How long does it take for rate cuts to be priced into mortgages? The 75 basis point rate cut hasn't afffected mortgage rates at all in my area yet? I dont kow of they will, I am just wondering if there is a delay.
The correlation isn't 100%. Mortgages are riskier than Fed Funds and T-Bills. Mortgage rates could actually go higher for less-creditworthy people in order for banks to protect themselves. That's part of what happens in a real estate bear market.
The mortgage rate isn't tied to the fed fund rate. It is tied to the 10-year note, which is correlated with the stock market. A stock market rally generally means a shift out of bonds and into stocks. This causes the 10-year yield to rise. IOW, If the fed funds rate drops 0.75% and that causes investor optimism there will be a stock market rally. Money will shift out of bonds which will cause the 10-year yield to rise. The mortgage rate will also rise then. Generally speaking, the mortgage rate is about 1.5% higher than the 10-year yield. If you are looking for a lower mortgage rate then you are cheering for a market drop. IOW, you do not want the FED to cut rates!!! Just one more point. The lowest a 30-year fixed mortgage can realistically get is 5.0%. That would correlate with a 10-year note at about 3.5%. The reason is that in order for it to get that low, people must invest heavily in 10-year notes. Nobody in their right mind is going to invest in 10-year notes that are returning less than 3.5%. that is the natural floor and thus mortgages will never get lower than that. The other day they were at 5.3% which is only 0.15% higher than the lowest point in history.
Thanks for the explanation Cache. Does this mean that there is a ceiling for how high TY prices can go? Comparing bonds and the S&P shows that bonds have already priced a bear market but stocks have not retraced comparatively over the last years. Can you tell us what this mean for the bond market? (if stocks tank, could TY break 121, or is 121 the most it can possible go?) Hope my question is understandable. Thanks again.
I made the attached with data from Freddie Mac and the Federal Reserve. http://www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp http://www.ny.frb.org/markets/statistics/dlyrates/fedrate.html
There is no direct connection between Fed rate cuts and Fannie Mae, FredMac loans and fixed mortgages. What it does it brings down the yield on 10 year note TNX which you can see the charts and mortgage rates are priced off that. Its a wrong to assume longterm debt is related to Fed funds rates.
Bullshit. The 10-Year is influenced far more by ff rate than stock market. Say there is a .50 cut tomorrow, ten year will also likley fall.
don't discount inflation fears if rates are dropped too much either. This could actually cause the 10 and 30 year to rise in yield.
You're dreaming. The TY yield is based on supply/demand. High demand for the TY means lower yields. I don't know how you can make that statement when just days ago there was massive evidence to the contrary. On the 22nd the previous day's close on the TY yield was 3.65 and the FED cut rates 0.75% before the open. The TY yield at the end of the day was 3.48%. The drop was directly correlated with a shift out of stock and into bonds. The next day on the 23rd ES gives up 40-points at the open and TY yields plummet until the end of the day when ES rallied back hard to close the day up 30 points. Unfortunately for TY yields, bonds stop trading at 15:00 so the gain in yields wasn't realized until the open the next day with a huge gap. I could go on and on because the evidence is completely obvious. Everyone knows that the TY-yield determines mortgage rates and that it has very little to do with the FF rate. Plain and simple, a stock market drop will cause people to get worried and the start dumping equities in favor of bonds. This move into bonds causes bond prices to rise which MUST result in falling yields. If you don't know this, then you really aren't qualified to be handing out advice.
I'll refer to the 10-year as TNX because that is the ticker used to track yields. There isn't a natural ceiling for TNX as you can see from 1982. The biggest influencing factors for TNX is inflation and investor fear. The FF rate has only an indirect relation because th FED drops rates during a falling market. It was the falling market that caused the TNX drop, NOT THE FF DROP. Inflation has been on an overall downtrend since the early 80's, but that is likely to change as Jayford noted. On a daily basis the main factor for TNX is investor fear. If people freak out and start selling, there will be a big move into bonds again, causing TNX to drop. This means lower mortgage rates. OTOH, if people become confident that the FED will save the market, then there will be a shift out of bonds and into stocks. While the stock market rises, TNX will also rise and mortgage rates will go higher. It really is that simple. I should throw in one more statement. If inflation picks up it will cause the FED to stop dropping rate and probably increase rates. This will cause a market drop which would normally result in TNX falling. However the increased inflation fears will cause a TNX rise that offsets this causing a rise in TNX instead of the expected drop. If you're wanting to get a mortgage there is not a better time.