According to Robert Van Order, chief economist for Freddie Mac, the federal funds rate is for short-term loans, those made overnight by banks to other banks. Mortgages, regardless of their original terms, are kept an average of seven to 11 years by borrowers, putting them more comparable to the risk terms of 10-year Treasury notes. If Treasuries drop by 10 basis points, as they did after the last Fed rate cut of 50 basis points, mortgage interest rates may also drop by about the same amount. Yet it may be hard to convince some borrowers who are hoping for big point cuts that they are still getting a good loan interest rate at today's rates. And that could cause them to miss the big picture if they are hesitating on buying a home based on loan interest rates.
Interest rates dictate how much home a borrower can buy in many cases.
The difference of a percentage point in a loan product could be enough to knock some borrowers out of the home or their choice or the neighborhood they want to be in. If market timing were that easy, everyone would be as wealthy as stock investor Warren Buffet and have 4 percent mortgages on fantastic homes. But the reality is that even the world's most successful investor doesn't expect to buy stock at the very moment it is at its lowest price. While buying low is certainly a fundamental, Buffet chooses investments based on their ability to generate sustainable earnings and growth. Mortgage interest rates are a fundamental of the home buying process, but they are only one factor.