Mortgage Rates — And Home Affordability — At The Whim Of The Federal Reserve
The Federal Open Market Committee starts a two-day meeting today, the third of its 8 scheduled meetings this year.
The FOMC is a special, 12-person committee within the Federal Reserve. It’s led by Fed Chairman Ben Bernanke and the group is responsible for voting on our nation’s monetary policy. This includes setting the Fed Funds Rate, the rate at which banks borrow money from each other overnight.
The general public tends to confuse the Fed Funds Rate for “mortgage rates” but, as shown in the chart at top, the two interest rates are very different. There is no direct correlation between the Fed Funds Rate and everyday mortgage rates in the North Georgia Mountains.
Since 1990, the two benchmark rates have been separated by as much as 5.29 percent, and have been as close as 0.52 percent.
Today, the separation between the Fed Funds Rate and the national average for a standard, 30-year fixed rate mortgage is 4.625 percent. This spread will widen — or shrink — beginning 12:30 PM ET Wednesday. That’s when the FOMC adjourns and releases its public statement to the markets.
According to Wall Street, there’s a 100% chance that the FOMC leaves the Fed Funds Rate in its current “target range” of 0.000-0.250 percent, the same range in which it’s been since December 2008. Depending on the verbiage in the press release, plus the comments of Fed Chairman Ben Bernanke in his scheduled, 2:15 PM ET press briefing, mortgage rates aren’t expected to steady as well.
If the Fed projects higher growth in late-2011/early-2012, or hints at new market stimuli, expect mortgage rates to rise on concerns about inflation. Inflation is bad for mortgage rates, in general.
On the other hand, if the Fed indicates that the economy is slowing down, or that it plans to withdraw its existing, $600 billion bond market stimulus, look for mortgage rates to fall.
It’s hard to be a home buyer in the North Georgia Mountains area when the Federal Open Market Committee meets. There’s just so much that can change mortgage rates and rising mortgage rates can affect purchasing power in a flash.
In the 6 months since November 2010, home affordability is off 9%.
So, if you’re shopping for mortgages, or just floating a rate, consider getting locked in before the FOMC issues its press release Wednesday. Once the statement hits, mortgage rates could soar.
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Mortgage Rates On Hold For Now
The Federal Reserve released its December 14 meeting minutes Tuesday afternoon. There wasn’t much there to disturb mortgage markets, thankfully.
The “Fed Minutes” is an official recap of the most recent meeting of the Federal Open Market Committee. It’s published 8 times annually, 3 weeks after the FOMC adjourns.
The Fed Minutes is similar to the meeting minutes released after a corporate conference or condo association gathering in that they provide additional details about the conversation and debate that occurred between meeting attendees.
The Fed Minutes are a lengthy companion to the Federal Reserve’s brief, more well-known, post-meeting press release. But, whereas the press release is measured in paragraphs, the minutes are measured in pages.
Here is some of what the Fed discussed last month:
- On inflation : Core inflation levels “trend lower”; disinflation risks are low.
- On housing : The market is still “quite depressed”; demand is “very weak”.
- On stimulus : The Fed will stick to its $600 billion support plan
In response, conforming mortgage rates in Georgia are unchanged today.
The no-change in rates is welcome news for this month’s home buyers and other people wanting to get a jump on the “Spring Buying Season”. Mortgage rates have been trending higher since November, erasing 7 months of gains in 7 weeks, and rapidly approaching the psychologically-important 5 percent figure.
Currently, Freddie Mac reports the average 30-year fixed mortgage rate as 4.86%.
As compared to November, mortgage rates are higher. As compared to history, however, mortgage rates remain low. If you are still floating a rate, or have otherwise not locked, your opportunity may be ending. Once the economy moves to higher gear, mortgage rates will be among the first of the casualties.
A Simple Explanation Of The Federal Reserve Statement In December 2010
Today, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged within in its target range of 0.000-0.250 percent.
In its press release, the FOMC noted that since November’s meeting, the “economic recovery is continuing”, but at a pace deemed too slow to make a material impact on unemployment rates. It also said that household spending in increasing, but remains constrained by joblessness, tight credit and lower housing wealth.
