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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Mick Mørmøny who wrote (59825)	8/18/2006 8:41:08 PM
From: Mick Mørmøny	Read Replies (1) \| Respond to of 306849

What Really Moves Interest Rates By BOB TEDESCHI Published: August 20, 2006 MANY homeowners breathed a sigh of relief when the Federal Reserve Board held its benchmark interest rate steady during its meeting on Aug. 8. But what many homeowners and prospective buyers do not know is that the Fed’s actions have little, if any, direct impact on traditional long-term mortgages. Multimedia graphics10.nytimes.com “For loans like the 30-year fixed mortgage, what really matters is what lenders think is going on with inflation, since that can reduce the value of the loans they’re making,” said Gus Faucher, an analyst with Moody’s Economy.com, an economic consultancy in West Chester, Pa. The Fed will, of course, consider inflation when it sets the so-called federal funds rate, the overnight interest rate it charges banks. The overnight rate is closely tied to the prime interest rate that banks charge their best customers. But because the prime affects short-term loans like car loans, credit cards and many adjustable-rate mortgages, Mr. Faucher and other economists and analysts said that anyone who wants to understand fluctuations in long-term mortgage rates should instead look to other economic statistics. The 10-year Treasury note is among the most widely watched indicators of long-term interest rate trends, but investors will often look at the so-called “swap rates” that banks charge each other when trading long-term and short-term loans. A glance at historical movements in the federal funds rate along with the yields on 10-year Treasury notes and the 30-year fixed mortgage rate helps to show how little connection exists between the federal funds rate and long-term mortgages. The federal funds rate bottomed out in 2003 at 1 percent, while 30-year fixed-rate mortgages also hit a low of just under 5 percent in June of that year. Since that time, though, the federal funds rate has climbed 4.25 percentage points, while long-term mortgage rates have risen about 1.5 percentage points. Yields on the 10-year Treasury note, by contrast, have risen by 1.76 percentage points in the same span. Of course, many recent home buyers can take solace in the Fed’s reluctance to raise its overnight lending rates for banks. That is because many more buyers have chosen variable-rate mortgages in the last five years to keep pace with rising housing costs, industry executives and analysts said. As many homeowners have learned this year, these loans can grow considerably more expensive when short-term rates rise. According to Moody’s Investors Service, 19 percent of all mortgages originated in 2003 were ARM’s. In 2004, the figure reached 34 percent, then settled at 31 percent last year. Since many ARM’s are adjusted after the first three years, this was the year when interest rates on the 2003 loans started to rise. Based partly on rising rates for those loans, the nation’s household expense for mortgage interest is expected to rise by nearly 18 percent this year, according to the federal Bureau of Economic Analysis. Some economists believe the Fed may have had that statistic in mind when it refrained from lifting rates again, since further increases in interest expenses could stall consumer spending and, by extension, the economy. “This will be one of the steepest year-over-year jumps in household interest expense since 1981,” said John Lonski, the chief economist of Moody’s Investors Service. “It’s worth noting that that was part and parcel of a relatively severe recession, which has to be on the minds of the Fed policy makers.” nytimes.com