Everything You Know About What Drives Mortgage Rates Is Wrong
I have to applaud 5280 for writing the article “Everything You Know About Denver’s Real Estate Market Is Wrong“. In this article, Natasha Gardner explores the realities of Denver’s real estate market. She has some good insight provided by some of Denver’s Real Estate agents. So I have to give her kudos for shedding light on the truth about Denver and the real estate market we live in. As an industry professional, I have been living this for a few years now. So part of what was written is not new. This is what it is, and what we industry professionals have grown accustomed to. What caught my eye was her point about mortgage rates. So I am going to share with you why everything you thought you knew about mortgage rates is wrong.
In the article, Natasha briefly talks about mortgage rates. She mentioned in Rule No. 3 how the Fed raised interest rates. What she completely missed here is that was the short-term rate. The Fed Funds rate is tied to short-term borrowing like credit cards, HELOCs (2nd mortgages), auto loans, and such. We all know one thing. The average mortgage is a 30-year note. Well, that is certainly not short-term lending.
Yes, they, in fact, raised the Fed Funds rate in December and March, this much is accurate. What is completely off base is the result. Folks, I can tell you that both times they raised the Fed Funds rate that mortgage bonds performed better and mortgage rates went down. In fact, this happened in 2004 and also after the increase in December 2015 as well. So the four times we can reference a Fed Funds increase in rates, mortgage rates have dropped following this. It has historically taken time after that before mortgage rates went up.
When I sit with my clients I show them the two most recent points on the bond trading chart where this occurred. And comparatively, show them the results to mortgage rates. So in short, don’t believe the hype, don’t listen to the static and avoid becoming fearful when people advertise about the Fed Funds rates and its impacts on mortgage rates.