We analyze mortgage rates by examining the mortgage-backed securities market and its reaction to economic data and events. Today, the Federal Reserve cut the Fed Funds rate to an historical low of 1%:
The Fed funds rate target is now 1%, the lowest level in more than four years. In announcing its decision, the Federal Open Market Committee cited a drop in spending by consumers and businesses, and predicted that consumption may slow further due to tighter lending standards.
"The pace of economic activity appears to have slowed markedly," the FOMC said in a statement, "owing importantly to a decline in consumer expenditures."
Why's the economy in the tank? You just aren't spending enough money, Joe the Plumber. Of course, you can't borrow any either so you're hesitant about spending. Hence, the Fed cut in rate. Normally, a Fed cut should be followed by a RISE in mortgage rates but it looks like the mortgage-backed securities market anticipated the cut a week ago.
Let's take a look the crystal ball (market chart):
See what's happening here? Two weeks ago, we had a six day BIG drop, which caused rates to rise from 5.875% to 6.5%. That drop was followed by a 5 day rally, which brought rates back down to 5.875%. Then, we had a six day BIG drop, driving mortgage rates back up to 6.5% (today)...
...and I think the market overreacted which means I think we'll see lower mortgage rates into the beginning of November.
This is the kind of volatility we've come to expect. Mortgage rates should drop to 6.25%, pause, then drop again to the 6% level or below. No guarantees but November closings should get a peek at 6% or better rates soon.
