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Mortgage affordability isn't dependent on Fed funds rate [Video]

Posted on Monday, November 16, 2015 at 10:13:31 AM

Many people are worried that mortgage rates will rise - possibly dramatically - if the Federal Reserve raises its benchmark interest rate next month as it has indicated. However, mortgage affordability is more closely tied to the 10-year Treasury yield. 

Janet Yellen, the Fed chair, has indicated that the bank will increase the Fed funds rate at its next meeting in December, and conversation about the intended move has focused on its potential effect on mortgage affordability. There is a widespread belief that should the Fed's benchmark interest rate increase, mortgages will follow. However, homes are long-term investments, which means it could make more sense to tie mortgage rates to the 10-year Treasury yield, which measures lengthier obligations. 

In 2006, the Fed increased its benchmark interest rate from 1 percent to 5.25 percent, according to CBS. However, this move did not result in a dramatic blow to mortgage affordability - the average rate for a 30-year mortgage increased to 6.7 percent in 2006 from 6.3 percent in 2004. 

More recently, during the week ending Nov. 12, the average 30-year mortgage rate increased to 3.98 percent, quite close to the 4 percent threshold it has hovered below for months now, the Freddie Mac Mortgage Rates Survey indicated. Whether mortgage affordability decreases immediately after a Fed rate hike or not, homebuyers may want to lock in rates below 4 percent while they still can.