Why The Fed Rate Cut Didn’t Help Mortgage Rates This Week

by | Sep 20, 2024 | Mortgage

This week’s newsletter will be intentionally short in hopes of it being easier to share, read, and digest. It will offer several strategies for understanding the paradoxical disconnect between the Fed Funds Rate and mortgage rates.  For those interested in a deeper dive, the past 3 newsletters thoroughly covered it in detail:

Why Fed Day Matters Even Though Mortgage Rates Are Already Lower

Why You Might Regret Waiting For Better Rates After The Fed Cuts

Here’s Exactly What a Fed Rate Cut Will Do For Mortgage Rates


Strategy 1: Think of mortgage rates as broadly correlated with the Fed Funds Rate, but with the important ability to adjust for probable changes in the Fed Funds Rate well before the Fed actually cuts/hikes.

Mortgages are based on bonds and bonds can move continually on any business day.  Contrast that to the Fed Funds Rate which can only move once every 6 weeks. That means mortgage rates can react to all of the news and data that will eventually lead the Fed to cut rates, which is exactly why mortgage rates have been moving lower recently.  Bottom line: the Fed was getting caught up to movement that already took place in the rest of the rate market.  In fact, the rest of the rate market is already planning on several more cuts.


Strategy 2: Understand that the Fed Funds Rate is like a 1 day loan whereas the average mortgage lasts a number of years. 

Loans with short and long time frames have different rates and can behave differently on any given day.  Sometimes, longer term rates like mortgages can move in completely different directions from the shortest-term rates.  This wasn’t necessarily a major factor this week, but it’s another reason for potential disconnects to be aware of.


Strategy 3: Understand that financial markets were already well aware the Fed was going to cut.

You may have heard the term “buy the rumor, sell the news.”  This refers to traders acting upon events that have a high likelihood of playing out as expected (i.e. “buying the rumor”), thus participating in a wave of momentum that makes those trades more and more profitable before ultimately exiting those trades (i.e. “selling the news”) when the news finally happens.


Strategy 4: Consider the nuances in Fed day information.

In addition to the Fed rate cut itself, which was widely assumed, there were other more important aspects of Fed day.  These included the member’s rate forecasts via the “dot plot” as well as Fed Chair Powell’s press conference.  The dot plot was actually somewhat beneficial for bonds/rates, but Powell’s press conference took things back in the other direction.  


Last but not least…

If you happened to see news headlines the day after the Fed announcement that suggested mortgage rates had, in fact, moved significantly lower, it was likely due to Freddie Mac’s weekly mortgage rate survey–the one that uses a 5 day average through each Wednesday before being reported on Thursday.  As such, Freddie’s rate can be very stale compared to daily changes in rates.  

It is true that we saw the lowest rates in a year and a half last Thursday and Friday.  Some lenders were at the same levels again on the Tuesday before the Fed announcement, but the average moved higher after that.  

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Even so, rates remain very close to long-term lows with the average lender more than 1.5% below the long-term highs from late 2023.  Incidentally, this remarkably similar to amount the Fed expects to cut rates in the coming years… almost as if the mortgage market can get in position for future Fed rate cuts well in advance?

The chart below shows the dot plot from this week’s Fed meeting compared to the next most recent dot plot released in June 2024.  Blue dots are new. Red dots are old.  Note the downward migration.  Each dot is one Fed member’s outlook:

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Financing for ADUs in Portland

Financing for ADUs in Portland

by | Mar 12, 2018 | Refinance

ADUs, mother-in-law units, granny flats – no matter what you call them – are a hot commodity in Portland. They come in all shapes and forms: basement renovations, garage conversions and free standing units. But they aren’t just to house your in-laws when they come to town anymore. Homeowners all over town are using them to offset their housing expenses and build long-term wealth. Whether you rent to long-term tenants or list it Airbnb-style, an ADU can turn your property into an income-producing asset. No two are alike, and many of them could be considered pieces of art. Designing one is fun, finding the financing for one is another story. Read on to learn how to finance ADUs in Portland.

Use the equity in your home

If you have equity available in your home, you’re half way there. Simply refinance your existing mortgage to the maximum limit (typically 80% of your appraised value) with a fixed rate mortgage. This locks in a low interest rate to fund your ADU construction. If you need a little extra cash, follow up with a Home Equity Line of Credit. However, HELOCs are typically variable rate loans and the monthly payment terms can be aggressive. It’s advisable to keep these just for any overage you may need.

