Market Watch – Fed Pauses On Rates

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The news from the Federal Reserve this week is a pause on rate hikes and while the Fed does not set these rates outright, its monetary policies and decisions inevitably echo through the housing market. This relationship has been notably evident through the 11 rate hikes since early 2022, leading to the Fed’s recent announcement of a pause in September.

A Glimmer of Hope for the Housing Market
Housing economists have found solace in this pause, with anticipations that the steep incline in mortgage rates may be nearing its terminus.

Mike Fratantoni, the Chief Economist at the Mortgage Bankers Association, states, “We anticipate a continual decline in inflation, aligning it closer to the Fed’s target. Concurrently, the job market is projected to decelerate, reflecting expectations that the Fed’s 2024 movements will be characterized by cuts instead of increments. This shift is foreseen to ameliorate affordability for prospective homebuyers.”

The Mechanisms of the Federal Reserve
The Federal Reserve delineates the borrowing expenses for short-term loans through modifications in its federal funds rate. This integral rate defines the interest paid by banks to each other for overnight reserve borrowing from the Fed.

Since 2022, the elevation of this fundamental rate was adopted as a strategy by the Fed to mitigate inflation, inadvertently escalating the borrowing expenses for Americans.

It is crucial to note that fixed-rate mortgages, which dominate the home loan sector, do not replicate the federal funds rate. Instead, they are anchored to the 10-year Treasury yield. However, the fed funds rate does shape the contours of short-term loans like credit card rates and adjustable-rate mortgages.

The Federal Reserve also engages in the purchase and sale of debt securities, sustaining the credit flow and subsequently impacting mortgage rates.

Diverging Influences on Mortgage Rates
The intricacies of fixed-rate mortgages are inherently tied to the 10-year Treasury yield. The fluctuations in this yield reverberate through fixed-rate mortgages, although the exact mortgage rate maintains a gap with the yield. This gap has extended to 3 percentage points through much of 2023, inflating the cost of mortgages.

Mortgage rates move based on variety of factors including inflation, supply and demand balance in mortgage lending, and the secondary mortgage market dynamics.

Of course if you’re looking to finance a home loan check with us – you can fill out our 60 second analysis on our website or just schedule a meeting and we can review your options and see what best fits your needs!