Rising Mortgage Rates In Hot Housing Market For Home Buyers

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Rising Mortgage Rates In Hot Housing Market For Home Buyers

This BLOG On Rising Mortgage Rates In Hot Housing Market For Home Buyers Was PUBLISHED On December 7th, 2018

How Federal Reserve Board Works During Rising Mortgage Rates In Hot Housing Market

Many of you hear on the news that the Fed is going to raise rates.

  • No need to panic
  • Let me explain how the interest rate yield curve works
  • There is the Fed Funds rate:
    • the 2 year note
    • 5 year note
    • 10 year note
    • the 30 year bonds
  • This is what Wall Street traders look at
  • Then there is the Mortgage Backed Securities
  • This what mortgages are priced off of
  • You could actually see all the prior rates go up one day and the MBS rates go down
  • This means mortgage rates get better that day
  • In general all rates move together though
  • Now when it comes to the Fed rate and them raising rates this can be a different story
  • A Fed Funds rate is the rate that the Government lends to Banks overnight

Reason Why Banks Borrow Overnight Funds

Why do banks need to borrow overnight, good question.

  • The reason Banks borrow overnight from the Fed is because a Bank Depository has all of our deposits in there
  • Your crazy if you think they keep it all in a safe
  • What they do is make conservative and risky investments with our money
  • That can leave banks with little money in their safes
  • There are regulations to how much they need to keep
  • So when they are short money they borrow from the Fed at a Fed Fund Rate

Role Of Feds During Rising Mortgage Rates In Hot Housing Market

The Government uses the Fed rate to slow down a heated economy or to stop inflation.

  • In the past they tried to only control wage inflation but that has seemed to blend in with price inflation of goods in the recent past
  • So when you see the stock market soaring you will hear the Fed trumpet we are going to raise the Fed Funds rate
  • Buyers of homes panic and think that the mortgage rates are going up. In the early part of the cycle of raising rates this is generally true

Affects Of Rising Mortgage Rates In Hot Housing Market And Feds Interference

After the rates go up and the housing market slows or the stock market starts to crash the it is a different story.

  • If the Fed raises rates too fast and the housing market slows down then the 10 year note and MBS rates will head lower so that lending will happen while the Fed fund rate is going up
  • This is happening right now
  • This is called a flattening yield curve
  • That is because the fed rate is going up towards 2.75% and the 10 year is falling below 3%
  • The spread between these rates historically is much greater
  • Usually around 3 points

Yield Curve And How It Affects Mortgage Rates

When the yield curve is flat like today there really is no benefit:

  • This is because the 5 year arm and the 30 year fixed are about the same rate because the yield curve is flat
  • Also when the Fed moves rates up too fast you will see the stock market start to fall
  • This is because Wall Street believes that the higher rates will slow the economy affecting corporate profits so they sell stocks and buy bonds
  • When you hear them say they are buying bonds this means 2, 5, 10 and 30 year notes
  • These are notes that the government will pay you if you lend them some money
  • When you buy any bond it drives the underlying rate down, causing mortgage rates to fall
  • Here is an example of how the Fed raising rates can actually mean lower mortgage rates

Call us at Gustan Cho Associates at Loan Cabin Inc. for any question to explain this complicated web of financial instruments our economy lives on. Gustan Cho Associates at Loan Cabin Inc. NMLS 1657322 has a national five star reputation for its no lender overlays on government and conventional loans. Loan Cabin Inc. offers non-qm loans and bank statement loans for self employed borrowers. We are one of the few national lenders that offers 95% LTV NON-QM Jumbo Mortgages with no private mortgage insurance

Over 75% of our borrowers are folks who could not qualify at other lenders due to their overlays and/or are stressing during their mortgage process. Contact us at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com.

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