Why Mortgage Rates are Falling Even As the Fed is Raising Interest Rates
When the Federal Reserve gathers on Wednesday, policymakers are all but certain to lift interest rates again in an attempt to keep inflation at bay by raising borrowing costs.
This will likely mark the third quarter-point rate hike announced by Fed chair Janet Yellen since last December.
But if that's the case, why have mortgage rates sunk to near a seven-month low, from 4.32% at the end of December to just 3.89% in June?
The answer is simple: There isn't just one interest rate that governs the entire economy. There are a myriad of rates to consider.
The Federal Reserve sets an ultra short-term rate called the federal funds rate, which determines how expensive it is for banks to lend money to each other on overnight transactions. This, in turn, helps determines how much interest you'll be charged on, say, your credit cards.
Mortgage rates, on the other hand, are influenced by the yield 10-year U.S. Treasury notes, which the Fed does not have direct control over.
When investors buy a lot of longer-term Treasury debt — which is viewed as a safe haven for global investors to park their cash — prices on 10- and 30-year Treasuries rise while their yields fall (bond prices and yields have an inverse relationship). And when long-dated Treasury yields fall, rates charged by banks for long-term mortgages also tend to drop.
"Mortgage rates say very little about the housing market," says Trulia chief economist Ralph McLaughlin. "It says more about what’s going on in the bond market."
And how investors feel about what's going on in the economy.
After President Trump's victory last fall, Wall Street fell in love with the narrative that with Republicans controlling both chambers of Congress and the White House, the GOP agenda of lowering taxes, cutting regulations, and increasing infrastructure spending would boost economic growth.
So investors, by and large, sold safe government bonds — causing Treasury prices to fall and yields to rise — while loading up on stocks, which would stand to gain if economic activity took off. Equity indexes, such as the S&P 500 and Dow Jones Industrial Average, ballooned to all-time highs.
The lovefest has tempered, though.
"The initial failed implementation of the Affordable Care Act repeal was a reality check for markets," says National Association of Realtors' director of housing finance and regional economics Ken Fears. The GOP agenda "may not happen as soon as we thought, and might be pared down significantly."
Toss in global uncertainty in places like North Korea and Syria, along with distractions stemming from multiple investigations into Russia's possible interference in the 2016 U.S. presidential election, and uncertainty again rules the economy.
And uncertainty and slow growth is great news for bond prices. As a result, the yield on the 10-year Treasury has sunk from as high as 2.62% in March to as low as 2.13% last week. It is currently at around 2.20%.
For now that means your mortgage rates will stay near historical lows, a boon to first-time homebuyers (if they can find a house for sale in their price range) and homeowners looking to refinance.
But the cost — weak economic gains in one of the longest business cycles and bull markets on record — is real.