In addition, the Fed used its press release to re-affirm its plan to keep the Fed Funds Rate near zero percent “for an extended period” while also opting to keep its $600 billion bond market support package in place.
And lastly, of particular interest to home buyers and mortgage rate shoppers, the FOMC statement devoted an entire paragraph to the Federal Reserve’s dual mandate of keeping inflation and employment at acceptable levels.
The Fed acknowledges making progress toward this goal, but calls it “disappointingly slow”. Currently, inflation is too low for what the Fed deems acceptable, and unemployment is too high.
Over time, the Fed expects both measurements to improve.
Mortgage market reaction to the FOMC statement has been negative thus far. Mortgage rates in Blairsville and Blue Ridge Georgia are unchanged post-FOMC, but appear poised to worsen.
The FOMC’s next scheduled meeting is a 2-day affair, January 25-26, 2011. It’s the first scheduled meeting of 2011.
Make A Mortgage Rate Strategy Ahead Of Today’s Fed Meeting
The Federal Open Market Committee holds a one-day meeting today, its 8th scheduled meeting of the year and 10th overall.
The FOMC is part of the Federal Reserve, the government group that sets U.S. monetary policy. The Fed’s primary policy-setting tool is an interest rate known as the Fed Funds Rate. The Fed Funds Rate is the interest rate at which banks borrow money from each other.
2 years ago Thursday, in an effort to jump-start the economy, the FOMC met and voted to lower the Fed Funds Rate to as close to zero percent as possible without actually going to zero percent; the benchmark rate was prescribed to a range of 0.000-0.250 percent.
The Fed Funds Rate had never been set so low before, but ever since, it’s been held to that range. It will likely be there until early-2011, too, but that doesn’t mean that mortgage rates won’t change today when the Fed adjourns today.
Because the Fed Funds Rate has been so low for so long, businesses and consumers have been able to borrow money cheaply. As a result, both capital and household spending have been on the rise lately, creating tailwinds for the economy.
The Fed is expected to acknowledge this today which, in turn, should lead mortgage rates higher. This is because, in the current recovery cycle and until markets find balance, what’s good for the economy tends to be bad for rates in our North Georgia Mountains.
The Fed’s press release today will be a focal point for markets. Talk of higher-than-expected inflation or better-than-expected growth, and mortgage rates should rise. Talk of a slowdown should lead rates lower.
Either way, we can’t be certain what the Fed will say — or do — this afternoon. If you’re floating a mortgage rate, the safe move is to lock before 2:15 PM ET today.
Fed Minutes Help Push Mortgage Rates To 4-Month High
The Federal Reserve released its November 2-3, 2010 meeting minutes Tuesday afternoon. Mortgage rates in Georgia have been on the move since.
The Fed Minutes is a comprehensive review of Federal Open Market Committee meetings; a detailed look at the debates and discussions that shape our country’s monetary policy. The report is published 3 weeks to-the-day after the FOMC adjourns.
Fed Minutes add depth to the briefer, more well-known “statement” to the markets which is issued upon adjournment. As a comparison:
- The November 3 statement contained 497 words
- The November 3 meeting minutes contained 6,623 words
If the Fed Statement is the executive summary, the Fed Minutes is the novel. And, the extra words matter.
When the Federal Reserve publishes its minutes, it gives clues about the groups next policy-making steps. For example, in November’s minutes, it’s revealed that the Fed discussed setting inflation targets for the economy; holding occasional policy briefings for the press; and, working to set yields on instruments such as the 10-year Treasury note.
In addition, the Federal Reserve acknowledged a video conference hosted October 15, the second such “unannounced” meeting of the year. The other was May 9, 2010.
Bond markets have not taken kindly to the Fed Minutes. The minutes show a propensity toward Fed “action”, most of which markets believe to be inflationary. Inflation leads to higher mortgage rates and that’s exactly what we’ve seen.
As compared to Tuesday morning, mortgage applicants in Blairsville are finding conforming and FHA mortgage rates to be higher by as much as 0.375 percent. In “real life” terms, assuming a 30-year term, that’s an extra $264 in annual mortgage payments per $100,000 borrowed.
If you’re still rate shopping, consider getting locked today. As a result of the recent shift, mortgage rates are now at a 4-month high.
