Fed Funds Rate Hike and Mortgage Rates

Fed Rate Hike and How it Does Not Mean Mortgage Rate Hike

Fed Funds and Rates not in Tandem

Fed Funds and Rates not in Tandem

We are most likely on the eve of something not seen in a decade – the Fed increasing the Fed Funds Rate.  It is not a for sure thing, but odds are the Fed will bump the Fed Funds Rate .25% tomorrow.  I want to shout from the rooftop that Fannie and Freddie do NOT go on hiking trips with the Fed.  Meaning, just because the Fed increases the Fed Funds Rate does not mean mortgage rates will climb up.  They may move together and they may not but the real question is are they moving because of each other?

Below and attached is a graph that shows you the history of both the Fed Funds Rate and Mortgage Rates (per Freddie Mac).  Although we are going to most likely see a knee jerk response in mortgage rates (and stocks) post rate hike announcement, what matters is where rates are when the dust settles and not where they are during the knee jerk.

Comparing Fed Rate Hikes and Mortgage Rate Trends:

Let’s pull out some key dates from the graph below and compare the trend/correlation (or lack thereof) between the Fed Funds Rate (FFR) and 30 Year Fixed Mortgage Rates (Mtg) during the hike cycle 2003 to 2007 (and even into the beginning of the drop cycle).  As you will see below, the 2 did not move in tandem during the last Fed Funds Rate Hike.

2003:             FFR 1.0% (baseline)        Mtg 5.23%   (baseline)
Dec 2004:    FFR 2.25% (UP)                Mtg 5.75%   (UP)
June 2005:  FFR 3.25% (UP)                Mtg 5.58%   (DOWN)
Dec 2006:    FFR 5.25% (UP)                Mtg 6.14% (UP)
June 2008:  FFR 2.0% (DOWN)          Mtg 6.32% (UP)

On the graph:
Fed Funds Rates are in BLUE    Mortgage Rates are in Red
Starting Date June 2003 – Ending Date Nov 2015.

Fed Funds Rate and Mortgage Rates

Fed Funds Rate and Mortgage Rates

 

 

 

 

 

 

 

 

 

Much More to Mortgage Rates:

It’s important to also recognize that during post 2008 era the Fed was influencing the mortgage rate market with Quantitative Easing (QE).  The moral of the story is that there have been and will continue to be a multitude of factors (including QE, the economy, employment, international news …) that go into where mortgage rates end up.  For example, if mortgage rates climbed due to economic factors, political factors etc… who is to say the Fed does not jump in with a leverage arm like the Quantitative Easing tools used starting in 11/08 that kept rates and housing healthy?  Fed Rates are not the primary or sole driving force behind mortgage rates.

For now, I don’t see the probable Fed Funds Rate hike of .25% having a material impact on mortgage rates.  As they say, “a trend is a trend until it’s not the trend anymore.”

By Jeremy House
The HOUSE Team

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Jeremy is the Founder of The HOUSE Team and a Sr. Loan Officer/Branch Manager with PrimeLending. Over the past several years he has ranked in the top 1% of all loan officers nationwide and one of the top 200 loan officers in America. In the mortgage industry, the devil is in the details. Jeremy prides himself on being a student and an expert when it comes to everything mortgage related.

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