They might be dropping the Fed Funds rate – so what?

The WSJ’s Development blog has a good Q & A today about the Fed Funds rate.

Whenever the Fed debates dropping the rate, inevitably buyers and sellers will ask me – that will help the market, right?

… mortgage rates actually follow the bond market, not the Fed-funds rate. The interest rate on a 30-year fixed-rate mortgage tracks the yield on the 10-year Treasury note (at yesterday’s close 4.383%. Track today’s rates here.). Lenders typically set their base mortgage rate around two percentage points higher than the 10-year bond yield.
…So if you want to know the direction of mortgage rates, you need to get a sense of where bond yields are heading

Let’s not discount the psychological impact of buyers and sellers hearing that “rates have dropped.” The perception that “rates are lower” may have a real impact on the local real estate market, whether they’ve dropped or not – particularly because nearly 40% of our active inventory (in Charlottesville/Albemarle) is priced above the $417,000 threshold that indicates “jumbo loan” territory.

That said, rates really aren’t high at all (look at March 1982, or March of 2002).

This Graph from August 2006 says an awful lot
(thanks, Jay for the graph)

Read Noah’s outstanding analysis and commentary on why a recession is the most desirable outcome. Keeping government out of the equation as much as possible should be the goal for all involved.

And, for insight from someone who knows what he’s talking about (rather than my perspective on the periphery) – read Dan’s post today. Better yet, subscribe to his feed.

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  1. Dan Green October 31, 2007 at 09:50

    Jim, that snippet you took from the WSJ is misleading. Mortgage bonds have NOTHING to do with treasuries except that both are bonds, priced in U.S. dollars.

    Mortgage rates come from mortgage bonds, nothing else. Certainly not from treasuries.

    The issue here is that mortgage-backed securities are not as easy to track as the current prices for GOOG, MSFT, the DJIA or even the 10-year treasury.

    If I told you that the FNMA 30-year 6.0% bond was trading at $100.88, for example, you’d have no idea how that translates into mortgage rates. So, writers like Teri Cullen at WSJ stick to the simple — thr 10-year treasury.

    It’s a disservice to all of the readers.

    If you want to know what mortgage rates are doing today, talk to a loan officer that watches the prices of mortgage bonds. It’s the only way to know.

  2. Jim Duncan October 31, 2007 at 10:08

    Dan –

    Thanks for the clarification and for pointing out how hard it is to gauge the rates. (I learn more from mistakes and being wrong than any other way)

    Simply put, the Fed Funds rate impact on the real estate market has more to do with psychology than with actual hard numbers. Is that accurate?

  3. Jim Duncan October 31, 2007 at 10:11

    And if you told me “FNMA 30-year 6.0% bond was trading at $100.88,” I’d ask you to translate into terms that my clients will ask – “so – what’s my rate going to be”? because that’s what matter to them.

  4. Dan Green October 31, 2007 at 10:27

    Ha, I knew that would be the next question. 🙂

    Breaking it down:

    1. A 6.0% bond pays $6.00 annually for every $100 in face value.

    2. $100 in face value is selling for $100.88, meaning an investor pays $100.88 for the right to a 30-year bond that pays $6 annually and $100 at maturity

    Using a bond price/yield formula, the effective yield on the 30-year mortgage bond is 5.94766%.

    Sure enough, “par” mortgage rates on 30-year fixed mortgages sold to Fannie Mae are hovering between 5.875% and 6.000% today.

  5. Jim Duncan October 31, 2007 at 10:41

    And simplifying it further – that is why I know enough to know that to get the best answer, I send my clients to mortgage brokers and lenders whom I trust – and I trust to know far more than I do.

    Thanks for your time and knowledge, Dan.

  6. Will October 31, 2007 at 11:39


    A generic blog comment on your inserted graphics – most times they are resized down (rightsized? hah) so much that the legends are unreadable, and only the general trend of a graph is discernable… also applies to the spreadsheet looking charts of housing sales, etc – the data is unreadable (at least to me, on my screen). Is it possible (or worthwhile) to have the inline images click-through to a higher-res originals?

  7. Jim Duncan October 31, 2007 at 12:13

    Will –

    thanks for the comment. I’ll work on that …