I fell in love with homes when I came to understand the manner in which they are woven into the fabric of the economy, and I'd love to share this with you as succinctly as I can.

Ultimately I hope to answer the three following questions for you - when the Federal Reserve (The Fed), raise or lower interest rates, how and why does it affect mortgages? What does it mean for the market? And most importantly, how does that affect you?

To preface this short article, this article is exactly that - short, brief, and hopefully, a tad insightful.

There are many layers and facets that impact the beautiful relationships that exist in our economy, but I hope those of you who understand this process forgive my “glazing” over of the topic at hand, and those who understand this least have gained a more tangible frame of reference.

Bonds : They come in many forms and are calculated investments that are rated by bond rating agencies as either high risk, or low risk. Just as any other risk in life, the higher the risk, the higher the return, and vice versa. What also makes Bonds attractive is that they can be resold and traded in the public markets, making them very “liquid”.

Amongst these Bonds are Treasury notes and Treasury bonds, and for the purposes of this article let’s call both Treasuries. Treasuries are backed by the U.S. Government and are deemed low risk for the return they provide – if the return on Treasuries increase, other bonds in the market must also follow suit and raise their returns to remain attractive; on the other hand, if the return on Treasury bonds fall too low, investors would surely seek higher returns away from Treasuries, such as mortgage-backed securities.

When the feds cut or raise rates, the rate they are controlling is the Federal Fund Rate and this is a Target Rate to reach and maintain through various instruments that they influence, such as overnight loans between different banks. To keep things simple let us refer to this as the “Rate”.

After the Rate is lowered, the Fed could buy or sell the government bonds in the open market to increase or decrease the overall money supply - this action lowers or raises the rates used by other financial institutions when they loan to one another, which indirectly affects the rate at which banks lend to the market at large, specifically, the Prime Rate: the rate used to provide loans to their best creditworthy borrowers.

With the above kept in mind, banks keep mortgage rates just a few points higher than Treasuries, this variance between the two is typically enough to keep investors pushed towards mortgage backed securities as an investment, and as rates on Treasuries rise, banks can raise rates on mortgages to maintain their appeal to investors; On the other hand, higher rates tighten the money supply and detract potential home buyers from entering the market to purchase a home because the rate of their potential mortgage will be higher and less affordable – this can drive down the overall demand in the housing market, and assuming the supply remains the same in both scenarios, home prices will typically react to the drop in demand by following suit.

Remember that your mortgage is a debt that you promised to pay monthly at whatever rate was agreed upon on your Promissory Note, but to an investor, your mortgage is an investment opportunity with a promised return for the term of your loan, and the world of fractional financing allows institutions to sell your loan to investors seeking this return on their money - just as bonds are competing to attract an investor for yields on their investments.

In Summary - to the government, a house is a fragment of a mortgage-backed security, in a nutshell, it's an investment to be bought and sold on the open market - increasing capital and providing additional financing options for a multitude of sectors.

To the bank, a house is collateral, tied to a Deed of Trust or Mortgage that securitizes a bill that must be paid as agreed upon to the mortgagee.

To a county, a house is a building on a parcel of land with a designated address and an assessed value used to measure the amount of taxes to collect to fund the various programs these funds are allocated to.

To a family, a house is a home, a start of a new beginning, new memories, a small step closer towards a feeling of immortality through permanence, it's equity, it's a safety net, it's the decider of what school your kids will go to and potentially the decider of what color and letter sticker you will have to put on your car in order to remain parked in a 2 hour time zone (San Francisco Joke).

A home is all these things and more, and I sincerely hope that this article has been an insightful read.

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