Any time the Fed chooses to cut short-term rates — it is done with the intention of stimulating economic growth. Accelerating economic growth ultimately increases the demand for capital – which, in-turn ultimately pushes up mortgage interest rates. According to Bankrate.com, the Fed lowered its target for fed funds 13 times from January 3, 2001, to June 25, 2003. Immediately after each cut, mortgage costs fell eight times and rose five times. Even though prime-based bank loans and many credit card rates drop within a few days to a few weeks after a Fed rate cut, the real impact of those changes don’t manifest themselves for several months afterwards as borrowers adjust to the lower cost of financing.

In the world of mortgage interest rates, the benefit of a fed fund rate cut is simply a function of a reduction in mortgage investors’ short-term cost of capital – i.e. warehouse lines of credit. A change in the overnight lending rate commercial banks charge each other for funds to meet their reserve requirements –and a 30-year fixed-rate mortgage — have little other direct correlation.

I think it is important for originators, borrowers and realtors alike to note that lower mortgage interest rates will do little to cure what currently ails the real-estate market. In my opinion the problem we’re all working through is not the impact of thirty-year fixed rate mortgage running roughly 1% above a 40-year low. The current level of mortgage interest rates is not the real problem. In my judgment, the real problem is the buying publics perception that residential real-estate is grossly over priced. No matter how low mortgage rates go – a knowledgeable buyer is not going to grossly overpay, at least in her/his mind, for a piece of property simply because they can finance it with a low mortgage interest rate.

Until the media quits screaming that the dream of American homeownership is nothing but a thinly veiled nightmare – mortgage interest rates could plummet to near 0% — with little notable impact on overall purchase money demand. I’ll concede the argument that super lower mortgage rate will create a surging refinance demand – but overall sales of new and existing homes will likely remain surprisingly lower. Bad news sells – but the complete story surrounding the slump in the residential sector is not nearly as bad as it is being made out to be. I’ll write more on this subject as the week progresses.

You can bet all eyes will be focused on next Friday’s 8:30 a.m. release of one of mortgage investors favorite measures of inflation pressures at the consumer level – the core personal consumption expenditure index component of the August Income and Spending report. If, as expected, the core PCE index remains well behaved with an August reading of 0.2% or less – mortgage investors just might begin to do a little bargain shopping – pushing rate sheet prices a little higher and note rates just a touch lower in the process. On the other hand, if this measure of core consumer inflation posts a gain of 0.3% or more, last week’s sell-off in the mortgage market will likely prove to be just a “warm-up” for the selling pressure that will likely inundate the mortgage market during the first week of October.