Saturday, November 26, 2005

Fed Funds and Mortgage Rates

by Osman Parvez

The widely held view is that we've hit bottom and mortgage rates will begin to climb at about the same pace as the Fed tightens its monetary policy with higher interest rates. This is true today and was also true a year ago.

However, mortgage rates do not move in complete synchronization with the Fed. In fact, mortgage rates have just fallen for a fifth consecutive week. This occurred immediately after the Fed (Federal Open Market Committee) increased its funds rate a quarter point - the eighth consecutive increase.

About a year ago, I attended a real estate presentation by Cendant, the giant conglomerate owner of companies like Coldwell Banker, Century 21, and ERA. A corporate rep confided that they were preparing for the possibility of much higher mortgage rates in about a year, on the order of 2% or more. Well that certainly hasn't happened and with a softening economy doesn't look likely in the near term.

Keep in mind that when national mortgage rates are quoted in the media they typically don't include points. In the article above, 30 year fixed rate mortgages carried a fee of 0.6 point.

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