Why Home loan Rates Rise When the Fed Cuts Rates
Short term loans like vehicle loan, credit cards and home equity loans are instantly decreased with Federal rate cuts because they are based on the Prime rate. Longer term loans such as home mortgages aren’t because they are based on competing financial investment choices, for instance investing in stocks rather than property.
When the Fed cuts rates the stock exchange takes it as an “all is well” signal, making stocks a more appealing investment. This causes money to be gotten rid of from the mortgage backed securities and bond market and put into the stock exchange, thus reducing the need for home mortgage backed securities and bonds.
Now the companies that issue bonds and mortgage backed security financial investments raise the rates to attract investors back into the fold with higher yields, essentially greater rates. Given that the yields are rising, so need to the rates on the hidden home mortgages.
If yields/rates rise on home loan backed securities then the actual rates on the hidden mortgages need to likewise increase. That is why mortgage rates can rise when the Fed cuts rate of interest.