Does a Fed Rate Hike Mean Higher Mortgage Rates? Not Always
Updated: 14 hours ago
Every time the Federal Reserve meets, I hear the same worry: "If the Fed raises rates, mortgage rates are going up, right?" It's one of the most common myths in real estate. Mortgage rates and the Fed's rate are related, but they don't move in lockstep. Here's what's really going on.
The Fed doesn't set mortgage rates
The Federal Reserve sets a short-term rate that banks use to lend to each other overnight. Mortgage rates are long-term rates. They follow the bond market, specifically mortgage-backed securities, which are bundles of home loans that investors buy and sell. Those investors are always trying to predict what happens next, and they move before the Fed does.
Why an expected hike is usually already "priced in"
Heading into this week's meeting, the market saw about an 88% chance of a 0.25% rate hike. You'll often hear that called 25 basis points. A basis point is one hundredth of a percent, so 25 basis points is a quarter of a percent.
Because investors already expect that hike, mortgage-backed securities have already adjusted for it. If the Fed does exactly what everyone expects, mortgage rates may barely move.
Where the surprises happen
A bigger hike than expected. If the Fed surprises everyone with a 0.50% hike, expect mortgage rates to jump.
No hike at all. If the Fed decides to pause, mortgage rates could actually drop.
In other words, it's the surprise that moves the market, not the announcement itself.
The real driver right now: oil and world events
While everyone is focused on the Fed, energy markets are taking hits. Drone attacks on Saudi Arabia's East-West pipeline, tension with Iran, and crude oil climbing past $104 a barrel are all pushing energy prices up.
Higher oil prices raise the cost of nearly everything, which fuels fears of inflation. And inflation is the biggest enemy of low mortgage rates. When investors expect their money to be worth less over time, they demand a higher return to lend it, and that shows up in the rate you pay.
The takeaway
Don't panic over a single Fed meeting. The bond market is usually several steps ahead. If you want a better sense of where mortgage rates are heading, keep an eye on what drives inflation, like oil prices and monthly inflation reports.
What this means for you
If you're buying, even a few tenths of a percent can change your monthly payment and how much home you qualify for. If you're a realtor, rate swings can change what your buyers can afford in the middle of their search.
Have questions about how this affects your buying power or your listings? Schedule a free strategy call or call me at 801-921-3174.
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