The fed just cut mortgage rates right?

Question

Well, no, the fed cut the fed funds rate which is the rate that big banks lend money to each overnight.  Therefore, the Fed decides what the shortest-term loan cost will be. The market decides what every other interest rate will be. Obviously, mortgages are longer than 24 hours so there is no direct correlation between fed funds and long-term mortgage rates. (The exception to this is loans based off prime which would typically be home equity lines of credit as the Fed funds rate does affect prime)

The Federal Reserve meets 8 times a year, while the bond market which actually dictates mortgage interest rates is traded every second of every day of the year. So, if you and I knew the Fed was going to start cutting the fed funds rate, the traders who do it for a living did as well. They look forward to where rates are going to be, not where they are currently. Therefore, the reason mortgage rates have gone down 1.5%~ or so over the last three months is due to the bond market pricing in this cut and future cuts. You can bet on where you think the fed funds rate will be with Fed Funds futures contracts, and right now that market has the fed funds rate all the down to 3% by June 2025.  https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html  Of course, markets can be wrong, and data can change, but that is what is being priced in at the moment.

In fact, mortgage rates often RISE after a Fed funds rate cut. This can happen for any number of reasons but for example if Powell says something that seems contradictory to the above assumptions rates can pop quickly up.

That all being said, rates can still be had at this point in the 5’s for those with good credit and loan to value.  Refi’s is certainly a possibility for those that have purchased in the last two years or so.

Chris Seveney · Answer

Great Post! People see interest rate cuts and think everything drops.

As you mention, this has been priced into the markets for some time, and the reality is those who buy MBS's and invest in mortgages compete against the 10 year treasury bill. If the 10 year treasury is at 5% which is guaranteed, investors will want a risk premium for the mortgage backed security which here is a great article on it.

Mind the Gap Between Mortgage Rates and the 10-Year Treasury Yield (firstam.com)

Marcus Auerbach · Answer

Residential mortgage rates have already dropped, but the general public has not paid attention. Now they will look at it again, even though the funds rate does not drive mortgage rates. Commercial loans should start softening, but not enough to be a game changer.

We could see the perfect storm in spring though. A few more rate cuts and the 10y Tbill going down could really light a fire under the real estate market. Nationally we have seen prices drop a bit, my market Milwaukee is still up 7% (despite high rates). With lower rates (mid 5s) I am expecting prices to jump again in spring, as they have done basically every year for the last 15.

Stuart Udis · Answer

Prime rate runs ~3% higher than the Fed rate but as others shared unlike residential mortgages with the prime rate there is a direct correlation and as the Fed rate decreases so does the prime rate.  You will often see this represented in your term sheets as Wall Street Journal Prime or WSJ Prime +xyz. In a real estate borrowing context it's most commonly used in construction and bridge debt originated by banks.  Banks can set the margin but in most cases you will see WSJ Prime +1%. If you see WSJ Prime + anything less than a point  it usually means the bank has a great deal of respect for your creditworthiness, really wants to fund your project or combination of both. Therefore anyone with bank originated construction debt or bridge debt is likely happy right now with the rate cut and narrative surrounding future cuts since in many cases these are adjustable rate loans with floors we likely won't see anytime soon.

It will be interesting to see whether this cut gets banks who have been on the sidelines back into the market or alternatively some lenders who have continued to lend but with tighter underwriting to ease their guidelines. That's where I suspect you may see the most immediate impact on the CRE side.

Patrick Roberts · Answer

I've already had two borrowers text me and ask if their rate went down by a 0.5% after explaining this repeatedly to them for the past month. Meanwhile I'm just watching the ten year climb since 230p...

V.G Jason · Answer

The complete lack of understanding is going to do some folks in.

The world has a way of working; you reach, it'll teach. Some of these folks think buyers are now lining up, and we'll see some buyers do just that. Just not be qualified. This is what I kept stressing about real demand vs qualified demand.

I'm back in the game, adding to the portfolio. But a lot of seller's interests went out the window once .5bps was announced. It'll take some time before they come back to the table.

Brandon Croucier · Answer

Lol, And my phone blows up whenever it happens!

Mortgage Rates are dictated by the bond market more or less, fed funds are typically a trailing indicator of the T Bills.

No, your rates not going down. HA

Jay Hurst · Answer

I thought I would bump this topic back to the top based on the fed cutting the federal funds rates a .250%.

Mike H. · Answer

While its true that mortgage rates don't correspond directly to the fed rate, I think its still somewhat related.  And if the fed rate continues to drop, so will the mortgage rate. I think it was a double whammy when the fed rate was boosted from nothing to 5-5.25 and the fed was also selling a bunch of the bonds they had bought before to drive mortgage rates down.  The key is the fed knows they need to help mortgage rates right now so if they lower the fed rate AND stop selling the treas bonds in their porfolio, that will help create more demand for bond sales to keep prices up and get rates down a bit.I can see mortgage rates hitting 5 to 5.25 by spring of next year.  The covid money is all gone and the economy is so so right now which should keep inflation down and keep the fed pushing rates lower which will help get mortgage rates lower eventually.

Ryan Dunn · Answer

@Jay Hurst

So then is the next talked about rate cuts that could happen in Nov,Dec getting priced in now or in the next few weeks? Or when will that happen since this .5 was already priced in months before.

Thanks

The fed just cut mortgage rates right?

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