What drives Mortgage Rates – and no it’s not the Federal Reserve

I am always astonished by the number of reports I read, before and after the Federal Reserve (Fed) makes a change in its interest rate, about the effect such a change will have on mortgage rates.
No doubt it came as a surprise to those writers when there was virtually no change in the Freddie Mac weekly survey of mortgage rates this week.

Myth
“Mortgage rates react to the Fed.”
Look at this chart for the last year:

The FFR rate was unchanged at 5.5% for over a year until last week, but during that time frame the FRM varied between a high of almost 7.8% last October and a low of just over 6% last week before the Fed cut its inetrest rate by 0.5%.(The Freddie Mac survey takes place from Monday-Wednesday each week, so the 6.09% reported on September 19 reflected rates before the Fed cut its interest rate).

What happened after the Fed cut rates?
Precious little. The rate before the Fed cut rates was 6.09% and afterwards…. 6.08%.

In simple terms, there is no correlation or link between the Fed’s interest rates and the rate on 30-year Fixed Rate Mortgages.

What does determine Mortgage Rates? (more…)