Conforming rates (on loans up to $417k) are down about .25% and Jumbo rates (on loans above $417k) are also down about .25% this morning following the Fed’s surprise intermeeting rate cuts. They came on the back of non-US equity markets dropping 5-10% yesterday and the Dow opening down 464 points. The Fed cut both the bank-to-bank Fed Funds Rate and the Fed-to-bank Discount rate by .75% each, the deepest single day cuts since 1984. Markets are still pricing in as much as .5% more in cuts at their January 30 meeting, but this is trending down as the morning progresses.
It’s important for everyone to remember: Fed rates influence but do not directly dictate consumer mortgage rates; mortgage-backed bond yields and borrower credit risk dictate mortgage rates. This is why you can see that we don’t have a direct .75% decrease in mortgage rates on the back of this Fed cut.The Fed cuts are a direct acknowledgment that credit markets are still causing a major drag on the global economy and our central bankers are willing to help with liquidity. I expect major volatility in mortgage-backed bond yields (and therefore mortgage rates) to continue as markets try to figure out long it will take for credit markets to normalize.
For the remainder of the first quarter, rates should trend down with trading spikes along the way and this should help housing demand, especially in the core Bay Area where we tend to find a bottom more quickly than the rest of the country.
Some argue that cutting rates this aggressively will reinflate the credit and home price bubble. But remember what Fed chairman Ben Bernanke said in on the Q&A following his January 18, 2008 testimony before the House Budget Committee: “Cutting rates won’t spur another bubble … cuts are aimed to reduce tensions in bank lending. It doesn’t prevent them from taking losses.”