What Does a Benchmark Interest Rate Halt Mean for Homebuyers?

By Sabrina Biehl Published Feb 19, 2019 02:27 pm

Big financial news this month, as the Federal Reserve reversed course and and paused benchmark interest rate increases after initially indicating they would continue to rise throughout 2019.

“Officials voted to hold their benchmark rate steady and delivered an about-face from their policy stance six weeks earlier,” said the Wall Street Journal. “Last month they raised their benchmark rate by a quarter percentage point to a range between 2.25% and 2.5% and signaled two more rate rises were likely this year.” Instead, the Fed just signaled they were going to slow down, applying patience to the equation.

Reaction was swift. Immediately following the Fed’s announcement, the stock market rallied. The Dow Jones Industrial Average was up 435 points and the Nasdaq rose by 155 points.

Impact on mortgages
So how will this surprising announcement affect homebuyers?

“Many people think mortgage rates are tied to the Fed’s short-term rate, but there isn’t a direct link,” said the New York Times. “Most 30-year fixed-rate mortgages are priced off the 10-year Treasury bond, which is influenced by a variety of factors, including the outlook for inflation and long-term economic growth here and abroad.”

While interest rates on mortgages aren’t necessarily a product of benchmark rates, consumer confidence certainly plays a role. A new CNBC report shows just how sensitive buyers can be to the slightest increase in mortgage interest rates. “Mortgage application volume decreased 3 percent last week from the previous week, according to the Mortgage Bankers Association,” they said. This was in response to average interest rates for 30-year fixed-rate mortgages rising ever so slightly, from 4.75 percent to 4.76 percent.”

Of course, “The biggest drop in application volume was for refinancing, which are most rate-sensitive week to week,” they said—and also the most impacted by benchmark rates.

Earlier expectations
Interest rates for 30-year, fixed-rate conventional loans were expected to surpass 5% this year—a number that hasn’t been reached in years—but it remains to be seen whether this will still occur. While industry experts were previously pretty unified in their predictions of where rates were going this year, they’re largely conflicted now. In fact, they can’t even seem to agree on what will happen seven days from now.

“Bankrate.com, which puts out a weekly mortgage rate trend index, found the experts it surveyed were evenly split on where rates are headed,” said the Washington Post. “Half said rates will decrease, while the other half said rates will remain relatively stable in the coming week.”