Will Fed Interest Rate Reduction Affect Mortgages?

Yesterday, the Federal Reserve voted to decrease the discount rate by half a point (50 basis points). Wall Street responded with a 300+ increase in the Dow Jones Industrial Average. (DJIA). Good news for the economy but is it good news for mortgages and the housing situation?

In a couple of words, not directly.

Mortgage rates are determined more by the Bond Market prices rather than the Stock Market (or interest rate reductions per se). However, when Stocks go up Bonds usually go down. This is because investors see a better opportunity to make money in the stock market and switch their money from bonds into stocks.

Also, when the stock market goes up, the value of 401Ks and other investments increase, improving the creditworthiness of potential borrowers.

So there is a beneficial effect but not a direct one.

It will take a couple of weeks to see how much of an effect the interest rate reduction will have on the availability of mortgage money. But it certainly is better than nothing.

Unfortunately, new home builders are still offering steep discounts on their new inventory homes if you can close quickly. Until that stops, resale homes will have to compete in this unusual market (see my post "Light At The End Of The Real Estate Tunnel?" on this Blog).

Comments welcome.

Richard