The Federal Reserve isn’t setting your mortgage rate

Make Me Smart April 20, 2022 transcript

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Sabri Ben-Achour: Half of the room from my bed. They are good at sound insulation. All right, here we go.

Amy Scott: Hello, I’m Amy Scott filling in today for Kimberly Adams. Welcome back to Make Me Smart where we make today make sense.

Sabri Ben-Achour: And I’m Sabri Ben-Achour in for the rest of the week. Thank you for joining us for Whaddya Know – wait, Whaddya Want to Know Wedn – I’m sorry. I’m still new. Whaddya Want to Know Wednesday, the day we answer your questions. And here is our first one.

Lee: Hi, this is Lee from Huntsville, Alabama. We are the Rocket City because we didn’t – we had Wernher von Braun’s team sending men to the moon. My question is about interest rates, the Fed upped the interest rates a quarter of a percent, but mortgage rates went up a lot more than a quarter of a percent. And so I’m wondering how that works, why the mortgage rate doesn’t follow the Fed rate more closely. Please make me smart. Thank you.

Sabri Ben-Achour: What a good question.

Amy Scott: Oh this is a great question.  Yeah, I love this. And honestly, it took me like a while as a housing reporter to to really figure this out. So I actually did a story about this last month, we can link to. What the Fed controls, as Sabri well knows from covering finance is something called the federal funds rate. It’s the rate that banks charge each other overnight to lend each other money. That’s super short term. Mortgages, you know, you get a mortgage for 15, 30 years, most people hold on to their mortgage, though, for maybe 10 years, give or take. So it more closely follows the 10 year treasury note. And that, those interest rates are really set by investors and how much they’re they want to be compensated for loaning the federal government money for 10 years. And those rates, yields, they call them in the bond market have been going up in advance of the Feds moves, partly because they were kind of pricing in what they expected the Fed to do, which is to make money more expensive. But also with inflation. You know, they’re looking at prices going up, their money’s not going to be worth as much and so they want to be paid more. And so that’s why we saw mortgage rates going up before the Fed even started tightening and are expected to see that continue to happen.

Sabri Ben-Achour: It’s like there’s just like a whole bunch of other factors that piled on there. It’s not just the Fed funds rate, like equals mortgage rate plus something there’s a whole bunch of other stuff going on, basically.

Amy Scott: Yeah, right. And then there’s other stuff like, you know, depending on the mortgage lender, you call, you’re gonna get a very different quote. And it can be as much as as like, the rent that they pay on their fancy office downtown, or what their quota is that week. I mean, there’s there’s a lot that goes into this. There’s also the whole market for mortgage backed securities, which plays into this. It’s more complicated than what I just said. But the bottom line is, yeah, don’t expect that to too closely follow what the Fed does, although it is related. Because what the Fed does does control kind of the cost overall of borrowing money and it, and it filters throughout the economy. Make sense?

Sabri Ben-Achour: Well, I hope – that makes make sense to me. I hope one day to be in a position to have a mortgage. But you know, New York housing costs.

Amy Scott: Yeah, come to Baltimore. There, we’ve got bargains here. All right. Up next, we’ve got a question about interest rates with a slightly different focus.

Pat: Hi, my name is Pat calling from Astoria, New York. My question is, when the Fed decides to raise their interest rates to cool the economy, they must think that the economy can take that hit without contracting. So why don’t banks and credit cards just raise their rates independently, when they think the economy is strong? Thanks for making me smart.

Sabri Ben-Achour: Right, okay, so, yes, banks and credit cards can set their own interest rates, but they, they tend to kind of be the same. We actually asked Rodney Ramcharan, a finance professor at USC Marshall School Business about this and he was saying that they banks and credit card card companies want to keep their rates about what their competitors are charging or they’re going to lose customers. So if a bank like raised, you know, its rates just on its own, I mean, what do you think is going to happen? Everyone else’s, you know, their customers just gonna be like, “Uh, screw you. I’m going to the next one.” You know, even though they might I mean, they might get some people wanting to open savings account, but it’s kind of it’s not like not worth it for them. It’s almost, you know, it’s it’s like a marketplace, you know, they they don’t want to, they don’t want to lose customers to their competitors. And yeah, so, so yeah, they’re not going to it’s, you know, it’s like they’re not going to just shoot themselves in the foot unnecessarily unless they absolutely have to. If that makes sense.

Amy Scott: Makes sense to me. Yeah. I mean, it’s interesting, they do have a little bit of leeway. But they it’s it’s funny how one rate goes up, and you see, like, right down the line others follow suit.

Sabri Ben-Achour: Yeah. Well, um, yesterday, Amy, you did a deep dive on this show into the economics of refugees. And we have a question related to that.

Hannah: Hi Make Me smart hosts. My name is Hannah. And my question is, are refugees frequently resettled in relatively smaller, more remote areas? And if so, why? I’m asking because my parents and grandparents were Soviet refugees, um, in the late 70s, early 80s. And they were placed in New Orleans by HIAS, which is where they met. But really shortly after my family moved up to New York City. And that’s where we’ve been since. So I’m wondering, do the agencies placed in places like New York directly, or nah? Thanks.

Amy Scott: If you missed that, she said, I’m wondering do the agencies place in places like New York City or not? Hmm, that’s an interesting question. She’s talking about HIAS which is the Hebrew Immigrant Aid Society. It’s a Jewish American nonprofit that provides Refugee Assistance, actually, all over the world. I spoke to them recently for a story, one of the the nine resettlement agencies here in the US. And you know, we couldn’t answer that question ourselves. So we went back to the economics professor Ramya Vijaya, that we talked to, and asked her that question, here’s what she had to say.

