Tuesday, March 18, 2008

Fed Slices Rate by 3/4 of a Point

The Fed cut its federal funds rate again today, down to 2.25%. The Fed Funds rate is the overnight rate banks charge each other for borrowing money. The Fed Funds rate has been chopped a full 3% since September 2007. MSNBC has a nice chart showing that the current 2.25% rate is the lowest since the end of 2004.

The dollar rebounded on the news, but some industry watchers were disappointed they didn't get a full 1% cut. The Dow also had a good day, rising 3.5% on the Fed's news, the largest one-day gain since July 2002.

What does it mean for mortgage rates? That's hard to tell. Generally, Fed rate cuts don't immediately impact mortgage rates. I heard from a very knowledgable mortgage lender (Andrew Schmidt of Nations Home Lending) yesterday that mortgage rates generally track with the stock market's Dow Jones, S&P 500 and other big indices. When stocks go down, mortgage rates go down. There was some complicated logic in there about traders selling stocks and buying bonds, thus pushing up the yield on the bonds, and thus decreasing the average 30year mortgage rate.

It's important to keep in mind that the overall real estate market is slower to move than the stock market. If stocks are a speed boat zipping up one day and down the next, then the national (and even local) real estate market is more like a huge ocean liner. It takes time to reverse course and start out in a new direction. (BTW, the speed boat/luxury liner analogy isn't my invention. Sadly, I can't remember where I heard it in order to credit the creator.)

Suffice it to say that I mostly understand the inner working of Wall Street, but I rely on a bunch of top notch mortgage lenders for my daily fix on what mortgage rates are doing and why.  You should too, if you're in the market to buy or sell. See my list of preferred lenders here: recommended-lenders.doc