Mortgage rates continued a trend of small, steady improvements into the new week today.  This marks the 4th straight day of a winning streak that began last Wednesday when the Fed announced its much-anticipated rate hike.  If the notion of a Fed rate hike followed by falling mortgage rates doesn’t make sense, don’t worry.  The Fed rate hike has drawn out lots of analysis on the implications for other interest rates, and much of it is missing two critical points.

First, mortgage rates are not directly connected to the Fed Funds Rate.  In fact, we’ve even seen them move in the opposite direction for months in the past.  That doesn’t mean rates went lower every day.  There was plenty of variability day-to-day, but at the end of one particular 4 month period, mortgage rates had moved 0.5% lower while the Fed Funds Rate moved 2.0% higher.

Second, much like Treasury yields, mortgage rates are free to move from moment to moment based on bond market trading.  As was the case in the example noted above, they’ve had plenty of time to prepare for the well-telegraphed Fed rate hike (by moving preemptively higher).  As such, the decrease in mortgage rates since the Fed rate hike can be thought of as a normalization with the recent spike being akin to bracing for impact.