BY: Greg A. DanielsSenior Loan Officer
Anyway, big news yesterday. There was a Fed meeting at which they announced a .75% (75 basis points) rate hike. The largest rate hike in 28 years.
Is this scary?
Does it mean mortgage rates got worse?
So what does it mean?
It means inflation is getting (has gotten) out of control and this is the Fed's attempt at stopping the bleeding. A bit late, but better late than never.
Immediately after the news yesterday, Bonds saw a very nice rally to the tune of about 122 bps. That's quite notable. Moves of 12-20 bps cause one to take notice so 122 bps jump was a huge move. A move up in Bond prices translates to improved pricing on mortgage rates.
How can that be? If the Fed hiked rates wouldn't mortgage rates rise too?
Surprisingly, no. The simple explanation is that the Fed Funds rate doesn't dictate mortgage rates. The Fed Funds Rate is the rate banks charge each other for overnight lending. That's different than mortgage rates. And the Fed making a move to control inflation makes an investor in a long-term security instrument, such as a 30 year Bond, more comfortable with that investment since the threat of inflation is tempered, which, as you know, erodes the value of a dollar.
Buuuuut, most of those gains made yesterday have been lost already today as the market opened. The cause of the selloff is that Central Bankers are scrambling to put the inflation genie back in the bottle and the markets don't like surprise actions from Central Banks.
What does all this mean for home values and interest rates going forward?
I don't know. Who cares. Trying to time the market is a losing proposition. It all kind of evens out. In other words, there's a couple scenarios, really:
1) It's a super hot seller's market. Homes are selling for well over asking. Rates are crazy low.
2) It's a buyer's market. Homes are sold at a discount. Rates are higher ...but again, you bought the home at a discount.
Would you rather pay $20-50,000 more for a home with a low rate, or pay 10-15% less for a home but have a higher rate?
Financially, the second scenario might arguably be more financially advantageous. Statistically, people will sell or refinance in 4-5 years, so one really only benefited from the lowest rate for a brief period but stuck paying the higher price for the home.
Look, just relax. Go acquire real estate (or any appreciating asset) and don't worry so much about the trivialities. Quit trying to time the markets or shop the entire planet for the lowest rate and all that other nonsense. Get an intelligent, strategy-minded advisor in your corner that you trust, adopt a big-picture mindset, and go get rich.
That's been my strategy and I have to say, it's paid off very, very well for me.