Art Alvarez explains the Fed's 0.25% rate cut and why it matters differently for different borrowers. HELOC rates drop immediately, but mortgage rates follow the 10-year Treasury bond market, not Fed moves. Inflation sits at 3.1% and the Fed's own forecasts disagree on future cuts.
Questions this video answers
0.25% (25 basis points).
Barely over 4% (about 3.99%).
4.08%.
About 3.1% year over year.
Nine said three cuts, six said one cut, one said no cut, and one said six cuts.
Foreign.
Good afternoon, everyone. Welcome to a special edition of Mortgage Minute. My name is Art Alvarez with Mortgage Works, where we have the answers and they're on the house. I'm coming to you from the California association of Realtors Reimagine conference at the beautiful Gaylord Pacific Hotel and Convention center in Chula Vista. So today the Fed has spoken. Actually, yesterday the Fed spoke. And as you probably know, the Fed lowered the fed funds rate by 0.25%. Now this was expected. And so what does it mean for both homeowners and home buyers? Well, first of all, for homeowners who have a heloc, a variable rate HELOC tied to prime, this is good news because the prime is directly connected to the fed funds rate. So if you have a heloc, you should see probably in your next monthly statement a drop in your rate by the same quarter percent. So that's also good news. If you're in the process of getting a HELOC or considering applying for one, now might be a good time to do so. But what about home buyers? Well, this cut of course, was widely expected, projected to happen well before yesterday. And so a lot of home buyers, I think, once again, I think focus too much on this announcement and because of the fact that they think when the Fed lowers the fed funds rate, that that somehow lowers all interest rates, including long term mortgages. But that simply is not how it works. And in fact, I'll bring up a concept that you hear a lot about in the stock market. You ever heard the phrase buy on rumor and sell on fact? Well, that kind of process somewhat applies to mortgage rates and the Fed and their Fed decision about lowering the fed funds rate. Mortgage rates had already been trending downward in anticipation of this announcement. And that was also pretty well known. But yet home buyers or people looking to apply for a mortgage didn't take advantage of that trending rates trending downward because they expected when the Fed announcement would occur that that might help them go down even more and to do so in a very quick fashion. But again, that doesn't work. That's not how it works. What folks need to focus on isn't the Fed when it comes to long term mortgage rates, it's the bond market. Most all mortgages are collateral for bonds. And so it's really the bond market that is, as we call it, the heartbeat of mortgage rates. So in this case, what we saw over the last few weeks, the bond yield dropping to at one point barely over 4%. And of course mortgage rates followed suit. But Guess what? Once the announcement was made, very quickly and briefly, the stock market went up 500 points yesterday midday. The bond yield, 10 year bond yield actually dropped slightly to just under 4% about 3.99. But then it went back up. Why? Because.
Fed Chairman Powell then had a news conference where he explained the decision. The issue there though was some of his comments gave the market reason to pause to consider that while this is good news, we're not out of the woods yet. Chairman Powell, for example, indicated that they're still maintaining somewhat restrictive policy as it relates to Fed funds. They still have a concern about inflation. Inflation in fact, most recently about 3.1% year over year. They did. He did comment that the labor market has softened and the unemployment rate has come up a little bit, but it is still low. He also forecast that they may have two more rate cuts this year, but possibly only one next year. So once that information is digested by the markets, well, what happens? The bond yield started to creep back up. By the end of the day yesterday, the 10 year bond yield had gone all the way back up to 4.08%. Another clue to this is the Fed has what they call a dot plot. And in that process, the Fed members will basically predict what they see happening with Fed funds cuts in the future. Nine said three cuts, six said one cut, one said no cut and one said six cut. So you can see there's a disagreement among Fed members about how many cuts we should see going forward. So what this underscores is the fact that while this is good news, don't get me wrong, the improvement in the Fed funds rate is good news, but it's going to have more of a long term effect as it relates to 30 year fixed rate mortgages. So in the meantime, the lesson here is don't focus on the Fed, focus on the bond market, in particular the 10 year treasury bond market, and I think it'll be better served.
