FOMC Cuts Discount Rate by 0.75%
Rhonda Porter on 12 16, 2008
From the FOMC press release:
“The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent….
As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.
…In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent.”
Mortgage rates should continue to improve with the purchase of MBS. This is why you need to do as Kenneth Harney recommends in this Sunday’s paper:
“Ask your broker or loan officer whether you can lock in today’s rate but still have the ability to move down should cheaper money become available to you.
Not all lenders can accommodate such requests. Some brokers offer 60-day locks with that option; others may charge you”.
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39 Responses to “FOMC Cuts Discount Rate by 0.75%”
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Would I be correct in interpreting that statement as meaning the fed is promising to keep mortgage rates this low or lower for at least “the next few quarters”?
cautious buyer, I’m not sure how long…but it certainly sounds like it to me.
cautious buyer,
I don’t think The Fed can “promise” anything about mortgage rates directly. I don’t think they control mortgage rates directly, and sometimes mortgage rates go up despite the Fed’s efforts to influence othewise. I could be wrong on that. But I have often read that mortgage rates and Fed policies are not a direct link. Someone who knows more than I please correct me if I’m wrong on this.
Ardell, the Fed buying mortgage backed securities (which is also promoting others to do the same) WILL lower conventional mortgage rates. Rates are going to drop.
You are correct that the Fed does not directly control rates (for example, when they drop the discount rate by 0.75%–mortgage rates don’t drop 0.75%) but the action of purchasing huge volumes of mortgage backed securities (bonds) will have a huge impact on mortgage rates.
We should have seen significant improvements to rates this afternoon based on how the MBS was trading…I expect we’ll see that tomorrow morning.
Until FHA and VA rates come down…well, let me ask. What will it take for FHA and VA rates to get under 5%? THAT would be a monumental occasion.
The rate that was dropped is the overnight lending rate – that’s not directly tied to mortgages. The numbers to watch are longer term bonds (which often, but not always follow suit) – especially the 10 year and 30 year treasury bonds. Both of those are on the way down as well.
The 3 month treasuries have basically been at 0% for over a week (or maybe a few at this point), so the overnight rate really isn’t changing much in reality – just perception.
I do agree with Rhonda that them buying up mortgage backed securities will help with rates. It’s just not how I as a responsible taxpayer want to spend my hard earned tax dollars.
I actually take this as something scary rather than good. That one lever is basically gone, unless the Fed wants to pay people to take money. Welcome to Japan in the 90s…
These low rates are EXTREMELY ominous. They only mean one thing: deflation.
In all likelihood mortgage rates will drop even further over the next couple years, but that will be cold comfort as home prices keep falling year in, and year out.
As I’ve mentioned before, I have a podcast about the problem with low rates at http://msurkan.podbean.com.
P.S. Thanks for your earlier compliments on the podcasts Ardell.
Yup, this is essentially the FED announcing that they concede, the end of the world as we know it is near.
Rates really only fall for two reasons. The first reflects supply/demand imbalances. In this case, there is no demand for money that is available to lend, so those with the money keep lowering interest rates in the hope that a borrower will show up. Unfortunately, the borrowers/consumers in the U.S., along with many businesses, are so burdened with current debt that they can’t afford to service any more. It’s time to pay, or default, on what has already been borrowed. In effect, interest rates have gone to zero, and people still don’t want to take on additional debt.
The second reason rates can drop so low is that lenders expect deflation to dominate the future. With deflation, the dollars that are used to repay debt become increasingly valuable as prices continue to decline. The $40,000 that bought one Porsche today may well buy two similar cars in a couple of years. In a deflationary environment it can even pay to have a negative interest rate, in effect to pay borrowers to take out loans, because again the dollars that come back as repayment in the future will have ever higher purchasing power. For many this is too bizarre to contemplate, but it’s true just the same.
As stated above, mortgage rates reflect longer term expectations about funding costs, essentially the 10 year bond rate, as well as a premium for the risk of default and declining collateral values. Oddly, falling home prices are a factor in keeping mortgage rates high, as they degrade the collateral behind the loan and lower potential recovery rates should the borrower default. But with time, these rates should fall too. A reasonable time frame would be over the next year or so. From then on, other factors come into play.
