Mortgage Rates Not Related to the Federal Funds Rate

There is a lot of confusion regarding interest rates. I received a few e-mails and some phone calls asking if it was now a good time to buy real estate since the Fed cut interest rates. I replied that the Fed rate doesn’t affect home mortgage rates. The two are completely different animals. In fact this week home mortgage rates went up after last weeks rate cut.

To make my point I have plotted the 30 year mortgage rate and the federal funds rate on the same graph. (Red = Federal Funds Rate, Blue = 30 Y Mortgage Rate)

Mortgage Rates and Federal Funds Rate

The only way the federal funds rate affects home mortgage rates is via the general economy. There is no one-to-one effect, neither is there an implied effect. Any effect you may see on this graph is the result of economic factors rippling through the market as the Fed changes the federal funds rate.

As you can see (on graph) there is no direct relationship. It’s not like you can increase one and the other automatically goes up or down. In the early 1970s there is a lot of back and forth movement. You may say that recently there is more of a relationship, but if you were to dig deeper you would see that no statistical relationship exists. We may see some kind of broad pattern but that is a function of overall economic conditions (which effects both rates) than the federal funds rate directly influencing home mortgage rates.

Just so you are aware, home mortgage rates are determined by Mortgage Backed Securities.

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