How will the Federal Reserve’s decision to cut a key interest rate impact you? Are you waiting until rates come down to buy that dream home Tampa Palms? While the Fed’s move to trim its federal funds rate from 5.25 percent to 4.75 percent was met with exuberance on Wall Street, home buyers might not see an immediate benefit.
Aside from the federal funds rate, other actions at the FOMC meeting affect short-term interest rate maturities and the Overnight Lending Rate. These moves directly impact on the Prime Rate, however, it is a mistake to conclude such reductions will cause a similar movement in mortgage interest rates.
Mortgage interest rates fluctuate with the market for mortgage-backed securities (MBS), which trade on a daily basis. Money to purchase mortgage-backed securities comes from overseas and domestic investors, many of whom have been spooked by issues in the subprime markets. The huge flow of funds to and from these securities is subject to competition from the stock market and complex economic and political influences. The yield of a an MBS fluctuates like other securities, and investors who previously viewed mortgage backed securities as a safe haven have become wary of the underlying quality of the assets (due to foreclosures and other factors). The Fed’s move to cut rates also weakened the US Dollar, which further reduced mortgage yields.
A key indicator for the movement of mortgage interest rates is the 10 year Treasury bond yield. This indicator is widely published, and if it is heading up…we will likely see higher mortgage rates.
