While you’re working from home home trying not to catch or spread the Corona Virus (Covid-19), you’ve probably watched the Stock Market plunge to new lows and the Federal Reserve cut its interest rate to near zero. If you’re wondering how or why these events are related and what they could be telling you about the direction of mortgage loan rates, you’re not alone. Even people who haven’t recently thought about buying a new home or refinancing an existing mortgage are wondering if they should seriously think about it and act NOW.
Hopefully, looking at each link in this chain of events and how each is influencing the others will help you to decide whether or not to rush into a possibly life-altering decision.
The Coronavirus (Covid-19)
It’s all you’re hearing about on the news, and even if you’re not worried about your own financial situation, chances are that there’s someone close to you who is. Let’s take a look at the big picture. There’s a huge trickle-down effect on the economy from all the efforts to keep the virus from spreading.
For example: You’re not traveling, so planes aren’t flying and cars don’t need as much gas. The usual tourist destinations are closing, because no one is allowed to go there. Hotel occupancy is rapidly dropping. Restaurants have been ordered to close their dining rooms. In-store shopping is considered a health hazard, etc. Social distancing is causing a slowdown in all kinds of consumer spending. These preventative measures and more are forcing businesses to close and causing people to lose, be laid off or get lower pay from their jobs.
The Stock Market Plunge
This is not just happening in America. It’s all over the world. As businesses close or fail, their stock value falls, and as it does, an excess of caution or panic causes people to sell. The Stock Market goes into a free-fall. More stocks are sold out of fear that investments won’t recover. Because the economies of the various countries of the world depend on and influence each other so much, a Domino Effect is created. Desperate people start looking to the Government to Do Something about their losses.
The Federal Reserve
On Sunday, March 15, the Federal Reserve cut its benchmark interest rate or federal funds rate, to almost zero percent. This is the interest rate paid by banks to borrow from each other to meet legally required cash reserves. It is the second emergency rate cut this year in response to the coronavirus and its negative effect on economic growth. If the federal funds rate is cut, banks can afford to lend more money and borrow required reserves from other banks at a cheaper rate. Increased lending by banks increases the amount of money in circulation. This is likely to lower interest rates for other forms of borrowing, such as home and car loans.
The Federal Reserve does not directly set consumer interest rates, but it indirectly encourages an increase or decrease in them. The goal is to maintain economic stability. When the Fed wants to boost the economy, it typically becomes less expensive to take out a mortgage. When the Fed wants to clamp down on the economy, it acts to drain money from the system, which means borrowers will likely pay a higher interest rate on mortgages. It takes some time before it is known whether a change in interest rates will positively impact households, the housing market, businesses and the financial sector.
Mortgage Loan Interest Rates
It’s designed to stimulate the economy by making it cheaper for people to borrow money for a mortgage, a car loan or other big purchases. Mortgage interest rates won’t go to zero percent. Even consumers with a high credit rating carry more risk than the U.S. Treasury, so the consumer rate is usually at least two percentage points higher than the Fed’s. “Mortgages respond to market forces and not to the Fed,” says Holden Lewis, mortgage and real estate expert at NerdWallet. “The Fed is actually following and not leading when it comes to mortgage rates.”
Even so, in response to the coronavirus, mortgage rates have already plummeted to historic lows, causing increasing demand from those who want this financial advantage. Another consideration is, “Will lenders have the resources to let mortgage rates go lower?” Banks could artificially hold rates up to “slow the flow” of refinances, in order to ensure the money is there to fund the demand. You don’t have to rush to refinance or get a mortgage, because banks are likely to be inundated with applications. Rates are still fluctuating, but they are likely to even out and stay low through the rest of the year, once lenders catch up with the backlog from the initial wave. That could be the opportune time to apply for or refinance a loan.
Keep an Eye on these Indicators
The Fed’s decisions on rate movements are often influenced by several economic factors, which consumers can easily track. Consumers can follow the employment report, which is published monthly by the Bureau of Labor Statistics, or BLS. The target inflation rate is another yardstick for rate changes. Employment, inflation and consumer price index are essential data the Fed considers when deciding what to do with rates. The banks and mortgage lenders follow. As things start to look better with the coronavirus, other influencers will carry more weight. Mortgage lenders set interest rates based on their expectations for future inflation and interest rates.
Changes in the federal funds rate affect a benchmark interest rate called the prime rate. According to the Federal Reserve Bank of San Francisco, the prime rate is the base rate from which many interest rates on consumer and commercial loans are set by banks. Consequently, a cut in the federal funds rate can trigger a decrease in mortgage rates, if lenders link their rates to the prime rate.
Lower interest rates provide the opportunity to obtain a mortgage with a more favorable interest rate, which yields long-term financial benefits from the reduction in the cost of financing a home or refinancing a current mortgage. At Citywide Home Loans, after just a 15-minute phone call, we can usually tell you whether or not now is the best time for you to buy a home or refinance your current loan. For consumer support and inquiries please contact our Consumer Solutions Dept. at 1 (866) 508-5515 or by email to [email protected].