Mortgage rates dropped yesterday afternoon following the Fed's announcement that it was raisingÂ mortgage interest rates. Yes, mortgage rates today are lower than they would have otherwise been because of anÂ increase in the Fed's overnight interest rates.
The economy is becoming increasingly hotter, with unemployment down, stocks up, and government policies designed to fuel the fire -- less regulation, proposed tax cuts, etc. These things are likely to cause inflation if the Fed can't cool things down by tightening up the money supply -- raising the interest rate banks charge each other for overnight loans.
Inflation occurs when people have more money to spend, but supplies of the resources they buy remain the same. For instance, oil. In fact, the price of oil is up this morning. More money competing for the same, finite resources means the price of those resources increases.
** FHA APRs include government-mandated mortgage insurance premiums (MIP).Â
These rates are averages, and your rate could be lower.
Everyone and their dogs knew that the Fed was going to raise rates. There were just too many signs of economic activity to ignore. So bond prices had reacted to this probably event days ago.Â In fact, it over-reacted.
When the Fed announced that its members did not believe that the Fed Funds rate would be higher by year end than previously forecast, markets experienced a correction. In other words, investors expected the Fed to announce more and bigger hikes for the rest of this year, and that did not pan out. So, rates calmed down quickly, falling an average .125 percent late yesterday.
Which brings us to this morning.
Today's weekly Jobless Claims report came in with 241,000 new claims for unemployment benefits, right in line with the expected 240,000. That won't do much to change mortgage rates.
Next, the Commerce DepartÂ announced that there were 1.29 million Housing Starts in February. Analysts believedÂ that 1.27 million homes were started in February,Â so this news is positive for the economy and potentially bad for mortgage rates.
Tomorrow bringsÂ the Industrial Production report and the preliminary highly-important Consumer Sentiment report for March. If either of these come in stronger than forecase, it could ush rates up. The opposite is also true.
Industrial production is expected to have fallen by .3 percent, while analysts believe that the Consumer Sentiment index rose sharply from 96.3 to 97.5.
This is a good time to take advantage of the drop in pricing.
Note that this is what I would do if I had a mortgage in process today. Your own goals and tolerance for risk may differ.Â
Mortgage interest rates depend on a great deal on the expectations of investors. Good economic news tends to be bad for interest rates, because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.
For example, suppose that two years ago, you bought a $1,000 bond payingÂ five percent interest ($50) each year. (This is called its â€ścoupon rate.") Thatâ€™s a pretty good rate today, so lots of investors want to buy it from you. You sell your $1,000 bond for $1,200.
The buyer gets the same $50 a year in interest that you were getting. However, because he paid more for the bond, his interest rate is not five percent.
Your buyer gets an interest rate, or yield, of only 4.2 percent. And thatâ€™s why, when demand for bonds increases and bond prices go up, interest rates go down.
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can't sell it for $1,000, because unemployment has dropped and stock prices are soaring. You end up gettingÂ $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)