After Fed Rate Cuts, Mortgage Rates Continue To Rise
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The world markets celebrated last week when the Federal Reserve lowered the Federal Funds rate a half percent. All but those guys at the 10 year bond market. They got nervous thinking the rate cut was too much and could strengthen their arch nemesis INFLATION.
So to combat evil INFLATION, the interest rates for a 30 year mortgage has jumped .23 percent over the past week thus negating any of the benefit for homeowners. So what does this mean?
To me it means the rising interest rate on fixed loans will make it harder for homeowners looking to buy or refinance to qualify for a new loan. This will put greater pressure on sales and pricing and keep housing sales soft. Of course, their are many other factors affecting the markets such as the weak dollar and countries shifting their savings to Euro’s instead of dollars. All of these macro effects are hurting the credit markets in the United States and thus the ability for homeowners to borrow.
The Fed last week sliced a sharp 0.5 percentage points off of the key federal-funds rate, which banks charge each other for overnight loans.
But while cutting the federal-funds rate directly impacts short-term borrowing like credit-card debt, it doesn’t automatically affect long-term loans like mortgages.
Instead, banks generally base mortgage rates on 10-year U.S. Treasury bond yields, which have risen 0.23 percentage points in recent days. McBride said Treasury yields have gone up because some bond investors fear the Fed cut short-term rates too much, risking inflation.
Inflation is bad news for mortgage investors because they agree to lend money at fixed rates for up to 30 years. So, unexpected inflation can ruin these investors’ returns. “Inflation is the worst enemy of investors that buy long-term (debts),” McBride said. via the BostonHerald.com.
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Comment by Sam Chapman on 28 September 2007:
What nobody is saying, at least in the mainstream press, is that the big buyers of mortgage backed commercial paper are wary about buying loans. They got burned by bad loans and are holding back. The small cut the Fed made didn’t give these investors the confidence they need. Only time will do that.