Napa Mortgage News

Will Fed Increasing Rates affect Mortgages?

January 9th, 2017 5:02 PM by Dale DiGennaro

Will Raising the Fed Rate next week affect Mortgage Rates?

Dear Gena,

After holding its benchmark Federal Funds Rate near zero for almost a decade to support the economic recovery, the Fed upped the target rate range to between 0.25 to 0.5 percent in December.
And this month...mid June, we are facing another potential increase.

So what does this mean for homebuyers and homeowners?

The Fed Funds Rate is the rate at which banks lend money to each other overnight. It is not directly tied to long-term rates on consumer products like purchase or refinance loans. So...home loan rates do not increase as a direct result of the Fed's decision. In fact, Leonard Kiefer, Freddie Mac's deputy chief economist, noted the last time the Fed raised its benchmark rate, it had a "delayed and muted impact" on the 30-year fixed-rate mortgage.

Instead, home loan rates are tied to Mortgage Backed Securities, which are a type of Bond. Many factors impact the performance of both Stocks and Bonds and play a role in the direction of home loan rates. For example, an improving economy, higher wages and higher inflation could all cause home loan rates to rise. However, a faltering economy or turmoil overseas could drive investors to seek out "safer" investments like Bonds, which could help keep home loan rates low.

According to Fed Reserve Chair Janet Yellen, the move to increase the Fed Funds Rate..."recognizes the considerable progress that has been made toward easing the economic hardship of millions of Americans." The increase also reflects the Fed's confidence that lagging economic factors will continue to improve.

As the economy continues to recover...or falter...the Fed will continue to consider additional rate changes going forward. Regardless of future Fed action, Freddie Mac's chief economist, Sean Becketti expects home loan rates to "tick higher but remain at historically low levels in 2016.

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Disappointing Job Gains

The major economic news over the past week was positive for mortgage rates. This included weaker than expected U.S. economic data, dovish ECB comments, and increased concerns about the UK leaving the EU. As a result, mortgage rates ended the week lower, near the best levels of the year.

The important monthly jobs report released on Friday was a big disappointment. Against a consensus forecast of 160K, the economy added just 38K jobs in May, which was the lowest level since September 2010. Job gains over the past three months averaged just 116K, far below the average monthly gains of 219K over the prior twelve months.

The unemployment rate declined from 5.0% to 4.7%. This was not a sign of strength, however, as the decline was almost entirely due to people leaving the labor force.

There were few surprises resulting from Thursday's European Central Bank (ECB) meeting. There was no change in policy. Comments from ECB President Draghi indicated that the ECB expects to maintain loose monetary policy for a long time. Prior to the meeting, some investors thought that the ECB might hint at tighter monetary policy. They viewed the continued dovish stance as better than the alternative, and global bond yields moved lower after the meeting.

A new poll released Tuesday reported stronger support in the UK to leave the European Union (EU) than in prior polls. Before the latest poll, investors had low expectations that the vote would be in favor of Britain exiting the EU. The new data increased the odds. A British exit likely would increase the level of uncertainty in global financial markets and could slow global economic growth. Increased concern led investors to favor safer assets such as bonds, including U.S. mortgage-backed securities.

Looking ahead, Fed Chair Janet Yellen will be giving a speech Today. Productivity will be released on Tuesday. The JOLTS report will come out on Wednesday. JOLTS measures job openings and labor turnover rates. Consumer Sentiment will be released on Friday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.

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This years "Bottlerock" was an amazing event! Thousands of people, great food from local restaurants complimented by many local vineyards! And the music was nonstop!

I was fortunate to have my kids there too and ran into many clients, peers and people in our industry...as well as the many new friends we made over 3 days! If you haven't experienced it yet....I highly recommend you go next year!

Our friend Napa Mayor Jill Techel & Mark Ibanez from KTVU SF Channel 2 on the Williams Sonoma Culinary Stage.

Florence & The Machine Headlined on Saturday evening... only to be briefly overshadowed by the entire crowd chanting "Waaaarrrrriorsssss" as they stole the game at the last minute! All started by one man yelling out when I walked by!

Thank you for always trusting in us to do the best for you and your family and please feel free to call me anytime with your questions. I will be happy to share with you whatever information you may need!