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  • Rob Purnell

Where Are Mortgage Rates Headed?

On October 30th the Fed lowered the Target Rate by another .25%, the third 1/4 point drop this year. This always triggers a rash of news articles and marketing campaigns saying "borrow now at lower mortgage rates." But the Fed's move doesn't affect mortgage rates, at least not directly. Mortgage rates are more influenced by what the Fed says than by what the Fed does.

Federal Reserve Chairman Jerome Powell announces the most recent rate cut. This is the third 1/4 point rate reduction this year.

What the does Fed control is the Target Rate, a short-term interest rate that banks charge each other for overnight borrowing. (Yes, it's THAT short term.) This directly lowers other short-term consumer rates such as personal loans and credit cards.


Mortgages are long-term loans, and rates are determined by trading in the bond market. The most common proxy for mortgage rates is the 10-year Treasury bond.


But the Fed's influence extends well beyond raising or lowering a target rate. Its major power comes from dropping hints about what it might do in the future. These hints are broadly interpreted by the markets as to where the economy is expected to go, and very importantly, whether or not there are any expectations of inflation.



When the Fed cuts the Target Rate it is telling the market inflation is under control, and the focus is on stimulating the economy. If investors don't have to worry about inflation (in this case we're talking about large institutions that buy mortgages) they can accept lower yields (rates) on those mortgages without worrying about the future value of their investment. Voila, your mortgage rates go down. Except when they don't.


Inflation expectations is just one of many factors influencing bond, and mortgage rates. Right after the recent Fed rate cut bond yields (and mortgage rates) quickly dropped as well. But the next week the 10-year yield had it's highest increase since the 2016 presidential election. Why? Institutional investors moved their money (in herd-like fashion) into riskier equities and out of the safety of bonds. With less demand bonds must offer higher yields in order to attract buyers. And so they did. This could change again tomorrow of course. Mortgage rates are still at their lowest level in 30 years. So if you are looking for a mortgage now I don't advise trying to time the market.


How Long Will Rates Stay Low?


With rates currently at historic lows it's easy to forecast rate increases in the next year or two. After all, how much lower could rates go? It's hard to believe but they could go lower.. (See Negative Interest Rates.)


I don't have a crystal ball, but my best prediction is that rates will stay in the mid 3% range for at least the next year assuming no major shocks to the economy.


All major indicators suggest there is no recession in the near future, and that growth should remain moderate. For economists (and politicians) moderate can be delicate, and they won't want to risk triggering a recession by allowing rates to climb. I guarantee this won't happen with a presidential election coming up next year.


Even if the economy does start to falter the Fed still has a few tools to push rates lower and try to stimulate growth. And with mortgage rates staying at these historically low levels it will continue to prop up real estate sales. There is an argument whether or not it's healthy for the country in the long-term, but one thing is for sure: if you have a mind to buy or sell property you should take advantage of this once in a lifetime rate opportunity.

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