Why a Fed Rate Hike Won’t Affect Mortgage Rates in the Short Term

Normal media channels do a terrible job of explaining what affects mortgage interest rates. And rest assured, every time the Fed talks about or raises interest rates, the cable news networks start shrieking about how mortgage rates are going up in a cloud of their own ignorance.  An appetite for investors to buy Mortgage Backed Securities (MBS) and US Treasury Notes, particularly the 10 Year Treasury Note (10 Year UST), are in fact the driving factors of mortgage rates and that appetite continues to be healthy.  When people invest in Treasuries and MBS, the yields drop and when their yields drop, so too do mortgage rates. This media alarm is wrong again and, in fact, many signs point to mortgage rates going down after a rate hike.

This is not the first time the media got this one wrong.  Take the Fed rate hikes between June of 2004 and July of 2006 as an example.  During this time, the Fed raised rates by over 4%.  During that same time, the yield on the 10 Year Treasury note increased less than ½ of one percent; having a nominal effect on mortgage rates throughout the two year period.  Here’s a chart showing what little impact the Fed rate hikes had:

10-year Yield vs Fed Funds Rate12-7-2015

This may or may not be the case moving forward but there’s absolutely no reason to think that rates are going to shoot up.  Especially when corporate bond markets are a mess, municipal bonds are suffering under the weight of Puerto Rico’s problem, Europe’s continued woes, instability in the Middle East, a stalled out stock market and oil prices drop due to oversupply.  All of these things are market weaknesses that make Treasuries look attractive.  In fact, a Fed rate hike could help rates because the Fed raising rates helps to fight inflation.  Inflation is the enemy of bonds because it devalues them and with that enemy in check by the Fed, rates could stay low or even drop.  In the near term, regardless of what the Fed does, rate forecasts are looking pretty good.  Here’s a sample from forecasts.org:

Mortgage Rate Forecast and Analysis for 2015

That’s a rather pretty picture so we encourage you not to get caught up in the media’s uninformed hysteria and rush a decision on your next home purchase.  The sky is not falling so take your time in finding the home you’ll really love.

Charles Dailey – NMLS 79048 – Branch Manager, Loan Officer, Certified Military Housing Specialist – 612-234-7283 – charles@charlesdailey.com


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