Sep 30, 2024

A Fed Rate Cut and Your Mortgage Rate

A recent online advertisement from a major bank read, “The Fed just lowered interest rates. Could refinancing save you money?”

There is an implicit assumption in the ad that the Fed’s half-percentage point rate reduction brought about a significant drop in mortgage rates shortly following the decision.

It didn’t. Why not? Changes in the fed funds rate indirectly influence but don’t mirror fixed mortgage rates. Last Thursday, Freddie Mac’s weekly survey pegged the 30-year fixed rate mortgage at 6.08%, down from 6.09% the prior week and 6.20% two weeks ago.

Instead, the yield on the 10-year Treasury bond has the greatest influence. It’s not a one-to-one lockstep relationship, but changes in the 10-year Treasury yield directly impact fixed mortgage rates, as shown below.

While homebuyers and those that may want to refinance may have been disappointed that a big drop in mortgage rates wasn’t forthcoming, rates are down sharply from the 2024 high of 7.22% in early May.

And they are down significantly from August 1, when the 30-year stood at 6.73%.

What else influenced the summer’s decline in mortgage rates?

In addition to the 10-year Treasury, there was increased speculation about a rate cut by the Fed during the summer, which contributed to the decrease in Treasury yields. The softer labor market and the slowdown in the rate of inflation also influenced the decline in yields.

Plus, demand for mortgage-backed securities, which are bundled by lenders and sold on the secondary market, can affect rates.

If demand for these securities is high, rates may come down slightly. When demand falls off, rates may tick higher to attract buyers.

Reproduction Prohibited without Express Permission. Copyright FDP Wealth Management. All rights reserved. Advisory Services offered through FDP Wealth Management, LLC, a state Registered Investment Advisor. Securities offered through Valmark Securities, Inc., Member FINRA/SIPC | 130 Springside Drive Suite 300 Akron, OH 44333-2431 | 800.765.5201. FDP Wealth Management, LLC is a separate entity from Valmark Securities, Inc. If you do not want to receive further editions of this weekly newsletter, please contact me at (949) 855-4337 or e-mail me at info@fdpwm.com or write me at 8841 Research Drive, Suite 100, Irvine, CA 92618. FDP Wealth Management, LLC, Valmark Securities, Inc. and their representatives do not offer tax or legal advice. You should consult your tax or legal professional regarding your individual circumstances. Indices are unmanaged and cannot be invested directly in. Past performance is not a guarantee of future results.

RELATED POSTS

Job Growth Blows Past Expectations

The U.S. Bureau of Labor Statistics reported that the economy added a whopping 254,000 jobs in September, about 100,000 more than economists surveyed by Bloomberg had projected. The unemployment rate, expected to hold steady at 4.2%, slipped to 4.1%.

Boom – Fed Opts for 50

On Wednesday, the Federal Reserve announced a 50-basis point (bp, 1 bp = 0.01%) rate cut for the fed funds rate to 4.75 – 5.00%, its first reduction since 2020. The announcement marks the end of the most aggressive rate-hike cycle since 1980 when the Fed funds rate rose a whopping 11 percentage points (1,100 bps) in just 6 months.

A Green Light for the Fed – in Three Graphs

All indications point to a rate cut by the Federal Reserve this week. What’s behind the Fed’s rationale? Let’s look at three key metrics. Aided by lower gasoline prices and stable prices for consumer goods, the rate of inflation has slowed dramatically.

August Melt-Up Follows Brief Meltdown

Market pullbacks are to be expected. They are incorporated into the financial plan. But like an unexpected traffic jam, they are exceedingly difficult to predict. Early August was one such event. The turbulence began at the end of July in the wake of seemingly minor news—the U.S. BLS reported another rise in the unemployment rate, which forced some investors to re-evaluate their view of a recession.

Then and Now

Overbuilding, speculation, and easy access to credit encouraged a housing boom and a bust in the 2000s. Sales cratered later in the decade, and along with it, prices tumbled. Today, housing sales have plummeted once again.