What if I don’t have a lot of equity in my home?

Renovation loans are your answer. Renovation loans use the future value of your property – the value of your home AFTER you’ve built the ADU. An appraiser gives an opinion of that future value, and we work backwards from there to determine the equity available for construction. This is different than a cash out refinance where you’re given all the cash at close and are sent on your way to build your ADU. Renovation loans require that the funds are held in an escrow account. Those funds are used to pay your contractor on a draw basis as work is completed. This keeps everyone on track and ensures you end up with the ADU that your estimated future value was based on.

Changes in Portland are opening the door for even more ADUs

Until recently, renovation loans had one major drawback: they only allowed ADUs that were attached to the main house. Think of a basement conversion. If you didn’t have much equity and wanted to build a free-standing ADU, you had to find some other way to finance it. That changed recently. With the sky-high demand for these free-standing ADUs in Portland, we can now finance them on properties in the City of Portland.

Portland was one of the first cities to embrace ADUs as a sustainable housing solution. As a result, it is being used as a test market for financing these detached units. If successful, this program will likely be opened in other cities across the U.S.

Adding to the ADU movement, the City of Portland has waived the required System Development Charges (SDC) when building an ADU. The waiver is valid through July 31, 2018, provided that the ADU is constructed and receives final inspection and certification of occupancy by June 30, 2019.

Interested in ADUs? Bring your questions. Let’s see what we can build together!

Conforming Loan Limit Increase Coming in 2018

Conforming Loan Limit Increase Coming in 2018

by | Nov 28, 2017 | Uncategorized

The conforming loan limit is increasing to $453,100 in 2018, up from $424,100. This applies to all “Conventional” mortgages – loans that conform to Fannie Mae or Freddie Mac guidelines. Any loan amount over this mark is considered a Jumbo loan and is subject to a different set of underwriting and qualification guidelines.

The Housing and Economic Recovery Act (HERA) requires that the baseline conforming loan limit be adjusted each year for Fannie Mae and Freddie Mac to reflect the change in the average U.S. home price. The Federal Housing Finance Agency (FHFA) is responsible for setting this limit.

According to the National Association of Realtors, the median home price in Portland for Q3 2017 is $389,400, a 8.6% increase from their last report.

Rate Drop + High Values = Time to Refinance

Rate Drop + High Values = Time to Refinance

by | Feb 25, 2016 | Refinance

2016 has, so far, been unfriendly to stocks and is likely not finished heading into a bear market. With falling oil prices, China’s economic turmoil, and other global pressures, investors are flocking to the safety of mortgage bonds. This translates directly to lower mortgage rates. Bad news to good news!

 

With many scenarios dipping below the 4.0%* mark again, here are some good reasons to consider a refinance:

  • Save money with a lower rate. If your rate is 4.25% or above, it’s a good time to look at what you might save over the short and long term.
  • Leverage your equity for investment. Portland home appreciation is up which means you likely have added equity in your property. Many people are leveraging this to upgrade to a larger home or buy a rental property.
  • Consolidate high interest debt. This isn’t my favorite reason to refinance, as you may be trading a short-term debt for a long-term payment, but I can help you do the math to determine if it makes sense.
  • Get rid of your mortgage insurance. Mortgage insurance benefits you not! It’s simply the lender’s protection against foreclosure. If you have at least 20% equity in your property, you can remove the MI and save.
  • Renovate your home. Build up, build down, remodel or build that Accessory Dwelling Unit (ADU) to rent out and create cash flow, simultaneously increasing the value of your property.
Down Payment Assistance – Buyers Only Need .5% Down

Down Payment Assistance – Buyers Only Need .5% Down

by | Mar 19, 2015 | Mortgage

Buying a home just got easier! A new Down Payment Assistance Program (DAP) for FHA loans means that borrowers only need .5% down. The DAP is a second mortgage, up to 3% of the sales price that can be used to meet the minimum down payment requirement and/or for closing costs. The DAP can be coupled with Portland’s MCC First Time Homebuyer Tax Credit. Certain eligibility requirements apply including income and debt limits.