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Old 06-10-2008, 07:55 AM
 
Location: Durham, NC
1,364 posts, read 6,007,750 times
Reputation: 764

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So I have read enough to know that the fed funds rate is not directly tied to the 30 year fixed rate on mortgages.

However people have said in the past that they sometimes mirror each other to a point - when the fed started dropping the rate last year, 30 year rates followed.

At a certain point, inflation fears took over and the Fed dropping the rate the last couple of times resulted in an increase in 30 year fixed rates, or at least no change if I recall correctly. People with a vested interest in the level of 30yr rates were hoping that the Fed would NOT lower the fed funds rate any further.

So my question is this: is it a no-win situation for 30yr rate watchers from here? Inflation drives rates up, but if the Fed combats inflation by raising rates, will 30 yr rates likely rise with those too? Or will an increase in fed funds rate be met with a relaxing of inflation fears and a drop in the 30 year rate for at least the first hike or two?

Does that question even make sense?
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Old 06-10-2008, 09:51 AM
 
28,455 posts, read 84,928,817 times
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Rates have been "decoupled" for a while. The Fed is just one input that is being used. Others are the supply/demand of investor cash and borrower activity. Too many weird turns of events with the mortgage crisis, Bear Sterns, gas prices, unemployment numbers, builder bankruptcies -- no "model" has all these things dialed in!

Right now the trend is that investors want more safety even if that means lower yield. What that ought to do is drive lenders to give a bigger 'penalty premium' to borrowers that are not putting as much down and/or have worse credit scores. That would also allow lenders to advertise lower "best rates" to help get people back into the offices.

I have no crystal ball, and I think the best advice that anyone can give right now is a "bird in hand is worth two in the woods" -- worry more about a fixed rate that you can afford NOW and do NOT plan to refinance later...
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Old 06-10-2008, 10:13 AM
 
Location: Durham, NC
1,364 posts, read 6,007,750 times
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Birds in hand are great - my worry is that we are building a home that will be completed in 5-6 months - we're deciding when we should lock...we can get a no-cost long-term lock and then re-shop at 30-60 days, but right now the 6 month lock is something like 6.75.
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Old 06-10-2008, 10:40 AM
 
122 posts, read 345,776 times
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Nobody knows for sure. We started building in Feb and we are now about 30 days out. We decided to wait until we could do a 45 day lock and not pay a higher rate. Everybody was saying "lock now" everytime the feds did something. But looking back now, over the past 5 months, the rates didn't move all that much. Is that to say they wont move over the next 5 months? Who knows. Thats the risk you take.
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Old 06-10-2008, 10:46 AM
 
Location: central, between Pepe's Tacos and Roberto's
2,086 posts, read 6,825,947 times
Reputation: 958
Quote:
Originally Posted by sneezecake View Post
So my question is this: is it a no-win situation for 30yr rate watchers from here? Inflation drives rates up, but if the Fed combats inflation by raising rates, will 30 yr rates likely rise with those too? Or will an increase in fed funds rate be met with a relaxing of inflation fears and a drop in the 30 year rate for at least the first hike or two?

Does that question even make sense?
I think that if the Fed Funds rate and the Discount rate were to start going up you would actually see 30 yr rates go down. Here is why:

FNMA 30 yr fixed rates are determined by the FNMA 30 yr bond. These bonds are sold in different increments, i.e. 5.5%, 6%, 6.5%, etc. The reason that rates have gone up immediately after a Fed rate cut is because investors en mass move their holdings from bonds to the stock market immediately after the rate cut. Watch the stock market and watch mortgage rates. For the most part, after a horrible day on the market you will see rates come down just a bit. I think Friday was a prime example (-400 DJI). Although I did not get a chance to check, I am almost certain that the cost to look yesterday (Mondays are not usually the best days to lock) was better than Friday. If rates go up than investors will start looking at more fixed earnings instruments, such as bonds, because of safety and return.

Of course I don't know what will happen 6 months down the line, but I don't see any fundamentals that show the rates seeing any drastic increase. That doesn't mean it won't happen though. Hope this helps.
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Old 06-10-2008, 12:29 PM
 
Location: Durham, NC
1,364 posts, read 6,007,750 times
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Thanks for the analysis DM3!
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Old 06-11-2008, 09:13 AM
 
299 posts, read 1,012,520 times
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What will also be of importance to borrowers will be the spread in rates that banks are using. Recently, even as rates for banks to borrow short term money to make loans dropped, they were keeping mortgage rates the same in order to make more profit on the loans and offset some of the losses in other areas of the balance sheet. If the banks become more stabilized and aren't taking huge losses any more, then this spread might shrink a little and mortgage rates could come down even if the fed funds and long term bond yields remain steady.
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Old 06-13-2008, 11:29 PM
 
Location: northern california
380 posts, read 2,345,578 times
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Quote:
Originally Posted by Daddys///M3 View Post
(Mondays are not usually the best days to lock)
Why not? What days are better? Thanks.
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Old 06-14-2008, 12:42 PM
 
Location: central, between Pepe's Tacos and Roberto's
2,086 posts, read 6,825,947 times
Reputation: 958
Quote:
Originally Posted by christeen View Post
Why not? What days are better? Thanks.
Middle of the week (Tue, Wed, Thu) are usually better. That's not to say that it's always a bad idea to lock on a Monday or a Friday. I've actually locked a few deals on Mondays that priced worse later in the week. I can't say exactly why, but it seems to me that most lenders hedge the bond market via pricing at the beginning of the week to anticipate any potential negative pricing during the week, and for the most part you will see better pricing during the middle of the week then prior to or immediately after a weekend.
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Old 06-14-2008, 01:18 PM
 
Location: northern california
380 posts, read 2,345,578 times
Reputation: 149
Thanks! (I probably understood half of that, but that's ok ).
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