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…)
Federal Reserve increase rates; Mortgage Rates drop
Too often I see a headline like this one: “Mortgage Rates Continue to Slide Despite Fed Hike.” The 30-year Fixed Rate Mortgage (FRM) does NOT follow the Federal Reserve’s rate increases!
Look at this chart for the last few months:
Note the correlation between the 10T (red line) and FRM (green) – and the lack of correlation between FFR (blue) and FRM.
Let’s look at this another way, the spread (difference) between the FRM and 10T, and between FRM and FFR:
Over the last 6 months, the spread between FRM and 10T has been in a tight band between 2.69% and 3.04%, while that between FRM and FFR has dropped from 3.04% to 1.42%.
For a more detailed explanation of what drives mortgage rates – and why the FRM will fall at some point – read Why Mortgage Rates Will Fall
And these recent articles: (more…)
What drives Mortgage Rates in one chart
I can explain as often as I do that the 30-year Fixed rate Mortgage (FRM) is based upon the yield on the US 10-year Treasury (10T), not the Federal Reserve’s Fed Funds rate (FFR), but still I read regularly comments such as “mortgage rates will move up after the Fed increased its interest rate.”
Look at this chart for the last few months, the dates being those when the Federal Reserve increased its interest rate:
Note the correlation between the 10T (red line) and FRM (blue) – and the lack of correlation between FFR and FRM.
Let’s look at this another way, the spread (difference) between the FRM and 10T and between FRM and FFR:
Over the last 5 months, the spread between FRM and 10T has been in a tight band between 2.69% and 2.85%, while that between FRM and FFR has dropped by a huge 1.7%.
For a more detailed explanation of what drives mortgage rates – and why the FRM will fall at some point – read Why Mortgage Rates Will Fall
And these recent articles: (more…)
Lies, Damned Lies and Inflation “Statistics”*
My daughter, who works for the Bank of England, is studying for her Master’s in Economics at the University of Edinburgh, and sent me one of her papers. It was filled with a vast array of complex mathematical equations of which I could make no sense, despite being a mathematician by training and studying Economics at Oxford…..a few years ago.
The Federal Reserve has teams of economists plus input from Reserve Banks all around the country. The Bureau of Labor Statistics, which produces the Consumer Price Index (CPI), has another battalion of experts. All this talent must, one could fairly assume, produce sophisticated and accurate models for inflation.
Imagine my surprise, therefore, to discover that one key element, housing inflation – which constitutes one-third of the CPI and 40% of “core” inflation (excluding food and energy) – is an imputed number (“assigned by inference”), not an actual one.
Read what Nobel prize-winning Economist Paul Krugman wrote recently: ”How does the bureau measure housing inflation? Not by looking at the prices at which houses are sold, which fluctuate a lot with things like interest rates. Instead, it looks at how much renters pay — and for the large number of Americans who own their own homes, it imputes what it calls Owners’ Equivalent Rent, an estimate based on rental markets of what homeowners would be paying if they were renters (or, if you like, the rent they are implicitly paying to themselves).
The trouble is that this measure relies on average rents, which to a large extent reflect leases signed many months ago. A new Fed study shows that official rent measures lag market rents by about a year. And here’s the thing: Market rental rates exploded in 2021, probably as a result of the rise in working from home, but have since leveled off and may in fact be falling.
So official inflation measures are telling us about what was happening a year ago; they overstate current inflation and, perhaps more important, grossly understate the extent to which the inflation picture has improved. If you try to measure inflation excluding those dubious housing numbers, plus other volatile elements, you get a picture of dramatic improvement, almost enough to declare the inflation surge over.”
Let’s look at inflation. There are more gauges of inflation than the UK had Prime Ministers in 2022, but let’s just look at Personal Consumption Expenditures (PCE is the value of the goods and services purchased by, or on the behalf of, “persons” who reside in the United States.). (more…)
Why Mortgage Rates Will Fall
I have read and heard several comments suggesting that the increase in the 30-year Fixed Rate Mortgage (FRM) this year has been a direct result of the increase in the Federal Reserve’s Fed Funds rate (FF).
