Comments on: What’s the Deal with Rising Mortgage Rates? http://www.amybergquist.com/blog/2007/07/08/whats-the-deal-with-rising-mortgage-rates/ News and views about real estate in Greater Hartford Sat, 22 Nov 2008 05:08:36 +0000 http://wordpress.org/?v=2.6.1 By: Amy http://www.amybergquist.com/blog/2007/07/08/whats-the-deal-with-rising-mortgage-rates/#comment-275 Amy Wed, 11 Jul 2007 02:21:23 +0000 http://www.amybergquist.com/blog/2007/07/08/whats-the-deal-with-rising-mortgage-rates/#comment-275 Thanks for the question, Dick. As you point out, the government has been changing the Fed Funds rate without much impact on mortgage rates. This graph (http://library.hsh.com/?row_id=90) shows what's been happening since mid-2004 as the Fed Funds rate was raised from 1.00% to its current 5.25% over the course of about 2 years. Mortgages track the 10-year Treasury rate very closely, which can be seen in the graph. The 10-year Treasury rate is set by investors in the market through their buying behavior. Investors are influenced by the Fed Funds rate, but it is just one piece of the puzzle. The Fed Funds rate is only actually used to set the interest rate on very short-term loans between banks. It's not terribly relevant to the interest rate of 10-year Treasuries since the risk of lending for 1 day is very different than the risk of lending for 10 years. Investors care about the Fed Funds rate because it is one of the few windows into the government's thinking on the economy in general and inflation in particular. Relatively stable mortgage rates over the past 3 years despite consistent increases in the Fed Funds rate by the government is a reflection of the market's confidence in the government's ability and willingness to control the economy over the long haul. Increases to the Fed Funds rate from 2004-2006 were a return to neutral levels and not an attempt to fight inflation or slow the economy. The government had lowered them significantly in the early part of the decade to combat the economic slowdown related to the popping of the tech bubble, the corporate scandals (Enron etc), and the 9/11 attacks. So to sum up, the Fed funds rate rarely has a direct impact on mortgage rates. It influences mortgage rates indirectly through investors, and its impact is magnified during extreme periods for the economy. Since we've enjoyed steady economic growth since 2003, the Fed Funds rate has not been much of a factor recently. It seems to be becoming more important, however, as investors worry we may be entering one of those extreme periods. Thanks for the question, Dick.

As you point out, the government has been changing the Fed Funds rate without much impact on mortgage rates. This graph
(http://library.hsh.com/?row_id=90) shows what’s been happening since
mid-2004 as the Fed Funds rate was raised from 1.00% to its current 5.25% over the course of about 2 years.

Mortgages track the 10-year Treasury rate very closely, which can be seen in the graph. The 10-year Treasury rate is set by investors in the market through their buying behavior. Investors are influenced by the Fed Funds rate, but it is just one piece of the puzzle.

The Fed Funds rate is only actually used to set the interest rate on very short-term loans between banks. It’s not terribly relevant to the interest rate of 10-year Treasuries since the risk of lending for 1 day is very different than the risk of lending for 10 years. Investors care about the Fed Funds rate because it is one of the few windows into the government’s thinking on the economy in general and inflation in particular.

Relatively stable mortgage rates over the past 3 years despite consistent increases in the Fed Funds rate by the government is a reflection of the market’s confidence in the government’s ability and willingness to control the economy over the long haul. Increases to the Fed Funds rate from 2004-2006 were a return to neutral levels and not an attempt to fight inflation or slow the economy. The government had lowered them significantly in the early part of the decade to combat the economic slowdown related to the popping of the tech bubble, the corporate scandals (Enron etc), and the 9/11 attacks.

So to sum up, the Fed funds rate rarely has a direct impact on mortgage rates. It influences mortgage rates indirectly through investors, and its impact is magnified during extreme periods for the economy. Since we’ve enjoyed steady economic growth since 2003, the Fed Funds rate has not been much of a factor recently. It seems to be becoming more important, however, as investors worry we may be entering one of those extreme periods.

]]> By: Dick Baker http://www.amybergquist.com/blog/2007/07/08/whats-the-deal-with-rising-mortgage-rates/#comment-259 Dick Baker Tue, 10 Jul 2007 03:55:46 +0000 http://www.amybergquist.com/blog/2007/07/08/whats-the-deal-with-rising-mortgage-rates/#comment-259 Interesting analysis. My question is why mortgage rates have stayed pretty much stable while interest rates have been raised or lowered by the Fed for the last couple of years? The market doesn't seem to be reacting with as much volatility as it did just a few years ago. Interesting analysis. My question is why mortgage rates have stayed pretty much stable while interest rates have been raised or lowered by the Fed for the last couple of years?

The market doesn’t seem to be reacting with as much volatility as it did just a few years ago.

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