The Fed Doesn’t Dictate Mortgage Rates
have dropped since late last year, and that’s good news for consumers. Lower
rates mean consumers pay less over the life of their home loan.
For agents, taking
the time to understand how mortgage rates work is key. As you guide your clients
through the homebuying or selling process, it’s a tool you can use to drive
informed conversations and help them better weigh their options.
important to know about mortgage rates? First off, let’s talk about a common
myth out there, that the Federal Reserve, also referred to as “The Fed,” sets
mortgage rates. That’s not entirely true.
What’s the Federal Reserve?
It’s the central bank of the United States, and it
controls our money supply. If you think about the U.S. economy as a person, money is the blood,
the banking system is the heart, and the Fed is our cardiologist. Congress has
tasked the Fed with keeping tabs on two of our vital signs – inflation (how
fast prices go up) and employment, specifically keeping the economy at the
maximum level sustainable.
Fed keeps its eye on that big picture. When Fed members meet eight times a year
to talk about how the economy is doing, they’re not specifically setting
mortgage rates. Instead, they’re deciding how to manage the supply of money in
circulation. They do this by buying and selling short-term Treasury bills.
how the Fed operates.
If it thinks
the economy is sluggish, it will buy Treasurys, thereby injecting cash into the
economy. In response to the increased demand for Treasurys created by the Fed,
their price goes up and their yield, or their rate of return, goes down. When that
rate is low, it’s cheaper to borrow money, so consumers and companies spend
more. That boosts the economy.
other hand, if the Fed thinks prices are beginning to grow too rapidly, they
will start selling off the Treasurys on their balance sheet in an effort to
reduce the supply of money circulating in the country. Less demand means lower
prices for the bonds and their rate goes down. Higher rates mean people are
less likely to take out loans and spend. The goal is to keep prices in check
without slowing the economy down too much and creating a recession.
rates are very much tied to Treasury yields, but here’s the rub.
They aren’t the same Treasurys that the Fed normally buys and sells to manage
the money supply. The Fed uses short-term Treasurys while mortgage rates track
with longer-termed Treasurys that are assets much more comparable to a mortgage.
That’s why mortgage rates don’t always move in lockstep with Federal Reserve
policies. The best proxy for mortgage rates is generally the 10-year Treasury,
and because these bonds span a bigger chunk of time, their prices are impacted
by more than just what the Fed is doing.
Treasury rates are impacted by a lot of things, ranging from people’s
expectations about the future health of the US economy to global, geopolitical
events. When people think things are risky in the world, you will often see
money move into these bonds and drive down their rates.
trick to learning and following mortgage rate movements is often to read the
news and look at how yields on 10-year Treasury rates respond. Often, you’ll
find that within a week mortgage rates will follow changes in the 10-year Treasury
almost to a tee.
what does all this mean for real estate agents?
other things being equal, we know that when mortgage rates go up, home sales go
down. And when mortgage rates fall, home sales should go up. All other things
are rarely equal, but that doesn’t mean you can’t use this information to
create valuable insights about the direction of mortgage rates and home sales
in your market. You can have better conversations with your clients and
demonstrate your value, not only as an expert on the local market, but as
someone who can see the big picture.
About Ruben Gonzalez
Ruben Gonzalez is the chief economist at Keller Williams. He leads in-depth research efforts and tracks leading indicators that impact the housing market.
Gonzalez creates ongoing housing forecasts and regularly provides commentary on real estate market trends to a range of national business, real estate and financial news outlets.
Gonzalez received his undergraduate degree and earned his master’s degree in economics from The University of Texas at Austin.