If I had a nickel for every time someone asked why mortgage rates haven't dropped like the Fed rate .... well, I'd be hanging out with Warren Buffett a whole lot more.
Why, then, is the Fed rate "apples" and mortgage rates "oranges"?
The short answer is: Risk.
Risk is THE bottom-line question for investors, and investors (not the Fed) determine mortgage rates.
Let's pull back the curtain and take a look at the mechanism that makes the mortgage world work.
Investors buy mortgage bonds, and the money collected from bond sales keeps the mortgage market running (ie lending).
It's the return on the investment that drives mortgage rates. Let's say investors see mortgage bonds as relatively risky investments -- that's been the case lately. Headlines about foreclosures, late mortgage payments, and investment write-downs all heighten that sense of risk.
Since investors have a wide menu of places to put their money, Fannie and Freddie have to offer a higher return on their bonds to attract investors.
The opposite is also true: If mortgage bonds are relatively safe investments, then investors don't demand higher returns, and Fannie and Freddie get their money "cheaper."
But the outlook lately is that mortgage bonds are risky investments, so investors want to be compensated for that risk.
Investors' money becomes more expensive for Fannie and Freddie, and they pass along that expense to mortgage lenders, who share the love via individual loans to homeowners like you and me.
I hope that clarifies what really drives mortgage rates. If you want to check out a site that shows you first-hand what investors are paying for Fannie Mae bonds, check out the Bloomberg ticker: Fannie Mae bond quotes.
If you'd like another perspective, here's some good commentary from Mortgage News Daily called "How Fed Rate Cuts Affect Mortgage Rates." If you want to geek out and follow this stuff closely (beware, it can drive you crazy) you can subscribe to the site's blog, too.
Next weekend's "spring forward" time change has me thinking about green.
A great story in Monday's Wall Street Journal also has me thinking about green -- being "green," or environmentally conscious. And saving money.
The gist of the story is that more home owners and home buyers want their homes to be more energy efficient and constructed with renewable resources.
The presumed higher cost of energy improvements (5-10% higher according to one consulting group quoted in the story) has been a deterrent. But the Journal story does a good job of getting right down to the nitty gritty: How long will it take to recoup the cost of environmentally-friendly improvements through energy savings?
Some improvements, like the growing popularity of bamboo and cork flooring, doesn't promise any household savings. These fast-growing materials are simply more renewable that hard woods, which take decades to regrow.
But solar hot water heaters, high-efficiency furnaces, and low-flow faucets and toilets have a longer pay-back period -- around 10 years, according to the Journal story.
That longer pay-back makes taking the plunge more complicated. But there are a growing number of incentive programs -- through utility companies, state and federal agencies -- to defray the cost. A group called D-SIRE maintains a great database of state, federal and private incentives available to home owners and businesses. Here's the link to the site (Click Here).
Do you have any stories about wanting to make your house more energy efficient and weighing the costs and benefits? Please e-mail me at dhackett@ftmc.net. I'd love to include your stories in the next blog.
And don't forget to move your clocks forward 1 hour next Saturday night.
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