When the Federal Reserve lowers short term rates, it stimulates economic activity and increases the potential for inflation.
0:28: Hello, and welcome to 680 Home Video Channel. A web series where we answer all of your Real Estate questions. I’m your host Theodora. And I’m talking to local East Bay Real Estate Broker, Doug Buenz.
0:41: Hi, Doug. It’s great to see you! Today’s topic is “Interest Rates and Mortgage Rates”. Doug, we hear it in the news all the time The Fed has adjusted the interest rates. Could you please explain to us what that means?
0:56: The Federal Reserve control short term interest rates. But the Federal Reserve does not control mortgage rates, long term mortgage rates. Or long terms rates in general. Here’s the distinction- The Federal Reserve controls both the Federal funds rate and discount rate. These are short term overnight interest rates that banks get charged to borrow funds on a very short term basis.
1:21: The Federal Reserve uses its interest rates to either stimulate or to dump an economic activity, depending on what their goal is. When the Federal Reserve lowers their short term rate, basically they are making the cost of money to banks less and that stimulates economic activity.
1:40: This does not however have the direct impact on what we consider long term mortgage rates, or 30 year fixed rate mortgages. They are not tied to short term interest rates. As a matter of fact, it’s almost an inverse relationship most of the time. If the Federal Reserve lowers short term interest rates, often times long term bond rates and long term mortgage rates will actually go up.
2:03: Because long term mortgage rates are rarely more tied to bond investors and bond market. And they are concerned about two things- the strength of the economy, and the threat of inflation. When the Federal Reserve lowers short term rates, it stimulates economic activity and increases the potential for inflation.
2:22: That’s a negative factor for long term investors, and will typically demand a higher yield in return. When The FED does short term interest rates, it has a positive impact on short term mortgages, on adjustable rate mortgages, on lines of credit, things of that nature. So, it does have some positive impact on Real Estate. But it does not help long term interest rates.
2:46 I often hear people say “Oh, am not buying a house until long term rates, fixed rates are under 4%.” Unfortunately, for that to be the case, it’s probably because there’s a global recession or depression. And there’s almost no demand for capital in that point. Probably, you don’t want that to happen. That’s really the distinction between short term rates and long term rates, and what The Fed controls.
3:21: If you have Real Estate questions, or need assistance, I do hope you’ll give me a call. I’m worthy of your trust!