Thursday, October 30, 2008

The Fed drops rates and mortgage rates move higher. Why????

The Fed lowers rates to spur economic activity, which is inflationary. An expanding economy has inflationary tendencies. Inflation erodes the value of money received in the future, therefore bond holders demand a higher yield whenever inflation is a concern – pushing mortgage rates up.

Rates are still around 6.5% which is great. Compare that to rates up to 18% in the early 80's and it looks even better!

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