One of the biggest misconceptions in the mortgage and Real Estate industries is the fact that the when the Federal Funds Rate is dropped that it also means there will be a corresponding rate drop in 30 year fixed rate mortgages. People wake up - It does NOT! In fact many times the exact opposite occurs.
I can't even tell you the number of times I have been hearing lately people making the comment "Hey the Fed is thinking of dropping the rates again...Mortgage rates should be heading down". What can be even more shocking is when Realtors don't realize how things work either! A good Real Estate agent should have at least a basic understanding of how the mortgage market works - Many do not!
The underlying belief is that lower 30 year fixed rates stimulate sales. This of course is true but there is a disconnect between this happening when the government cuts the Federal Funds Rate.
Since January the Federal Funds Rate has been cut a number of times. In January of 2008, 30 year fixed rate mortgages stood at around 5.5%. In March they have been moving around between 6.25% and 6.5%. So since January when the Federal Funds Rate was cut longer term interest rates have moved up between 3/4% to 1%. This is the perfect illustration of why there is no connection.
The Federal Funds Rate helps determine what banks charge each other for over night loans. Long term rates (30 year fixed) are mostly tied to the ten year treasury yield which is determined by bond traders. Inflation drives long term mortgage rates. When bond traders demand higher long term rates it drives up long term mortgage rates too.
There is a much bigger correlation between The Federal Funds Rate and short term mortgage vehicles know as adjustable rate mortgages (ARMS).
These rates tend to move closer in step to the Federal Funds Rate. The adjustable rate mortgage market is influenced by a number of measures including the one year treasury yield and the International Libor.
So the next time you hear "The Fed is dropping rates" Do not assume that 30 year fixed rates will also drop!
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The above information regarding the Federal Funds Rate & fixed rate mortgages was provided by Bill Gassett, the team leader for the #2 RE/MAX
Team in Massachusetts in 2006.
Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of Hopkinton Massachusetts and other Metrowest towns for the last 23 Years. Bill's office is conveniently located in the center of Hopkinton MA at 77 Main Street.
I have a passion for Real Estate and love to share my marketing expertise! I would welcome the opportunity to earn your business.
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Bill - I love this post, Wish I could print it out and hand it to buyers. I just again explained this to another client...so many consumers do not understand this. Adam is right this should be feature. I'm flagging it also.
Hi Bill,
Great info as usual on your part. And truthfully it's easy to understand why this is so confusing for consumers. They just hear something like this on the news and expect it to impact their loan application.
Lynda - Thanks. I think it is perfectly understandable that a consumer might not know but a Realtor should! It is our job as professionals to provide accurate knowledge. This is basic mortgage information that anyone that has been in the business for a few years should know. I wrote about this topic because I have heard so many Realtors speaking about this without a clue what they were talking about.
Missy - Agreed but as professional Realtors we should also be educating consumers.
Bill, when I started in real estate I actually had a few agents tell me not to really get involved with the financing end of the transaction...that's why we do what we do, and the mortgage people do what they do. Boy, they were sure wrong!! I think it's imperative to know the mortgage industry. I think we should learn whatever we need to so we can be a more responsible REALTOR for our clients.
I agree with Adam..this needs to be featured and I will send a flag as well.
Bill,
This is one of the clearest explanations I've seen! I think it's very important that Lenders and REALTOR®'s alike understand this information. After all, consumers look to us for confidence in handling their transactions. If we don't know and understand what we're doing, how are they to feel confident?
Best,
Bill, that gold star sure looks good on you! Congrats on your feature! :-)
Bill - Congratulations on the feature! ; -)
Bill,
It's just another smoke screen so the consumer thinks the mortgage rates are dropping...so far since they announced the last few...I haven't seen too much light at the end of the tunnel.
Ricardo thanks I am glad the explanation for easy to understand as I am I will be able to help a few consumers understand how things really work.
Linda - Thanks for your support,,,much appreciated :)
Mara - Thank you Thank you!
Sandra - Thanks a million for your support and marking for feature.
You said it perfectly, in fact I have just booked marked this post! This is hard to explain to clients and I want to be able to send them to your post!
Nice work my friend
Neal that is one of the most frustrating parts of it all. I have had some of my seller clients actually resist making a price change because they hear on the news that the fed is dropping the rate and assume incorrectly that long term mortgage rates are coming down too.
Cree - Thanks. It can be challenging at times because people hear things from so many different sources and don't know what to believe. It is our job as professionals to keep them informed about what the truth is.
Charles - Thanks! Feel free to make a post and link to it if you like :)
Monika thanks there sure are misunderstandings about how the mortgage market works.
Brian - I hear the same thing all the time as well. It seems I have to explain this misconception all the time.
I have been explaining this to clients the last few months. Everytime I see a rate cut, I cringe.
Great post, Bill.
What's just as sad is when the Fed lowers its Federal Funds rate, the local news is just as confused as most other people. It's a constant education process in explaining to people how it all works.
Great post, Bill.
What's just as sad is when the Fed lowers its Federal Funds rate, the local news is just as confused as most other people. It's a constant education process in explaining to people how it all works.
Kirk - Thanks I appreciate it.
Tom - Well I am surprised to hear that. I know you are big on Real Estate education.
Shannon, Diane, & Jennifer - Every Realtor should have the basics down when it comes to mortgages and how the markets operate. This is a subject where there is always misconceptions.
Hi Bill, I have had a lot of people say the same thing about mortgage rates will be going down because the fed is dropping the rate. Good post.
Megan it really is a wide spread misconception amongst the general public. We just need to continue to educate.
Hey Bill,
Yes real estate agents do need to have basic information about real estate motgages. I meet many who do not know about any type of product
Brad thank you! I appreciate you stopping by and commenting.
Ronnell you are right it would make a lot so sense for this to get more exposure on tv.
Bill, great explanation of how the drop in Fed rates "really" works! ;-)
Bill great explanantion on the diiference between a Federal Funds Rate drop and long term mortgage rates. I agree most people think they are the same.
Frank - Thanks. This is one of the biggest Mortgage/Real Estate misconceptions floating out in the public.
Bill this is excellent information on mortgages. I must admit I was confused about this. You have explained this subject well.
Thanks Ben I know there is a lot of confusion when it comes to The Federal Funds Rate and how it pertains to 30 year fixed rate mortgages.
Bill: Great post that reinforces many of my posts on my BLOG. As a result, you earned a RE-blog from me! Thanks for the great content and for clarifying an issue that many buyers AND agents are confused about!