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Consumers are often
misled when it comes to the subject of the Federal Reserve and how it affects
mortgage interest rates. Often the media is the culprit causing the confusion.
In the last few years, the Fed has taken action that caused mortgage interest
rates to move in a direction other than what consumers expected, because the
media provided weak reporting on the subject.
The Federal Reserve affects short-term interest rate maturities, the Fed Funds
rate, and the Overnight Lending rate. These factors have a direct impact on the
Prime rate. If you took only this into consideration, you may mistakenly
conclude that changes made by the Fed will cause a similar movement in mortgage
interest rates. However, mortgage interest rates are dictated by the trading of
mortgage-back ed securities, which trade on a daily basis. The real dynamic at
the heart of interest rate movement is the relationship between stocks and
bonds.
Stocks and bonds compete for the same investment dollar on a daily basis. There
is literally only so much money to be invested. When the Federal Reserve feels
that interest rates need to be decreased in an effort to stimulate the economy,
this reduction in rates can often cause a stock market rally. When the market
becomes bullish, the money to invest in stocks comes from the selling of
mortgage-backed securities.
Unfortunately, selling mortgage-backed securities to fuel stock market rallies
causes interest rates to go up, not down.
Historically, there have been many times when the Federal Reserve has increased
interest rates. Stocks then sell off in fear that the increase will affect
corporate profit margins, and the liquidated stock assets need a place to park
until the next rally comes a long. The safe haven is found in mortgage-backed
securities which cause mortgage rates to drop.
The daily ebb and flow of money is what matters most when it comes to the
movement of mortgage interest rates. I work with several qualified professional
lenders that make it a point to monitor interest rates. As your trusted advisor
in real estate I welcome your inquires and looking forward in helping you with
managing your real estate investments.