The Fed's Big Move

Posted by: Chris Palmeri on March 18, 2008

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The Federal Reserve takes a huge gulp and slashes its key interest rate 3/4s of a percent. The stock market cheers. But on Realtor oriented Web sites such as Activerain.com the mood is less ebullient. After all the brokers have seen the Fed slash rates for months and the housing market has continued to tank.
The truth is the Fed cuts don’t translate directly into lower mortgage rates. Mortgage rates have risen since January, despites the Fed’s slashing.
Gibran Nicholas, chairman of the CMPS Institute, which certifies mortgage bankers, says it’s important for consumers to know how the mortgage markets work. The Fed cuts involve the Federal Funds Rate—which is what banks charge each other for loans. Adjustable rate mortgages are most often tied to Libor—the London Interbank Offered Rate. Home equity loans are based on the Prime Rate in the U.S., what banks charge their best customers.
Traditional mortgage rates are most closely tied to those of mortgage securities, that is what investors on Wall Street are willing to accept in return for the money they invest. Mortgage securities pricing closely follows 10 year Treasury rates, i.e. what global bond investors are willing to accept for lending to the U.S. government.
Other factors come into play. The value of the dollar. Inflation. The economy. The attractiveness of other investments. It’s all part of the global money stew. The Fed’s moves certainly won’t hurt home values, but nor are they are an instant end to the market’s slide.

 

About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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