December 18th, 2015 5:09 PM by Richard T. Cirelli
Well, the Federal
Reserve finally did it! They raised the target federal funds rate 0.25%, its
first boost in nearly a decade. That does not, however, mean that the
average rate on the 30-year fixed mortgage will be a quarter- point higher.
That's not how mortgage rates work.
Mortgage rates follow the yields on mortgage-backed securities which are traded
in the financial markets. The price of these “Mortgage-Backed Securities”,
which are a form of “bond”, change every day and throughout every day, regardless
of the Fed. And, they move in anticipation of what the Fed may do in the
future. They don’t wait for the actual event plus there are many other factors,
domestic and global, that also impact the course of mortgage rates.
As it relates to this week’s rate hike by the Fed, it was expected for a long
time and so was already baked into mortgage rates. We may even see a slight
temporary decline in rates as a result. The Fed’s comments after the
announcement imply that future rate hikes will be slow to come and dependent on
future data. They said this:
"The Committee is maintaining its existing policy of reinvesting principal
payments from its holdings of agency debt and agency mortgage-backed securities
in agency mortgage-backed securities and of rolling over maturing Treasury
securities at auction, and it anticipates doing so until normalization of the
level of the federal funds rate is well under way." This means that the
Fed will continue to buy Mortgage-Backed Securities as they get paid off on previously
I’m hoping the rate hike will decrease the volatility that has plagued the
market for some time now and allow it to stabilize going forward – until
something else occurs that will move rates or the pricing of Mortgage-Backed
Securities. In the long-run though, mortgage rates are expected to rise over
time next year, particularly if the Fed get more aggressive with future hikes
in the Federal Funds Rate.