Today, once again the Federal Reserve reduced short term interest rates by .25%. This is a reduction in the fed funds rate, the rate that banks charge when lending to each other. This action is taken in times of economic downturns to stimulate banks in lending money and encourage consumers to borrow money and spend it, all of which will breathe life into the economy. When the Federal Reserve takes this action, it has an immediate effect on prime rate as well as rates on other types of loans such as car loans and credit card rates. Unfortunately, it does not have a direct effect on Hilton Head mortgage rates.
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Source: Bankrate.com |
Changes in Hilton Head mortgage rates are more closely tied to fluctuations in the yield on the 10 year Treasury note. In a “normal” lending environment, you would find the rate on a 30 year fixed rate conforming loan (those with loan amounts under $417,000) to be about 1.75% above the yield on the 10 year Treasury note. As we are all aware, we are not in a “normal” lending environment at the present time, as investors are requiring a larger spread to cover assumed risk. Thus, today you will find the rate on the same 30 year loan to be about 2.25% above the yield.
In fact, many times we see mortgage rates on Hilton Head rise after a reduction in short term rates by the Federal Reserve. Why, you ask? Well, the biggest fear of the treasury market is inflation, as that erodes the value of the note. One would normally find rising inflation in times of economic upturns. When the Federal Reserve reduces the short term rates, the treasury market reads that as a stimulus to the economy which could lead to a possible rise in inflation. So to guard against this, the treasuries sell off forcing a rise in the yield. Having said all of this, most of the time a reduction is so anticipated that the rise in the yield has already been priced into the value of the note, so when the rate cut is finally announced it is pretty much a non-event. For example, three weeks ago, the yield on the 10 year note was 3.46%. As we drew closer to today’s fed meeting, most economists were predicting a .25% cut in the short term rate. So, over the past three weeks we have seen the yield on the 10 year note rise to today’s 3.82%. After the announcement, the yield did not move at all.
Where do Hilton Head borrowers and lenders go from here? Most analysts feel that the Federal Reserve will not cut rates again in 2008. This means that the monthly economic data will determine the direction of the treasury yield. Bad news will lower the yield while positive news will cause it to rise. Even the experts don’t know if rates will be higher or lower later this year. Remember that historically rates are still very, very low. There are many properties in the Hilton Head area that are value priced. If you find one that you like, buy it now. Don’t wait for lower interest rates.
Patrick S. Child, Vice President
Residential Lending, Wachovia Mortgage
Hilton Head Island, South Carolina
(843) 686-9342