Well put Scotsman, though we will need some more deflation before we can get a Porsche for $40k
I guess the FEDs powder just got soaked.
Exchange rates could get you the 40k Porsche, at least ones not built in this country.
Nothing left to cut anymore. No backstops !!
The mother of all shorts awaits Mr. Helicopter Ben.
The silence … before the sell-off.
How about this morning’s rates: 4.375% for 30 year fixed priced w/1 point $417k loan amount, 80% LTV and 740+ credit scores (apr 4.605) 45 day lock for purchases and rate/term refinances.
I don’t think my Twitter updates are working on the Mortgage Info page…and I don’t have time in this market to tweek around w/it…but just thought I’d give you an example of where rates are following the Fed’s move yesterday.
Wow.
When I go to standard mortgage calculators, on a 350K loan, a drop from 5% to 4.5% really looks like it only saves you a bit over a hundy (or about 5%) a month on your mortgage payment.
Is that right? If so, how do they think this will significantly stimulate buying?
This is the kind of rate that is needed for 100% or more LTVs to make a difference by helping owners in distress. Personally I think it will do little or nothing to attract buyers like myself. The markets that have more or less corrected in price are still swamped with foreclosures and in markets like Seattle that has just started to correct it makes sense to wait since things are just getting better on the buying side and worse on the job market side.
As long as it’s not your job.
bili, I actually meant “my” job. It makes sense to wait with buying and see if I can keep it in the tough years to come.
Just to be more precise for 650K appraised, 350K loan, Here’s the monthly payment at %5 (from Motley Fool):
Principal And Interest $1,879
Taxes and insurance $458
Total Payment $2,337
…and at 4.5%:
Principal And Interest $1,773
Taxes and insurance $458
Total Payment $2,232
The rate just doesn’t seem to have a huge impact.
No doubt, TJ. No doubt.
$100 bucks a month means nothing? Wow. I don’t have time to chat–I’m locking in loans…I’ll revisit here tonight after I’m done locking clients.
The larger the loan amount (up to $417k) the more meaningful the savings is. This may make more of an impact for refinances.
You also need to consider the life of the loan. $100 a month = 1200 per year and I know you fella’s are smart enought to figure that out.
I didn’t nothing, Rhonda. I am happy to have a money for a few extra dinners out a month. I just doubt this will make too many choose buying who were planning to rent.
If I were shrugging off $100 a month, many commenting here would have a hay-day with me.
$400k loan amount @ 4.375% for 30 years = $1997.14
” ” @4.5% = $2,026.74
” ” @5.0% = $2,147.29
” ” @6.0% = $2,398.20
Even 6% is a great rate historically.
I agree with biliruben, in Rhonda’s example add an item rental at ~$1200 a month for a $400k home. That’s the tough comparison.
The reason for that problem is of course the bubble valuations. If the $400k home that rents for ~$1200 today was instead valued at $250k the 4.375% interest rate would likely spur a rush in the interrest to buy instead of renting. We’ll see when we get there
rates appear to be up 0.5% to rate from this morning…good thing I haven’t had lunch yet…I’d lose it!
tj,
In my service area of Eastside and North Seattle/Green Lake and surrounds, a $400,000 house or a house rental at $1,200 is not the normal scenario. Most people renting vs. buying who can buy, but are on the fence, are looking at rental prices of $2,500 and above and still not liking their options in that price range. I wrote a post today aimed at that target market.
Ardell, I rent a 2750 sqft sfh valued at over $700k for $1750 in that area. It’s an excellent home in a very nice area. I don’t think $1200 rent for a $400k home is that hard to find. Just don’t look at new construction or very new homes. Our rental was purchased for $440k in 2002 .
hi BombayTrader,
Can you elaborate on “the mother of all shorts”? stocks or treasuries?
thanks.
tj,
sf and rentals is a market of diminishing returns. A 2,750 where half is the basement will rent for less than a 2,750 two story home. A one story rambler with no basement that is half that size, will not rent for half that price.
