Comments Off on The Week In Review (December 3, 2007) : What To Watch For

The Week In Review (December 3, 2007) : What To Watch For

2007
12.03

If you enjoy roller coaster rides, last week’s mortgage markets were a delight. Up and down mortgage rates went, trying to find a balance between inflation and recession (or maybe neither).

A major cue for markets last week came from a high-ranking Fed official who raised expectations for future cuts to the Fed Funds Rate. Currently, the Fed Funds Rate sits at 4.500%.

For homeowners, it is unclear how changes in the Fed Funds Rate will impact mortgage rates. Contrary to popular belief, changes in the Fed Funds Rate are not tied to changes in mortgage rates.

This chart shows, for example, how the FFR increased more than 3.00% between 2004 and 2006 while mortgage rates only edged higher.

Similarly, the recent drops in the Fed Funds Rate have been accompanied by only a slight reduction in mortgage rates.

Instead, mortgage rates are based on the prices of mortgage bonds and recently the demand for the bonds has been erratic. This is why mortgage rates have been erratic, too. As demand goes up, mortgage rates come down. The reverse is true, too.

This week, demand for mortgage bonds should be tied to expectations from the Fed and its December 11 meeting, and to this Friday’s employment data. Many economists believe that the Fed will take some cues from Friday’s report so the numbers will take on added significance.

The economy is expected to have added 75,000 jobs in November, and the unemployment rate is expected to rise to 4.8%. If the actual numbers are stronger than the estimates, expect that mortgage rates will increase in response.

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