Lowest Mortgage Rates in Weeks After Fed Hikes Rates. Here’s How That Works…

The implication of a “Fed rate hike” is a constant source of confusion in the housing market. The general belief is that the Fed controls rates and if they are increasing, then rates are going higher. It doesn’t work quite the same way.

Let’s leave the question of the Fed’s control for another day. This is a fairly circular and philosophical debate (chicken/egg sort of thing) that has no real relevance to today’s mortgage rate movement). Instead, let’s look at why today’s Fed rate hike coincides with a lowering of mortgage rates.

The Fed hiked the fed funds rate. This applies to loans between large institutions for periods of less than a day. By pushing the cost of even the shortest term capital to higher levels, the Fed is attempting to reduce demand for goods and services, thereby reducing inflation.

Mortgage rates apply to loans that last longer than 5 years on average (before the home is sold or the loan is refinanced). This means that they serve a very different purpose for investors and can be handled in a very different way than shorter term debt. But it’s not even the biggest reason for the disconnect.

The most obvious reason that Fed rate hikes can co-exist with low mortgage rates is because the bond market already knew the Fed was going to hike and had priced it in at current rates for a long time. It would be different if the Fed could raise rates at any time, any day, but there are only 8 meetings per year that result in a rate change. This means that the market has had plenty of time to adjust its expectations between those meetings.

Because the market was already responsible for the increase, all that was left was to respond to Fed Chair Powell’s comments at the post-announcement press conference and the Fed’s change in terminology. That rhetoric generally conveyed the likelihood that this was the last Fed rate hike for a long time. Even if that outlook is heavily dependent on economic data, the bond market relished the fact that the Fed was not ready to continue hiking.

Average mortgage lender is at its lowest level in nearly 3 weeks. Additional gains will depend on economic data in the coming days – particularly Friday’s jobs report and next week’s consumer price index (CPI).