Real Estate Finance News

I am sure you are wondering what is going on with mortgage rates. They have climbed noticeably after the Federal Reserve started taking action to tame inflation that was the result of their rate drops during the outbreak of the Corona Virus. 

Below is a brief comparison on how the rate on the 30-year fixed conventional loans have been behaving: 

• Mortgage rates in January 2021 were hovering in their all time lows, in the low to mid 3% range for 30-year fixed loans up to $822,375 (the limit in 2021)
• Mortgage rates in January 2022 were hovering in the mid to high 4% range for 30-year fixed loans up to $970,800 (the limit in 2022)
• Mortgage rates in January and February 2023 were hovering in the mid to high 5% range for 30-year fixed loans up to $1,089,200 (the new limit for 2023)
• Mortgage rates jumped into the low 6% range at the beginning of March 2023 for 30-year fixed loans up to $1,089,200 
• Mortgage rates continued to stay in the low to mid 6% range during the first week of March 2023 until 3/13/2023 for the 30-year fixed loans up to $1,089,200  
• Mortgage rates dropped to 5.875% on 3/13/2023 (the day following the failure of Silicon Valley Bank and Signature Bank) for loans up to $1,089,200. This lasted until this morning, 3/20/2023. In the afternoon, however, mortgage rates rose again closer to 6% for loans up to $1,089,200. 

One of the strongest ammunition the Fed has to control inflation is its ability to raise rates. Raising rates is referring to raising the Federal Funds Rate by the FOMC (Federal Open Market Committee). The FOMC is a committee within the FED responsible for deciding open market operations. 

The Federal Funds rate is the rate commercial banks borrow and lend their excess reserves to each other overnight.   

When the Fed raises the Federal Funds Rate, its intention is to slow economical growth by: 

• Slowing the amount of money circulating through the economy and drive down aggregate demand, 
• Lowering the demand for goods and services and causing the prices for those goods and services to fall, 
• Encouraging consumers to spend less by causing interest rates on credit cards and auto loans to go up. Mortgage rates (long term rates) are not directly impacted by the Federal Funds Rate. 

Now, after more than a year of “unfriendliness,” the Fed is finally thinking about leveling off its pace of raising rates and seeing how things play out without too many more rate hikes. They have already decreased the pace from 0.75% per meeting to 0.25%. 

Below is a historical graph of the Federal Funds Rate going back to 2000: 

As for the current week, the drop in rates was driven not only by the flight to safety, but also the expectation that the Fed will be able to start cutting rates by the end of the year. Please refer to my previous blog for the chart referring to September’s Fed Funds Rate expectations falling below March’s. 

Last but not least, every Fed day concludes with a press conference from the Fed Chair. This week’s will be one of the most important and informative press conferenced in recent memory as Powell will be forced to choose between policy goals and calming a potentially panicked market.