As you listen to news reports about the Federal Reserve’s latest rate cut, Bob Walters would like you to keep one thing in mind.
“Ninety percent of the media is getting this dead wrong,” says Walters, chief economist at Quicken Loans.
Walters says many reporters and pundits — and mortgage shoppers — share a fundamental misunderstanding about how changes in the federal funds rate affect mortgage rates. And that error could cost you money.
“People need to understand that the Federal Reserve does not determine mortgage rates,” he says. “The bond market does.”
In recent weeks, mortgage rates declined to levels not seen since March 2004. This occurred because fears of an impending economic slowdown drove investors to seek the safety of Treasuries and other bonds.
As investors purchased these safe havens, yields fell, causing mortgage rates to follow suit. However, much of that economic fear has now been priced into the bond market.
“The bond market is concerned about a lot of things, including inflation,” Walters says. “The bond market has already factored in that the Federal Reserve is going to continue cutting interest rates. That’s fully priced in.”
For this reason, Walters urges people to lock in their mortgage rates sooner rather than later.
“I think people would be naive and miss the boat if they wait around and think they are going to go down in the future,” he says. “That may happen, but it’s also entirely possible that interest rates could rise from here.”
Prior to the most recent Fed meeting, speculation swirled about whether the central bank would trim by 25 basis points or 50 basis points or more. Today’s regularly scheduled Fed meeting came a week after the Fed announced an emergency rate cut of 75 basis points.
Had the central bank cut by 25 basis points, it would have been “them putting a little icing on the cake they just gave us” after the Jan. 22 emergency rate cut, says Walters.
By cutting a full three-quarters of a point, the Fed is “adding another layer to the cake,” he adds.
“I think (Chairman Ben) Bernanke and his crew certainly realize that the financial system is struggling, the banking system is struggling,” Walters says. “I guess this is what they made central banks for — to step in when nobody else wants to.”
Although the Fed’s latest rate cuts are unlikely to have a direct impact on mortgage rates, that doesn’t mean opportunities don’t exist for mortgage shoppers.
Indeed, mortgage rates already have declined so significantly that they offer a potential boon to homeowners and prospective buyers with strong credit histories, according to Doug Duncan, chief economist of the Mortgage Bankers Association.
“Clearly, there are some opportunities for people who have managed credit well,” Duncan says.
In particular, the drop in mortgage rates should be a wake-up call to anyone who has an adjustable-rate mortgage due to reset in coming months, Duncan says.
“They probably want to get on the bandwagon if they are like others who are creditworthy,” Duncan says. “This is an opportunity to refinance and improve your terms.”
Of course, not everybody can take advantage of declining mortgage rates. People who have a history of poor credit or whose equity has declined substantially due to sinking home prices may have trouble qualifying to refinance, Walters says.
“There’s absolutely a group of people who are being frozen out because of their home value or because of their credit,” he says.
Duncan agrees, saying there are fewer opportunities for “people who have a history of not paying their obligations on time.”
The Fed has now slashed the federal funds rate by 250 basis points since last September. Walters says such steep cuts are likely to boost the economy eventually.
“As interest rates drop, that just means people’s debt burden drops,” Walters says. “If you pay less money toward your mortgage because your interest rate drops, that means you have more money to spend.
“This is absolutely a good thing not only for housing but also for consumer spending and for the market.”
Still, people should not expect the moribund U.S. housing market to revive anytime soon, Walters says.
“Anybody who thinks home prices are going to rebound in six months or a year is going to be sadly disappointed,” Walters says. “Home prices will resume their long march upward somewhere in the next year or two. It won’t be fast, it will be slow.”
While the nation’s housing downturn has spooked many Americans, Duncan urges homeowners to see such woes for what they are — a market cycle that eventually will work itself out.
He advises people with stable jobs and no plans to move to stand pat and wait for better times ahead.
“If you’re not planning on moving and your mortgage fits well and it doesn’t appear to be an opportunity to refinance on better terms, then what is there to worry about really?” he asks. “Not that much.”
Walters offers similar calming words, urging today’s nervous homeowners to “just take a deep breath and relax and get the best financing in place that they possibly can.”
The Fed’s dramatic slashing of the federal funds rate over the past 10 days indicates that the central bank is pulling out the heavy artillery in its fight to halt an economic slowdown. Meanwhile, sinking mortgage rates offer a great opportunity for people looking to buy a home or to refinance.
Bankrate’s rate tables can help you
compare mortgage rates in your area.
Bankrate can also help you
calculate whether a fixed-rate or adjustable-rate mortgage is better for you.
To determine whether refinancing is right for you, use Bankrate’s