This is not correct.
As I will demonstrate, the FRM is determined by market forces, and in particular by the extra yield – the “spread” – which investors require when buying pools of mortgages (Mortgage Backed Securities or MBS), as compared with the risk-free yield available with the 10-year Treasury Note (10T) which has the nearest duration to the expected life of a pool of mortgages.
In contrast, the FF is the rate that banks use when setting their Prime Rates. When the FF increases, banks increase their Prime Rates and therefore the interest rate on those loans whose rates are based upon Prime Rates – e.g. credit cards and auto loans.
And we will see that the FRM increased this year long before the Fed started to increase the FF rate.
Mortgage-Backed Securities (MBS)
A conventional mortgage or conventional loan is any type of home buyer’s loan that is not offered or secured by a government entity. Instead, conventional mortgages are available through private lenders, such as banks, credit unions, and mortgage companies.
Most conventional mortgages are packaged into mortgage-backed securities and sold to investors. This allows the bank or originator to use its capital to finance more mortgages.
The relationship between 10T and FRM
This chart shows how the two have moved in lockstep over the last 30-plus years:
Source: National Association of Realtors
No, the Federal Reserve does not control mortgage rates
There is widespread misunderstanding about what drives mortgage rates. Indeed, I read an article recenlty on the National Association of Realtors website which stated that mortgage rates had risen sharply following the increase in the Federal Reserve’s interest rate.
Not so. (more…)
Recession: what Recession?
The August jobs report published yesterday showed that the labour market remained red-hot in July despite expectations job growth would cool as tighter monetary conditions and company layoffs stoked fears of a recession.
Here were the key numbers from the report, compared to economist estimates compiled by Bloomberg:
Non-farm payrolls: +528,000 vs. +250,000 (more…)
Federal Reserve tries to rewrite history
Two comments from Federal Reserve Chair Powell struck me while I was listening to his Press Conference on Wednesday:
On the “speed” of the Fed’s move to increase rates:
“When inflation changed direction, really, in October. We’ve moved quickly since then. I think people would agree. But before then, inflation was coming down month by month. And we kind of thought we had the story. Probably had the story right. But then I think in October, you started to see a range of data that said no. This is a much stronger economy and much higher inflation than we’ve been thinking.”
Moved quickly? (more…)
Federal Reserve in Fantasyland: Implications for Housing Market
Immediately following the issuance of the Federal Reserve’s decision on Wednesday to increase the Fed Funds rate by 0.75% and the accompanying, optimistic statement and press conference, both bonds and equities rallied strongly, leading some to think – hope – that the worst was over in markets.
And then came Thursday, when equities resumed their plunge and bonds rallied further – on the belief that a recession was now likely. (See my Are we already in a recession?).
For my part, were it not so serious I would have allowed myself a louder chuckle as I heard Chair Powell say that the Fed would be “data-dependent” – and then forecast that inflation – using the Fed’s preferred measurement – would be 5.2% this year, 2.6% in 2023 and 2.2% in 2023. Based upon what “data” exactly? And what does all this mean for the housing market?
Fantasyland
If you google “Federal Reserve and Fantasyland” you will get a lot of hits. And while many of the comments from Wall Street insiders – particularly those working for investment banks who tend to be optimists – were supportive of the Fed, many of those with perhaps more objectivity were in the fantasyland camp.
The response to COVID
The world’s economy faced a major shock and challenge with the outbreak of COVID. In response the Fed acted swiftly – cutting the Fed Funds rate by 1.5% in two weeks in March 2020 – and with shock and awe – a huge program of Quantitative Easing – injecting vast amounts of liquidity into markets. The Fed became the main buyer of Government and Mortgage-Backed Securities (MBS) and its balance sheet doubled from $4 trillion to over $8 trillion: (more…)
Will the Federal Reserve show chutzpah today?
