This afternoon the Federal Reserve will release its most recent statement, and then at 2:30 pm EDT Janet Yellen will conduct a press conference about it. Most analysts agree that there will be a subtle but significant change in the wording of the statement – they will remove the word “patient” as it relates to tightening the money supply. In other words, we are inching closer to a day when the Federal Reserve finally begins to raise short-term interest rates.
The Fed does not, however, set or even control mortgage interest rates. Those are set by the market, and are determined largely by:
- The number of institutional investors who want to park their money in low-yield, long-term, safe investments,
- The competition for that money,
- The number of mortgage applications, and
- Expectations about inflation.
In other words, there are lots of levers and knobs on the machine that controls mortgage interest rates, and the Fed doesn’t’ have anything to do with any of them.
However, the folks who tweak the controls pay attention to what the Fed says.
So this could be a big day for interest rates.
Take a look at the chart above. The red line shows that over the last two weeks the 10-Year U.S. Treasury bond yield has been falling steadily. While this doesn’t directly affect mortgage interest rates, it is an easily-tracked index of a very similar investment (stability, term) and thus directly competes for the same investors’ money. Therefore, mortgage rates tend to track fairly closely, as you can tell by the…
Blue line. This is the 60-day Fannie Mae yield, and thus represents the interest rate that Fannie Mae sets each day to purchase conforming loans that are locked today, closed by lenders in the next month, and delivered to Fannie Mae within 60 days. Think of this as the wholesale price of mortgages, expressed as an interest rate, every day. Notice that the blue line is also moving down, but not quite as fast as the red line.
But you don’t pay wholesale prices – you pay retail prices. The green line is a look back at actual locks, as measured by Freddie Mac. Notice that we don’t have data for this week yet, but also notice that it has not yet begun its downward slide. This line represents retail prices – what you actually pay.
Barring Ms. Yellen saying something totally unexpected lenders have the room to reduce pricing after she speaks today. Expect a rally in the bond market this afternoon and going into tomorrow, and price improvements across the board this afternoon and tomorrow, and maybe beyond.
Add to this that weekly mortgage applications are down, lenders are working through their pipeline, and now want more business. The handwriting is on the wall, and it’s pretty clear.
Or else I’m wrong. Stay tuned!