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Houston Mortgage Rates |
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Cam Nowlin Phone: 512-698-7910 Fax: 281.333.2755 E-mail: cnowlin@southernlendingcorp.com |
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February 5, 2008
By Cam Nowlin
What does the Fed rate cut mean to you? The market has been adjusting downward for sometime in anticipation of a ½% point rate drop in the Discount. The fact that is was ¾% is somewhat significant, but not abnormally so, even though it has not had a decrease this size in one drop in over 20 years.
Keep in mind, this is the same rate the BANKS borrow money from the feds – not the mark that guide mortgage markets. So, if you think that your mortgage rate should drop the same amount that is not going to happen! The mortgage rates are built in different indices, and are somewhat affected by the Discount – but not directly affected. It is complicated. In fact mortgage rates are now higher than they were before the Fed began cutting rates by in January. The reason this is difficult to understand from a borrowers stand point is because the mortgage rates are not derived directly from the Fed or the 30 year Treasury bonds or 10 year Treasury notes like most people think. Those are government securities that are backed by the full faith and credit of the U.S. government and have no direct effect on mortgage rates. So what are mortgage rates based on? As it turns out the answer is mortgage based bonds known as Mortgage Backed Securities (MBS). Bonds issued by Fannie Mae and Freddie Mac (MBS) and the trading performance of those bonds will determine the direction of mortgage rates. Finding the catalyst that causes mortgage bonds to move will give you the keys to finding out what makes mortgage rates rise or fall and one catalyst that seems to be working in the opposite direction of MBS prices is the Nasdaq and broader stock market. As bond prices rise, interest rates fall and as bond prices fall interest rates rise. The Nasdaq Composite Index and the Fannie Mae 6.5% mortgage bond tend to follow paths that are almost mirror images of each other. As the Nasdaq moves higher, bond prices move lower causing interest rates to rise. As the Nasdaq declines, mortgage bonds benefit, causing mortgage rates to fall. Additionally, and unlike common opinion, Fed rate cuts have virtually no direct effect on mortgage rates.
The bottom line is that it appears mortgage rates will get better if the Nasdaq sells off and will get worse if the Nasdaq rallies. So it is not necessarily what the Fed does that affect mortgage rates as it is how the Nasdaq and broader stock market interprets the Fed’s action that will ultimately influence the direction of mortgage rates.
Predicting the future is tough, so nothing is written in stone. Keep an eye on the Nasdaq , and keep in mind that the best rates may be behind us. But, mortgage rates are still low and could have some quick dips so make the most of them while they last. |