In my How far Behind the Curve is the Federal Reserve? report last weekend I suggested that the Fed needed to increase its Fed Funds rate by a full 1.0% today to regain control of the inflation narrative and asked if it has the chutzpah to do this.
The following table shows clearly that it has been the market fighting inflation by driving up interest rate – while the fed has continued with its easy money policy.
We’ll find out in a few hours how serious this Fed is about getting inflation under control.
And read these recent articles:
How far Behind the Curve is the Federal Reserve?
How quickly are houses selling?
Have Home Sales slowed?
June Housing Inventory: still way below 2020 levels.
Swampscott House on over 1 acre with HUGE potential
Marblehead Neck Oceanfront New Listing
Why are Mortgage Rates so high?
Time to Consider an Adjustable Rate Mortgage
The Federal Reserve and Mortgage Rates
Federal Reserve: “Make me responsible…. but not yet”
How Marblehead’s 2022 Property Tax Rate is calculated
Essex County 2022 Property Tax Rates: Town by Town guide
Guide to Buying and Selling in Southwest Florida
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact me on 617.834.8205 or [email protected].
Andrew Oliver, M.B.E.,M.B.A.
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
m 617.834.8205
www.OliverReportsMA.com
“If you’re interested in Marblehead, you have to visit the blog of Mr. Andrew Oliver, author and curator of OliverReportsMA.com. He’s assembled the most comprehensive analysis of Essex County we know of with market data and trends going back decades. It’s a great starting point for those looking in the towns of Marblehead, Salem, Beverly, Lynn and Swampscott.”
__________________
Andrew Oliver, M.B.E., M.B.A.
Real Estate Advisor
[email protected]
www.TheFeinsGroup.com
www.OliverReportsFL.com
————
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800 Laurel Oak Drive, Suite 400, Naples, FL 34108
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How far Behind the Curve is the Federal Reserve?
In March 2020, as the impact of COVID-19 was being felt, the Federal Reserve cut the Fed Funds rate by 50 basis points ( 0.5%) on March 3 and followed that with a 100 basis points (1%) cut on March 15th – a total of 1.5% in under two weeks. This emergency action was decisive and instrumental in preventing a financial disaster. But the economy quickly bounced back with a huge rebound in Q3 2020. The emergency was over.
The Fed, however, kept pumping huge amounts of cash into the economy. Eventually, the market decided that the Fed was behind the curve and market rates took off. Yet the Fed has been slow – make that very slow – to respond. This chart shows interest rates on January 31st 2020, the trading day before COVID-19 was declared to be a public health emergency in the US, and this Friday after the announcement that the Consumer Price Index rose 8.6% in May from a year earlier.
Does anything strike you about this chart? Such as the fact that all the market interest rates are up anywhere from 50% to 130% – and the Fed Funds rate is still way down from its pre-COVID level. (more…)
The Federal Reserve and Mortgage Rates
As expected, the Federal Reserve (Fed) increased its Fed Funds Rate (FF) this week by 0.25% to 0.5%, the first increase since 2018.
What does this mean for mortgage rates and why are they rising? The FF rate affects the lending rate for credit cards, auto loans, adjustable rate mortgages, all of which are impacted by banks’ Prime Rate, which moves with the FF rate. Fixed Rate Mortgages – the typical 30-year mortgage – have a longer life and their benchmark is the closest Treasury security, which is the 10-year (10T).
Five charts explain the factors driving mortgage rates. In all cases the numbers are at the dates that the Fed has changed its FF since 2015: 9 increases followed by 5 decreases before this week’s rise. Because the purpose of this article is to show the link between FF, FRM and 10T the dates shown are only those on which the FF rate changed. Bear that in mind when looking at the charts below – they do not attempt to show all the price movements in between the dates shown. (more…)
Federal Reserve: “Make me responsible…. but not yet”
With apologies to St. Augustine the gist from the release this week of the minutes of the last meeting of the Federal Reserve Open Market Committee (FOMC) was that, yes, inflation is worse than we expected, and yes, we need to raise interest rates and, yes, we need to sell some of our huge portfolio of Treasuries and Mortgage-Backed Securities, and we will …soon…I promise.
