Janet Yellen
I wrote this blog over 2 years ago, and it applies to the same principles of today. This is also why you will see the picture of Janet Yellen to the right who has since been replaced by Jerome Powell.
Did you know in the Month of December, Mortgage Rates have dropped nearly 1/2%? Even know the Federal Reserve has raised the key short term interest rate.
The current Fed Chair has raised rates for a fourth time this year on December 19th 2018: (Here is the original Post from 2016) This news is bad for borrowers and consumers who may have a Home Equity Line of Credit, Revolving Credit Debt, Looking for a new Car loan or any other type of adjustable short term interest rate. Even though this move has been widely expected, we never seem to grasp the reality of what it does. The Fed Fund Rate has no direct tie to mortgage rates or other fixed rates in the market, it’s how the Markets perceive the comments of The Fed.
The FOMC meeting adjourned with an announcement of a quarter point increase to key short-term interest rates. Short Term interest rates are the Prime Lending Rate, Credit Cards, Car Loans to name a few. This was expected and priced in to the mortgage market over the last several days. However, We did get some surprises and the bond market has not responded well to them. The biggest and most impact is that the Fed is estimating 3 or more rate hikes next year when the previous estimate was 1 or 2. That means the Fed is confident in the U.S. economy continuing to grow, making bonds less attractive. This is especially true when the Fed strongly believes that inflation will continue to strengthen. Their revised economic projections showed a slight upward revision to the GDP (1.8% to 1.9%), a downward tick in the unemployment rate (4.8% to 4.7%) and no change to core inflation (1.7%). Overall, the news has not been taken well in the stock or bond markets. The Dow is currently down 152 points while the Nasdaq is down 32 points as the rate increases are expected to restrict future economic growth and corporate earnings. The bond market is currently down 15/32 (2.52%) since the additional rate increases means the Fed feels that the economy will continue to strengthen and be able to absorb those moves. The net impact on mortgage rates is an intraday upward revision of approximately .250 of a discount at the time of this update. However, if bonds continue to slide, another increase before the end of the day is quite possible.
So What Happens? The Financial Markets react to the shift in rate hike expectations among Fed members. The Fed has increased the amount of times they increase the key short term rates in the future. Thus causing Wall Street to react which will affect the Stock Market and Mortgage Markets in a Positive or Negative way depending upon the actual language of the Federal Reserve, and they use their words very carefully. The Mortgage Markets will act the opposite of the Stock Markets…Stock Market is up, rates tend to worsen, Stock Market drops, Mortgage rates will improve. Why? As the stock market falls, traders will pull there money from risky stocks and invest in the Bond Markets or Treasuries, known as a much safer investment which causes mortgage rates to improve. And this can all be caused by the language the Federal Reserve uses. Back when Alan Greenspan was in office, the markets would react to how light or heavy his briefcase was. Yes… its this sensitive!!
What should you be doing?
If you are in the process of purchasing a home, Now is the time to reach out to your Loan Officer and request them to update your Pre-Approval in order to reflect the higher mortgage rates. Rates, depending upon when the Pre-Approval was issued, could be up as high as 3/4’s to a full percent. That equates to over $100 in a monthly payment for loans above $200,00 and in some cases even more.
For More Information about Mortgage Rates, Loan Approvals and mortgages that are best suited to your financial needs, contact me anytime at 978-273-3227 or email me and you can always visit my mortgage site at www.billnickerson.com
William Nickerson
The Mortgage Markets 