We took our boys snowboarding last night at Snowqualmie where I began to receive text message alerts on my Treo about various markets being slammed from around the world based on fears of a US recession. The Fed met last night deciding to make an intermeeting cut to the Funds Rate to 3.5%. This is the biggest single Fed Funds rate cut since 1984.
“The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”
The Fed also reduced the Discount Rate to 4.0% (this is the rate banks can borrower directly from the Fed) in an attempt to add liquidity to the markets.
Unless you have a HELOC, this will not directly impact mortgage rates except for how investors react to the cut. Should they seek the safety of bonds (like mortgage backed securities) rates will go down as they have slightly this morning. The markets are all ready off their low lows of this morning. Mortgage rates will continue to be very volatile.
Remember, the Fed is scheduled to meet on January 30 where another rate cut is still heavily anticipated.
Update 1/22/2008 1:00 p.m.: Here is a graph that I came across compliments of my subscription to Loan Tool Box which shows the impact to mortgage interest rates when the Fed has recently cut the Funds rate.
[photopress:Rate_Chart.jpg,full,alignright]
amazing to see how this Fed is bent upon bailing out the misguided and reckless consumer and mistakes of individuals and keep adding to the banks profit machines. I guess there was no intervention when the banks were raking in billions in $$$ in profits. We will create another type of a bubble(maybe a stock bubble this time).
This Fed is so scared of washouts. My honest opinion is that we are just postponing the inevitable. We americans needs to learn to live within our means and save for the rainy day. This generation just does not know and want to learn to be conservative and live within the means.
Every 25 year old college grad wants a brand new BMW(no wonder I never get a appt at the dealer for servicing for 3 weeks out), a 600K home and a 50″ plasma TV and dine/wine every other day.
Expect to see mortgage rates skyrocket by the end of the year. Nobody wants to buy mortgage backed securities anymore, they are contaminated and everyone knows it. The Fed can drop to 0% and you will still pay 8% for a mortgage, if you are in the lucky 1 out of 20 people who will qualify. I hope you guys saved a lot of cash from the boom years, deflation is about to kill the housing market all together.
b-you better lock now! In fact, I’m pretty busy this morning locking in mortgages so it may not be until this afternoon that I’ll be around RCG to comment.
Rhonda, it’s amazing that you had the time to write this post…this is going to be a very busy day for you and other lenders to lock in rates!
Five more cuts of this size and we will be at zero! Keeping interest rates at zero for six years worked out so well for Japan…
Thanks, Deborah. I also did a quick post at Mortgage Porter with some mortgage rate examples. Borrowers who are refinancing should get price quotes for 45 days or be prepared to pay for an extension (or ask if their LO will). Many mortgage companies, title and escrow companies may be short staffed. Plus guidelines are tighter than the last time they had a mortgage…back to work! 😉
I’m all set to lock a rate today, but I’m confused by what I’m reading. I realize that the rate the Fed controls is not directly related to Mortgage rates, however, the last 3+ times the Fed has lowered the rate, mortgage rates have come down as well. With today’s large reduction by the Fed, is it logical to think that mortgage rates will ease down yet again? The 10 yr Treasury is down as well……a good indicator for falling Mortgage rates?? Why do I need to lock today?
Chuck –
In a normal world that is generally true. However, with a declining housing market and worldwide credit implosion, mortgage rates are more likely to go up no matter what the Fed does. Falling home values implies higher default risk which translates to a higher risk premium for mortgages. Since most of the low rates of the last few years were driven by derivatives that are now worth pennies in the dollar, expect to see higher rates coming down the pipeline. If I were you I would lock in now as this is likely around the low point for the next several years.
b –
Are you thinking deflation in terms of housing or the broader economy?
MrRational –
Both. We are watching deflation right now in housing, but the broader economy is not far behind. The worldwide credit implosion started in housing, but it is spreading to all of the other junk derivatives created in the last 5-10 years, credit cards, auto loans, etc. Monetary supply is rapidly shrinking as banks don’t want to lend what they won’t get back, so the Fed rate cuts are meaningless at this point and just there as psychological treats to stop all out crashes (like today, DJIA poised to drop significantly so they cut 75bp for the hell of it). We see inflation now, but that is remnants of the housing/credit bubble. It will take a little while for the full effect of the shrinking money supply to come to us on the street, but it will. As everyone saw yesterday, the global markets are not going to continue to expand while we contract, so hyperinflation is out of the cards. Convert equities into cash or equivalents, and ride it out. Oh, and don’t buy a house or take on any other unnecessary debt right now! If you refinance, do not take cash out! Debt is the worst thing possible in a deflationary recession.
