, though, isn’t an area that appears particularly vulnerable.

One thing many people remember from the last recession is how quickly and how far home values fell.  “For Sale” signs littering neighborhoods, short sales, and foreclosures are still fresh in the minds of many, but if we look at the data, this time is different.  And while many aspects of what causes a recession are complicated, and global economics isn’t always easy to understand, one major factor in housing is very easy to comprehend – the idea of supply and demand.

Supply and demand laws state that when there’s a high supply, and not enough demand, prices go down.   And when there’s high demand and low supply, prices go up.  Well, let’s look at supply and demand in terms of housing, first with supply:

Supply is below demand levels in the current housing market

As you can see, current supply levels are far below where they were in 2008, when values began to crash.  But what about demand?  Well, let’s take a look at one of the biggest drivers of demand – household formations:

Housing completions aren’t keeping up with household formations – a good sign for home values

Household formations are a strong indicator of demand for housing, and as you can see in this graphic, annual home completions aren’t keeping up with household formations (due to many factors), and if you look back to the last recession, you can see the opposite was true – the supply of homes far outweighed the formation of households to fill those homes up.

The chicken or the egg?

BUT, you may say, you can’t escape the fact that there was a recession, and that during that recession, home values fell substantially!  And you’d be correct – but which came first.  If you look at the data, the housing bubble started to collapse, and actually caused the recession.  It was a housing bubble that caused a recession, and not a recession that caused problems with home values.  Today’s market IS different – we have a high demand for housing, and not a lot of supply, which means even in a recession, home values should be in relatively good shape (as they have been historically through recessions).

2008-2012 was a bubble collapsing, there’s no doubt.  But those who think the market today is similar aren’t looking at data. The data suggests that home values will continue to hold strong, and forecasts are calling for home appreciation to continue.  Historically, buying a home has been one of the biggest pieces to the puzzle of wealth building, and today that still rings true.  Want proof?  Ask a MasonMac loan officer to share data with you on your local market.  Real estate is local, but in the majority of markets, you’ll see supply is lagging behind demand, and buying is a smarter financial move than renting, especially long term, but in some cases, short term as well.

Recessions aren’t fun.  They cause problems for a lot of families, industries, and communities.  While we don’t want to diminish the fact that people could see some financial struggles, we do want to make it clear that yes, in fact, this time is different.  While the Great Recession crushed housing, going forward, housing looks to be one of the strongest areas of our country’s economy, and it doesn’t look like that trend will be ending any time soon.

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