Dunno much about renting basement homes and ramblers. Ours is a two story 4 bdrm and the other two we rented before were also two story. All with attached garages. At every swap we found a handful suiteable homes in one month in the area we live in. It was suprisingly easy each time. Could be that we were lucky but it seems a bit to much luck
Are you really seeing people pay 2500/mo for a 400K place? For a 800K place I can believe it, but for those cruddy new townhomes in the North Aurora area listing agents call “Greenlake neighborhood”, are people really paying that much?
Cautious Buyer,
As you may know, I am a big fan of “North Aurora” and three blocks from The Lake at Green Lake, is Green Lake as far as I’m concerned. Yes, I am clearly “one of those agents”.
I lived in Licton Springs just North of Green Lake when I first moved to Seattle, and my sister has lived there for about 10 years and loves it. She has great neighbors, the kind that call me if they haven’t seen her for a few days because they are worried about her.
I am a huge fan of the area of which you speak.
I don’t think anyone should pay $2,500 a month for something that would sell for $400,000. That’s not what I said. I said a house (not townhouse) that would sell for $400,000 is not the norm nor is a house rental at $1,200 the norm.
Going back to comments 26. and 27. I don’t think we were talking about townhomes at all.
tj,
I think that price for that square footage is an excellent deal. I don’t know more about house rentals than the average Joe, as I rarely handle rentals. But experts have recently told me that they rent anywhere from $.85 to $2.00 a square foot, depending on location, age, etc. People I know who rent pay just over $1.00 a square foot or more, so it appears to me that you have a super deal.
Sorry, Ardell, but those are the only category of homes I could think of in the areas you mentioned that are in the 400K price range. You do cross from a low to a higher crime area between greenlake and a few blocks north.
Looking at #26 it seems like you were saying that 1200/mo rent for a 400K place is too low, and 2500 is more common, but maybe I misunderstood what you were trying to say.
In answer to tj, I was saying neither were commonplace on the Eastside. $400,000 homes or homes renting at $1,200. A 2,750 sf home like tj’s is more likely to rent for $2,500 on Education Hill (newer home). An older split entry in North Aurora would rent for $1,800 or so. I don’t see many houses that rent in either place for $1,200. A 2 bedroom townhouse in Redmond at 1,100 sf rents for $1,450.
Larger homes start getting diminishing returns, because no one wants to spend too much on rent, no matter how big and fancy the house is. Well, maybe not “no one”, but very few people.
The $400k kind of sidetracked the intention with my remark. Rhonda used $400k for her purchase example and that’s why I used it. We could use $700k instead or whatever price range is common and the result would be the same. Renting is far cheaper than a purchase at 4.5% interest rate and therefore a tough competitor until prices moves much lower. Low interest rates are not enough in this area at this time to make it palatable for a renter. Remember that many owners have the option to rent their homes cheap since they bought cheap many years ago. Not all homes on the eastside are newer than 2000. I think we got a pretty good deal since the onwers are not renting out for profit but for keeping their home while they are expatriats outside the US. On the other hand our friends rented a 3000+ sqft lakeview home in Houghton for $2000/month for three years before they bought another home in 2007. The rental home was bought a long time ago and paid off by the owner. There are deals to be had in renting with some luck.
tj, just to be clear, my example is based on a $400k loan amount–not sales price–with 20% down ($500k sales price min.). I try to stick to this loan amount/sales price since it’s what I use for the Friday rate updates.
Thanks Rhonda, that’s how I understood it. It’s just that a downpayment is hard to use in a comparison to rent. It probably makes the purchase in a declining/deflationionary environment even more to a disadvantage so I just choosed to compare with the $400k loan amount.
[...] have record low rates. Congrats! I do think rates will continue to bounce around quite a bit with the Fed’s move to purchase mortgage backed securities and agency debt…the question is to homeowners, what rate will it take for you to refinance and/or is there a [...]