Video Transcript
The Federal Reserve just made your mortgage
rates drop – and you’re going to want to know how. Let’s get into it. [The Homebuyer.com doorbell.
Your dog barks.] I’m Dan with Homebuyer.com. We are the mortgage company for first time
home buyers. Let’s jump right in about The Federal Reserve,
what happened at its January 2024 meeting – and why mortgage rates dropped – even though
the Fed didn’t make a change – didn’t cut rates.
We have an accompanying article for this story
– with charts – and stats – it’s on our website – go there now if you want – the link is in
the description. Now again: the headline. The Federal Reserve voted to leave the Fed
Funds Rate at 5.25 percent after its January 2024 meeting – a 2-day meeting on the 30th
and 31st – and since that meeting ended – since the Fed adjourned – mortgage rates are down
big.
About a quarter percentage point so far and
that’s a big deal. Now, as a refresher – the Federal Reserve
is an independent group – within the U.S. government – that controls the supply of money
– through banks – through businesses – consumers.
And because the Fed is an independent group
– apolitical – it does what it does without outside influence. The Fed’s main job – above all else – is to
keep prices stable – which we call – managing inflation. That role was set forth by charter – 110 years
ago – in the Federal Reserve Act of 1913 – which established the Federal Reserve System as
the United States central bank.
Keeping prices stable is a challenge – because
hundreds of forces – affect prices – that businesses pay for inputs – that you and I
pay for everyday items – things like clothing – housing – eggs. And, the Fed’s main tool – for managing prices
– for managing inflation – is an interest rate – called the Fed Funds Rate. The Fed Funds Rate is an interest rate for
loans that banks make between one another.
Why banks make loans like that is beyond the
scope of our discussion but – that rate – the Fed Funds Rate – it’s the starting point for
other rates that are in scope – like charge card rates – home equity lines of credit rates
– personal loan rates – and so on. When the Fed changes its Fed Funds Rate, those
other rates change, too. This is why your credit card rates – are 5
and quarter points higher as compared to what they were during COVID – because the Fed Funds
Rate is higher by five and quarter points.
And when consumers like us – and businesses
– pay more interest to borrow money – it leaves us less money to spend on goods and services
– in the economy. So raising the Fed Funds Rate – slows the
economy down – it taps the brakes – on growth. And, the Fed has tapped those brakes 11 times
in the last two years – it raised the Fed Funds Rate from near zero in 2021- to 5 and
quarter percent now – all to slow growth – to slow inflation.
But that cycle – of raising rates – looks
like it’s over. it’s been a while since the Fed last raised
rates – this last meeting makes four meetings in a row that the Fed didn’t raise rates – that
it held the Fed Funds Rate exactly where it is – the Fed’s foot is no longer on that brake
– it’s letting the economy coast – because inflation rates have tamed – the cost of living
has come way down. It was 9 percent per year.
Now it’s under 3 – which is still higher than
what the Fed wants by the way – the Fed has a target of two – but the rate of change – in
inflation – is slowing. Like a car – when you take your foot off the
gas and coast into the ride. That’s where we are as a people right now.
And for buyers of homes, this is excellent. Because inflation rate and mortgage rates
are linked and home affordability is improving by a lot. So the big takeaway here: the Federal Reserve
doesn’t set mortgage rates and it doesn’t control them.
But the Fed does make on influence on mortgage
rates – in a roundabout kind of way – and that’s important – because mortgage rates
– like the Fed – respond to inflation. And here’s why. When you pay your mortgage each month, you
pay in dollars.
And your lender – they collect your payment
in dollars. When there’s inflation, your payments are
worth less to your mortgage lender. That’s the definition of inflation – your
money losing its value.
So when inflation is rising – expanding – like
it did – last year – and the year before – mortgage lenders don’t actually want your mortgage
– at today’s rate anyway. Because they know your payments will be worth
too little a year from now – two years from now – 10 years – because inflation makes your
payments worth less. So – to account for that – mortgage rates
go up – they have to – because otherwise – your loan’s below market.
Now. The other side of that – is that when inflation
rates are slowing – or expected to slow – mortgage rates can come down. Because now – lenders want your mortgage.
Because it’ll be worth more than the market. And lenders like that. If you’ve been trying to buy a home these
last few months – you’ve experienced how this works – and how the Federal Reserve affects
mortgage rates.
There’s been no change to the Fed Funds rate
– but the Fed is saying out loud: inflation rates are receding. So – Wall Street – and lenders – they’re doing
what you’d expect – they’re competing for your business – with ever-lower rates. If your lease is coming up – and you want
to stop renting and start owning – comments like this from the Fed make this an excellent
time to find out how much home you can buy – to get pre-approved.
Pre-approved buyers do better. Now the next Fed meeting is scheduled for
mid-March and – again – the Fed won’t likely lower its Fed Funds Rate at that time. However – as inflation keeps dropping – and
the Fed keeps communicating – buyers can expect mortgage rates to at least stay where they
are and keep this window open.
We cover all that activity right here on the
channel. Subscribers find out first. If you like this video, show us!
Click the thumbs up – subscribe – tell us
in the comments – and don’t forget we have current mortgage rates on the website – at
homebuyer.com. You can use our immediate mortgage approval
to get pre-approved, quoted, and locked – all in one step. You got this.
I’m Dan with Homebuyer.com – the mortgage
company for first-time home buyers. Happy homebuying.
