The Fed lowered Rates by 1/2%!! Why aren't mortgage rates coming down.
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- 2yCory VitaleBusiness MemberAccountant · Member since 2021 · 23 posts · 7 votes
Quote from @Jack Pyle:
Many people tend to think that the Federal Funds rate controls interest rates. The Federal Funds Rate is the overnight lending rate that Federal Reserve Banks charge each other for overnight lending. (We individual investors or Long term Lenders can't borrow at that rate)
Mortgage rates typically follow the 10 yr Treasury yield. This is because Mortgage backed securities are in direct competition with investors looking for "safer" investments backed by the full faith of the United States Government. Investors pick MBS investments for a little more risk and a higher yield.
The reason rates didn't drop much last week is because they already did! Take a look at the 10 year treasury yield on Aug 29 3.91%. The day the Fed announced 3.68% and today 3.78%. Anytime the media spits out news coverage on rates, it has already been baked into the market from Wall St. Investors.
With that being said, the trend is our friend and rates are moving in the right direction. It's just not going to drop dramatically overnight.
I love this topic and insight into the conversation! I find that the media often doesn't fully understand this difference between the fed funds rate, risk free rates (i.e., treasuries), and mortgage spreads.
I like how you point out the "technical" elements at play by mentioning the demand for MBS versus treasuries. Of course, the Federal Reserve's QT also impacts the supply side and can cause price changes that are not one-for-one with changes to base rates like the fed funds rate.
I find it so interesting that you can have spread widening at times when rates are going down. For instance, in a time of economic uncertainty, the fed may lower rates but the perceived riskiness of a 30Y fixed rate mortgage may be higher, causing that rate to stay the same or even go up a bit compared to Treasuries. Thus you have spreads increasing (widening) even as rates are moving down.
As I'm sure you're aware, the 10Y treasury somewhat tracks the 30Y fixed rate mortgage rates because the average duration of those assets has always been around 7 years (i.e., very close to 10).
Question for you @Jack Pyle. Do you think it's possible that the spread on mortgage rates will be higher in the next 10 years than the last 10, even as it comes down? And do you think a reason for that might be that the average duration of a 30Y mortgage has actually slowly increased upwards as some portion of the population hangs onto their 2% mortgages from COVID era rates? In other words, could lenders and investors in MBS require a higher return because of the data now show that people on average are prepaying their mortgages more slowly? Food for thought...
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