Ramya Vijaya: The choice of where to resettle refugees depends on a few different criteria. For example, refugees may have family connections in some place in the US in that case, they may be resettled closer to that place. Resettlement also depends primarily on the capabilities that the resettlement agencies have been able to build up over the years. Some agencies also specialize in some special needs for refugees, perhaps medical needs, or if they have children and they have been able to mobilize more childcare resources within the community. Currently, New York, Texas and California are the top refugee receiving states. But as I mentioned, as different agencies build up their capacities, these might change.

Amy Scott: And Sabri, we talked yesterday a little bit about Erie, Pennsylvania, you know, where Marketplace has done quite a lot of reporting. It’s a big draw, big place for refugees. And I think part of that is they’ve had a really a decline in population because of the loss of their industrial base. And when you develop that reputation, and the network that goes along with that you’re, you know, you become a good place to attract more refugees. And actually, there’s a significant Ukrainian population there. I wouldn’t be surprised if we see more folks come in this new wave from the war.

Sabri Ben-Achour: Yeah, you know, the older I get, the more amazed I am to really think about what it takes for refugees, or  frankly, you know, many immigrants to you know, come here and start over, like, completely over, you know, it, it – I don’t know, just, you know, moving to New York was hard enough, you know, like, it’s, it’s, just wild.

Amy Scott: Yeah, and the trauma that and we talked yesterday about the economics of resettlement and just how quickly people tend to fall into jobs and contribute to the economy and I’m just thinking they’re doing this on top of, you know, tremendous trauma and difficulty, you know, with with the possibility of never going home. It’s really is amazing. And sad. Yeah, all right. This next one is an email from Jennifer in Pittsburgh, and I’m gonna read this she asks, “Hi, Make Me Smart. I’d like to know how Elon Musk you got to be the richest man in the world. He seems like just a marketing guy and hype man who makes a lot of money. When he sell stocks after driving up the price with outrageous tweets, what am I missing?” Sabri, this is all you?

Sabri Ben-Achour: Yeah, I mean, I think that might be his hobby, you know, like some of us have plants or like, play Wordle. But I think Elon’s hobby is just messing with …

Amy Scott: Messing with companies on Twitter.

Sabri Ben-Achour:  … the market on Twitter. Yeah. But, yeah, no, he is the, you know, according to Forbes, He’s the richest person in the world. I mean, the short answer is that a lot of his wealth comes from owning Tesla stock and Tesla’s stock has just skyrocketed over the years like 33%. And, you know, part of his – also he beat out the competition. So Jeff Bezos started Amazon. Amazon’s stock price had dropped a little plus Bezos gave away some money to charity. So he fell to number two, the longer, yeah, the longer answer is –

Amy Scott: Lowly two.

Sabri Ben-Achour: The more, – yeah, what a loser. Falling to the number two. Number two richest man on the planet.The longer answer is that well, a He comes from a family with resources. So I mean, he started with that. His mom was a model of former Miss South Africa finalist. His dad was Errol Musk was an engineer and a pilot and part owner of an emerald mine in Zambia. So you know, he’s not coming from nothing.

Amy Scott: That helps.

Sabri Ben-Achour:  Yeah. But you know, he’s been building his wealth through startups for a while internet startups, tech startups. His first one was this thing called Zip2, which he founded with his brother, they sold software for online city guides, newspapers, and that company was sold by – was sold for $300 million. So that was a little nice start. And, I mean, he, he’s done so much more since then. I mean, you know, he sold another company for $22 million. This online banking startup startup. He, well, I should say, an online banking startup that merged with another company and became PayPal. You might know PayPal?

Amy Scott: Oh yeah. May have heard of them.

Sabri Ben-Achour: Yeah. So he had to leave PayPal. But when eBay bought PayPal, for one and a half billion, Elon Musk walked away with 180 million. So you know, he took that he invested that in SpaceX, he invested that in Tesla. And, you know, SpaceX is, you know, got him billions and contracts from NASA. Tesla went public, raised more than $200 million in its IPO. So you put all that together, plus how much Tesla stock has grown, you know, he’s pretty damn rich. So that’s how he did it. Easy really.

Amy Scott: But you gotta wonder if he hasn’t hurt himself at times with his, his behavior. You know, I mean, he’s gotten in trouble with the SEC. And, you know, clearly he’s building wealth, but I wonder if he also is chipping away at it at times?

Sabri Ben-Achour: Yeah. You know, I feel like it takes a certain kind. Well, I shouldn’t say that it takes a certain kind of personality to to build these kinds of businesses. But I don’t know there’s, I feel like the personality traits that contribute to that also can be destructive sometimes. Yeah. You know, I mean, like, Yeah, I mean, you think about people even know like, you know, sometimes people who are great at business are not great at dinner, you know?

Amy Scott: Right or great at people. Yeah.

Sabri Ben-Achour: People, people. Yeah.

Amy Scott: I think that’s all the questions we have time for today. But those were really great. Thank you for sending them. Thanks for listening. I will be out tomorrow but back on Friday. Sabri will be here for the rest of the week, filling in for Kai.

Sabri Ben-Achour: Yep, I will hopefully be back tomorrow doing the news, Make Me Smile with Marielle Segarra so keep sending us your questions for Whaddya Want to Know Wednesday you can email us, makemesmart@marketplace.org. Or you can leave us a voicemail at 508-U-B-SMART.

Amy Scott: Make Me Smart is produced by Marissa Cabrera and Marque Greene with production help from our intern Tiffany Bui.

Sabri Ben-Achour: Today’s show was engineered by Juan Carlos Torrado. Ben Tolliday and Daniel Ramirez composed our theme music and our senior producer is Bridget Bodnar.

Amy Scott: Hoarders, greenhouse edition. I’m still laughing at that one.