Why the Fed move doesn't matter to mortgage rates

The Federal Reserve did it — raised the target federal funds rate a quarter point, its first boost in nearly a decade. That does not, however, mean that the average rate on the 30-year fixed mortgage will be a quarter point higher when we all wake up on Thursday. That's not how mortgage rates work.

Mortgage rates follow the yields on mortgage-backed securities. These bonds track the yield on the U.S. 10-year Treasury. The bond market is still sorting itself out right now, and yields could end up higher or lower by the end of the week.

The bigger deal for mortgage rates is not the Fed's headline move, but five paragraphs lower in its statement:

"The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way."

When U.S. financial markets crashed in 2008, the Federal Reserve began buying billions of dollars worth of agency mortgage-backed securities (loans backed by Fannie Mae, Freddie Mac and Ginnie Mae). As part of the so-called "taper" in 2013, it gradually stopped using new money to buy MBS but continued to reinvest money it made from the bonds it had into more, newer bonds.

"In other words, all the income they receive from all that MBS they bought is going right back into buying more MBS," wrote Matthew Graham, chief operating officer of Mortgage News Daily. "Over the past few cycles, that's been $24-$26 billion a month — a staggering amount that accounts for nearly every newly originated MBS."

At some point, the Fed will have to stop that and let the private market back into mortgage land, but so far that hasn't happened. Mortgage finance reform is basically on the back-burner until we get a new president and a new Congress. As long as the Fed is the mortgage market's sugar daddy, rates won't move much higher.

Read MoreWhat a Fed rate hike means for you

"Also important is the continued popularity of US Treasury investments around the world, which puts downward pressure on Treasury rates, specifically the 10-year bond rate, which is the benchmark for MBS/mortgage pricing," said Guy Cecala, CEO of Inside Mortgage Finance. "Both are much more significant than any small hike in the Fed rate."

Still, consumers are likely going to be freaked out, especially young consumers, if mortgage rates inch up even slightly. That is because apparently they don't understand just how low rates are. Sixty-seven percent of prospective homebuyers surveyed by Berkshire Hathaway HomeServices, a network of real estate brokerages, categorized the level of today's mortgage rates as "average" or "high."

The current rate of 4 percent on the 30-year fixed is less than 1 percentage point higher than its record low. Fun fact, in the early 1980s, the rate was around 18 percent.

"The Fed is seeing more people going back to work, and with the expectation of job growth for America it feels comfortable with its intent to raise rates," said Berkshire Hathaway HomeServices President Stephen Phillips. "But the reality is that an entire generation of first-time buyers has never experienced a meaningful rate increase. This is a new and unfamiliar phenomenon to them."

An increase from the current 4 percent on the 30-year fixed to 4.25 percent on a loans ranging from $200,000 to $300,000 would amount to less than the average borrower probably spends at Starbucks every month. Still, a majority of respondents to the Berkshire survey, which was mostly millennials and Gen Xers, said rising mortgage rates would make them "anxious" about their current financial situations.

Another survey by real estate brokerage Redfin appeared less dire, claiming its buyers said they were "unfazed" by the prospect of rising rates. Just 6 percent, according to the report, seemed to care at all. They were far more concerned with rising home prices and the very tight supply of homes for sale.

The exception, of course, was among what Redfin referred to as "budget-conscious buyers shopping for the least-expensive houses." Redfin categorized them as buyers looking at homes priced $250,000 or less. Seventy-one percent of them said they were concerned.

Interesting, given that the median price of an existing home sold in America in October was $219,600, according to the National Association of Realtors. Of course Redfin is based in Seattle, where the median home price is more than twice the national average. That may be clouding their view of a "bargain."

In fairness, Zillow, a real estate listing company also based in Seattle, put out a report this week claiming 70 percent of potential homebuyers it surveyed nationwide said they would not abandon their buying plans if mortgage rates were to hit 4.5 percent.

Suffice it to say, home buying is the most emotional financial investment most people will ever make. Whether or not every penny matters, the prospect of every penny lost or gained matters.

CORRECTION: An earlier version misstated where Zillow is based.