“Participants observed that, in light of the current high level of the Federal Reserve’s securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate,” the meeting summary stated.
The minutes show concern about inflation and financial stability though members urged “a measured approach” to tightening monetary policy. FOMC members noted that “inflation was beginning to spread beyond pandemic-affected sectors and into the broader economy.”
No kidding. (more…)
Earth to Federal Reserve: What are you waiting for?
As the debate amongst economists continues as to whether the Federal Reserve will raise interest rates 3 times, 5 times or 7 times this year, the Federal Reserve continues to do….nothing.
Giving the market advance warning about changes in monetary policy is an excellent idea, but the lack of flexibility from the Fed is alarming. The Fed has consistently said that its decisions as to the timing of the end of its bond buying program – which has glutted stock and real estate markets with cash – and the start of the “lift-off” in interest rates would be “data dependent.”
Well, my question is this: what data are you seeing Mr. Powell that the rest of us are missing? And by the rest of us I mean professional and award-winning economists – and me..
In March 2021, 11 months ago, Chairman Powell said: “We’re not going to act pre-emptively based on forecasts for the most part, and we’re going to wait to see actual data. And I think it will take people time to adjust to that, and the only way we can really build the credibility of that is by doing it.”
Also in March 2021, I published “Party on, dude” says the Federal Reserve which included:
Former Federal Reserve Chair William McChesney Martin, Jr famously said: “The Federal Reserve…is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”
This week, current Fed Chair Jerome Powell in effect said “party on, dude.” As the New York Times commented: “The official view of the central bank’s leaders now is that it has been an overly stingy host, taking away the punch bowl so quickly that parties were dreary, disappointing affairs.
The job now is to persuade the world that it really will leave the punch bowl out long enough, and spiked adequately — that it will be a party worth attending. They insist punch bowl removal will be based on actual realized inebriation of the guests, not on forecasts of potential future problematic levels of drunkenness.”
I just hope that those attending Mr. Powell’s prolonged party are not planning to drive home.
In that March article I also wrote: “The test for the Fed will come in future months as the economy recovers. The market may demand higher interest rates, even as the Fed will want to keep them low to finance continuing federal deficits.”
By June 2021 I was writing: “Should inflation prove to be more persistent than the Fed expects, then it is likely that the Fed will have to start to increase interest rates sooner and move them up more quickly than it currently expects. And mortgage rates would follow.
I have to admit that I struggle to understand how low interest rates, which boost asset classes such as stock prices and real estate, are helping to boost employment. Lower interest rates benefit those who own assets which appreciate.
I would like to see the Fed start to reduce (taper) its bond buying, while encouraging Congress to focus on removing barriers to employment – by providing increased child care allowances, for example. In other words, deal directly with the problem rather than hoping that benefits will trickle down somehow.”
And my most recent post on this subject was Can the Federal Reserve prevent a Recession? in which I wrote: “Since World War II there has been a consistent pattern of the Federal Reserve hiking interest rates to control inflation and thereby triggering a recession. With the Fed finally acknowledging in late November that inflation was not transitory and committing to end its bond buying spree and also raise interest rates, will it be able to avoid a recession? Can this time be different?”
I also wrote: “It is important to understand that the Fed controls short-term rates and that mortgage rates are based upon the yield of the 10-year Treasury, where the yield is set by market demand. I have been forecasting – guessing – that mortgage rates will reach 4% this year as I expect that interest rates will need to be raised aggressively to ward off stubbornly persistent inflation. But if the result is indeed a recession later this year then interest rates may ease back later.
The chart below shows that the 30-year mortgage rate id now back to its pre-COVID level and is set to move higher next week – unless Mr. Putin decides to invade Ukraine, an action which would likely drive investors to buy Treasuries and force rates down in the immediate term.