If only I could borrow the money today to buy a house in a few years.
Chuck, I added a chart to the post to show you how rates have been reacting to the Fed rate cut. The Fed does not directly control mortgage interest rates. Mortgage interest rates are currently reacting to the Fed’s move and the stock market’s reaction. Fears of recession are driving the rates lower.
When/if the Fed cuts again on Jan. 30…you could see mortgage rates go up.
Regardless…if you’re happy with today’s rates, I suggest you lock.
I agree with “b” somewhat in that the price of a loan doesn’t depend on what the fed does. Loans are a product, and as such it’s supply and demand. That interest rates are low means there’s still plenty of supply to meet the demand that exists today. If either the people wanting to buy these loans goes down, or the people that want to get these loans goes up (both in absolute $$$ not number of people), then interest rates will rise. That has little to nothing to do with the Fed, which is why you get those situations like in the graph that was added to the main piece.
I’m just surprised so few people realize that easy credit and interest rate manipulation by the Federal Reserve was a major contributing factor to the real estate bubble. Now that the bubble burst, the only cure that’s being prescribed is more credit and lower interest rates, along with a number of liquidity injections by central banks. That was the problem in the first place, so how is it supposed to cure the problem that it created? Gold is already back up close to $900, and foreign nations may not be so willing to accept our dollars if we keep devaluing them.
The fed didn’t create easy credit on home loans.
And the Fed does not “create” mortgage interest rates. Only helocs are directly impacted by the Fed lowering the Funds rate (helocs are based on the Prime Rate which are 3% plus the Funds Rate).
Well I was speaking more of the types of programs available, not necessarily the interest rate. It’s not like the fed does things that ends up with people with 550 credit scores getting loans, or people getting loans with teaser rates.
Well, Kary, I was speaking more to foreclosurefish’s comment. 😉 Just backing ya ‘up.
Banks created the products with the teaser rates… Wall Street gobbled up the 550 scores (actually 580 was the lowest I saw…but I’m sure lower scores happened).
Kary –
That is only partially true. The Fed regulates the banking industry and it wasn’t until a month or two ago that they actually came out with some standards for mortgage lending, closing the barn door a little bit late. Also Greenspan in 2003, when rates were at their lowest, actively encouraged “creative” loan products in the banking industry as being good for everyone and has numerous speeches around that time talking about the subject. This, along with his too deep for too long cuts, is what really spurred the bubble. So while they might not be directly giving out loans to overextended borrowers, they encouraged the market and then turned a blind eye when it was obvious lending standards had turned into fogging a mirror.
interesting article on the effect on LIBOR and yeild curve and who actually benefits:
http://globaleconomicanalysis.blogspot.com/2008/01/select-few-are-helped-by-rate-drop.html
“b” seems to be the only person here who gets it regarding inflation/deflation. We are headded for deflation and interest rates will go up appreciably.
Lock in a low rate if you want, but it will be for a rapidly depreciating asset.
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Rhonda is close on the Fed Funds rate. The Fed Funds Target rate doesn’t set anything, but is more of a barometer of what the inter-bank short-term rates are doing. If the banks are lending to each other at low rates, the FED will drop the FFT. If they are lending at higher rates, the FED will raise.
I will say that the FED’s timing is one of intervention. I also think they are trying to front-run the decline in credit, as they have been trying to defend their low target rate with limited success. If the banks don’t follow, the FED will raise its target to achieve balance.
Lower short-term rates are indicitave of a collapsing commercial credit market (shrinking economy) and rising rates are indicitave of the inverse. When the FED is lowering rates, that’s not cause for celebration (unless you are clueless or trying to catch the bottom of an impending economic boom). When “the FED cuts” you should be bracing for some very chilly winds.
The reason it looks like the FED sets rates (mortgage rates dropping when they cut) is because the demand for credit is shrinking rapidly. As demand drops, the price (interest rate) also drops, and the FED is following that interest rate.
I can look at the declining thermometer outside my house and think one of two things:
-it’s cold outside and that is causing my thermometer to drop, or
-my thermometer is making the weather cold, and if I want it to be 75F, I need to take the hairdryer to my thermometer.