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Mortgage Rates Defy Fed Increase

Mortgage Rates: Back In The Dumper AgainMortgage rates have fallen since the decision of the Federal Reserve to increase interest levels.

The Fed announcement came on December 16th. It raised the overnight lending rate for banks by .25 percent and the nation’s banks instantly went into action, increasing the prime rate for borrowers by .25 percent while not touching the measly rates paid to depositors. By effectively increasing the spread between deposits and loan rates the Fed handed the nation’s banks massive, multi-billion dollar profits.

For real estate borrowers the action by the Fed has had two results.

First, ho hum, the Fed increase had been expected for months and had been built into mortgage rates. Any increase in mortgage rates at the time of the Fed announcement was simply unnecessary. As the Mortgage Bankers Association explained in its November forecast, “we may not see another rate increase until the second quarter of 2016. Due to the delay in raising rates and continued demand for safe assets, however, we expect that the 10‐Year Treasury rate will stay below three percent through the end of 2016, and 30‐year mortgage rates will stay below 5 percent until early 2017.”

Second, while the Fed may impact bankers it does not set mortgage rates. Mortgage rates are a by-product of both capitalism and basic economics: if a lot of cash is sloshing around the system relative to demand mortgage rates go down, if the supply of cash declines relative to demand interest levels go up. The Fed controls none of this.

Mortgage Rates & Negative Interest

As it happens the world has a massive over-supply of capital. In Europe and Asia cash is like infected wheat, no one wants it and the result is negative interest rates. In fact, just before the Fed’s December announcement the European Central Bank dropped its rate to – .3 percent – that’s MINUS .3 percent, less than zero, negative interest.


So what happened to mortgage rates after the Fed’s big announcement? They went up, of course, but only because of headline-induced jitters. Now, a few weeks later, we’re back to reality and the reality is this: Rates are actually lower than before the Fed announcement.

For example, Mortgage News Daily says fixed-rate, 30-year financing hit 3.94 percent on January 8th versus 4.04 percent on December 15th. Freddie Mac’s weekly prime rate survey shows that interest levels for conforming 30-year loans with 20 percent down hit 3.97 percent for the week of December 17th, the week of the Fed announcement and 3.92 percent for the week of January 14, 2016.

Low Mortgage Rates A Fed Threat

The inability of higher mortgage rates to stick after the Fed announcement could be an early warning sign, a suggestion that the Fed may have to backtrack on its December rate increase. Such a move would be hotly opposed on Wall Street and on K Street, but it would not be surprising: Central banks in Europe, Japan and Sweden all raised rates and then quickly went back to zero, according to The Washington Post.

Given worldwide stock market gyrations during the past few weeks it’s obvious that a lot of money is moving from equities to the relative safety of bonds, if there is such a thing as safety. Such movement – should it continue – suggests that low mortgage rates will be with us for a very long time.

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