economy & mortgage rates
Hi guys,
I know this is the ibanking forums, but this is also the most visited and the place to get the most responses. Posting here to get more feedback as well.
I was wondering how mortgage interest rates/mortgage prices tie into the overall economy (inflation rates, treasury notes, fed funds rate). Have been scouring wsj/wso and reading up on as many articles as I could, but wanted to see the collective opinion.
Any thoughts/opinions are greatly appreciated as well as articles that can better my understanding on this topic.
Thanks in advance!
Most conventional mortgages, 30 year amortizing, are tied ten year constant maturity treasury notes. Generally mortgage rates will rise when the economy is doing very well, i.e. 2004-2007 because the federal reserve attempted to normalize economic growth through its policy influence. We have seen short-term and long-term borrowing rates, fed discount and all rates for that matter, fall to historic low levels since the financial crisis that began in 2008. Currently, as you're probably aware, the housing market remains in the doldrums and the federal reserve has taken many measures to ensure an ultra-low interest rate environment in an effort to prop up the ailing housing market. All mortgage rates are tied to some form of risk free rate plus a spread which is generally some form of prime and or LIBOR because the bank is taking on risk by lending to you.
Generally:
Bad Housing Market - Low/Declining Mortgage Rates Good Housing Market - High/Rising Mortgage Rates
I've read that mortgage rates aren't "tied" to theoretically anything directly. If 30-year and 10-year treasury rates decline, it doesn't necessarily mean mortgage rates will decline/rise. However, it's the general effect it has on the economy that trickles down to mortgage rates.
Ex: Gas rates increasing has made the consumer spend less resulting in a looming economy. However because the economy is looming, it keeps the mortgage rates low because the Fed wants to spur home ownership. So the increase in gas prices doesn't result in a negative effect on mortgage rates.
The example might be a bit off, but I'm just trying to get the general sense of the relationship of the economy (fed funds rate/treasury rates) to mortgage rates.
Great input though.
bumpp
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