Summary
The danger of being slow to end the bond buying program and slow to increase short-term interest rates is that the Fed will also be slow to lower rates if economic growth and inflation slow – and thus cause a recession. Right now the US economy is expanding rapidly and is fairly close to the current level of full employment. I hope that the Fed manages successfully to manage interest rates to slow down the economy without driving it into recession. An early 50 basis point rise in the Fed Funds rate would make me more confident that it will succeed.
Read these recent reports:
February Inventory – Marco? Marco? Where are you?
How Marblehead’s 2022 Property Tax Rate is calculated
Essex County 2022 Property Tax Rates: Town by Town guide
Essex County 2022 Commercial Property Tax Rates: Town by Town guide
Guide to Buying and Selling in Southwest Florida
Andrew Oliver, M.B.E.,M.B.A.
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
m 617.834.8205
www.OliverReportsMA.com
“If you’re interested in Marblehead, you have to visit the blog of Mr. Andrew Oliver, author and curator of OliverReports.com. He’s assembled the most comprehensive analysis of Essex County we know of with market data and trends going back decades. It’s a great starting point for those looking in the towns of Marblehead, Salem, Beverly, Lynn and Swampscott.”
__________________
Andrew Oliver
m. 617.834.8205
www.AndrewOliverRealtor.com
www.OliverReportsFL.com
Can the Federal Reserve prevent a Recession?
The housing market is driven by the balance between supply and demand. Supply cannot be increased significantly quickly, so the only way for the booming housing market to slow is if demand drops. And the most likely causes for a drop in demand are either a major geopolitical development – such as Russia invading Ukraine and the US and its NATO partners deciding to respond militarily – or a recession.
Since World War II there has been a consistent pattern of the Federal Reserve hiking interest rates to control inflation and thereby triggering a recession. With the Fed finally acknowledging in late November that inflation was not transitory and committing to end its bond buying spree and also raise interest rates, will it be able to avoid a recession? Can this time be different?
The Boston Globe recently carried an excellent article on this subject by Jim Puzzanghera: ‘A hellishly difficult task.’ Can the Federal Reserve lower inflation without causing a recession?
“The virus is unpredictable. People’s responses to the virus are unpredictable. It’s not a garden variety business cycle by any means,” said Donald Kohn, a senior fellow at the Brookings Institution think tank who served as Fed vice chair from 2006-10. “It’s much harder to peer into the future and know how to calibrate your monetary policy.”
Bernard Baumohl, chief global economist at the Economic Outlook Group, a forecasting firm, was more blunt. “The Fed has a hellishly difficult task right now,” he said. “There is absolutely no history for the Fed to lean on to deal with this kind of inflation.”
Most economists predicted last spring that high inflation would be temporary, pointing to the supply chain problems caused by restarting the US and world economies. But some economists warned the $1.9 trillion COVID aid bill enacted last March risked fueling longer-lasting inflation by pumping too much money into the already recovering US economy.
By last June even I was writing: “Should inflation prove to be more persistent than the Fed expects, then it is likely that the Fed will have to start to increase interest rates sooner and move them up more quickly than it currently expects. And mortgage rates would follow.
The Fed’s two goals of price stability and maximum sustainable employment are known collectively as the “dual mandate.” In explaining its policy of keeping interest rates low – in part by buying large quantities of Treasuries and Mortgage-Backed Securities, the latter helping to keep mortgage rates low – the Fed refers to the still high level of unemployment.
I have to admit that I struggle to understand how low interest rates, which boost asset classes such as stock prices and real estate, are helping to boost employment. Lower interest rates benefit those who own assets which appreciate.
I would like to see the Fed start to reduce (taper) its bond buying, while encouraging Congress to focus on removing barriers to employment – by providing increased child care allowances, for example. In other words, deal directly with the problem rather than hoping that benefits will trickle down somehow.”
Some quotes (more…)
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