Despite many lenders promoting the 9/19/2024 "Fed half point rate cut" as a significant change that drastically reduced home loan rates, in reality, there was minimal to no immediate impact on rates following the Fed's decision. These dishonest lenders employ manipulative tactics to attract attention and solicit more interactions from borrowers. Every form of communication is viewed as a chance to make a sale. It's a classic marketing strategy.
It was already factored in by Wall Street mortgage bond traders that there would be a half-point Fed discount rate cut, which was not a surprise to experts, weeks before it happened. Federal Reserve meetings are scheduled months in advance. The key factors influencing mortgage rates are economic news and any unexpected comments from the Fed after their meetings that could significantly impact rates in either direction. For instance, if the Fed had unexpectedly reduced the discount rate by a full point instead of half, it would have led to a substantial drop in mortgage rates.
The Federal Reserve establishes the discount rate, which is the rate at which banks borrow short-term money from the Fed. This has an indirect impact on all borrowing rates such as mortgages, although not always precisely. Currently, the Fed is inclined to reduce rates in response to a perceived economic slowdown, but it will ultimately be economic indicators, particularly inflation, that drive rates lower. The more significant the inflation data, the greater the fluctuation in rates on any given day. Further details on the factors influencing rate movements are provided below:
Rate quotes from lenders can vary significantly, constantly fluctuating, and rarely aligning with advertised rates. The main question is, why is that? In this article, I will elaborate on the factors influencing your rate and what to be mindful of.
Three primary factors are responsible for determining the interest rate you will be offered-
Factors affecting rate movement in the economy, the choice of mortgage lender and their pricing approach, and lastly, your transaction criteria and personal circumstances.
We will address the economy here and discuss the other two topics in separate articles.
The impact of the economy on mortgage rates
Whether we are in a 'high-rate' or 'low-rate' environment at any given time is determined by the robustness of the U.S. economy and investor confidence. Let's delve into the mechanics of this relationship.
Mortgage-backed securities (MBS) set the tone for mortgage rates
After closing, lenders usually sell the majority of mortgages to investors on the secondary market as part of bundles known as mortgage-backed securities (MBS). This process allows lenders to free up funds for future borrowers by generating profits from these sales. MBS, which function as bonds, are fixed-income investments available for purchase by investors globally.
How the MBS market affects rates -Supply and Demand
Lenders keep a close watch on the secondary market where MBS are traded. MBS prices can fluctuate significantly on numerous occasions. In case of substantial price changes, lenders may adjust their rates several times a day to align with the market. When the demand for MBS rises, leading to an increase in their price, mortgage rates usually decrease. This typically occurs during periods of economic uncertainty or decline. Investors prioritize safety, and MBS are generally considered a secure investment. Consequently, an influx of funds into the mortgage market leads to a drop in borrowers' rates.
The Fed’s role in determining mortgage rates
By adjusting its discount rate, the Fed plays a role in influencing mortgage rates, although the two are not directly correlated. Changes in the Fed rate can impact investor sentiment in the MBS secondary market, leading to fluctuations in home loan rates.
Another way the Fed can impact mortgage rates is by purchasing significant amounts of MBS, which decreases the supply accessible to typical investors. A decrease in available MBS results in lower rates, whereas an excess supply of MBS results in higher rates.
Watch the news if you’re rate shopping - inflation, inflation, inflation
During periods of economic growth and significant inflation, there is a strong likelihood for mortgage rates to rise. Conversely, when there are signs of economic downturn and decreasing inflation, rates tend to decrease.
This can be relevant even on a daily basis. A surprisingly positive economic report can lead to an increase in mortgage rates, whereas a report that is worse than anticipated can cause rates to decrease. It is crucial to stay informed about the news when looking for mortgage rates. Rates could decrease suddenly or increase rapidly at any moment, so it's important to be prepared to secure a rate when the opportunity arises, especially when considering a refinance.
Displayed below is a graphic listing factors that influence economic rates
