On Wednesday, Federal Reserve Chairwoman Janet Yellen announced they would raise the federal funds interest rate by a quarter-point. This is the fourth increase since December 2015.

For those a little unsure as to what the fed funds rate is or why it matters to us in real estate, note that the federal funds rate is viewed as the base rate for determining the level of all other interest rates in the U.S. economy – but it is not the only rate that governs the entire economy. Case in point, with the rise in the fed funds rate, mortgage rates have sunken to a seven-month low dropping from 4.32% at the end of December to 3.89%.

But why is this?

When the Federal Reserve determines whether to raise or lower interest rates, they must assess the health of the economy as a whole. Lowering interest rates is a method used for boosting economic activity during difficult times such as the Great Recession of 2008. Conversely, when the Fed raises rates, it is seen as an indicator of confidence for the U.S. economy. However, the Fed Funds rate is the interest rate set for banks to lend money to one another on overnight transactions, and serves as a better gauge for the impact on other loans and CDs. Interestingly, mortgage rates are more influenced by the 10-year U.S. Treasury note, which the Fed actually has no control over.   

So while it is understandable for many of our colleagues to sit uneasy with this announcement, we must use the facts of our reality to direct our thinking and action.

First, investors initially fell in love with the prospect of President Trump's prospective impact for the growth of the economy. As a result, Wall Street fled from bonds to stocks, and the market ballooned to all-time highs. However, the excitement of those same investors has softened, and anxiety due to uncertainty of much international conflict is leading them back to perceived safety – safety found in bonds, in particular, U.S. Treasury bonds. The result of this shift is reflected in the declining yields for the 10-year Treasury note, and corresponding decline in mortgage rates.     

Second, home prices are rising because the demand for homes is outpacing the supply available to buy. If we couple this with declining interest rates, we can only conclude that this change can only have a positive effect on the housing industry and our business as a byproduct.

Let us not be fearful just because the consensus tells us to do so – our success will be dictated by our ability to make sound decisions based on the facts, and the facts once again supports acting from a contrarian point of view. Let us remain focused.   

Interested in connecting with me? (three options)

1. Do you have a real estate topic for our next blog? Send us a message at [email protected]
2. Want to join me for lunch? E-mail [email protected] and let's get something on the calendar!
3. Looking to grow your real estate business by leveraging key mortgage concepts? Join us for our Elevate conference and RSVP to [email protected]. Our next event is October 26th, 2017 at the Marriott Courtyard in Boynton Beach!

 

The views of this blog, podcast, and on this site in general are solely those of the authors, Matt Weaver (NMLS-175651) and Zack Lewis, and do not express the views or opinions of Finance of America Mortgage.