When there are dramatic swings in the stock market, you may wonder how mortgage interest rates will be affected. What is the relationship between mortgage rates and the stock prices? Do they move together or in opposite directions?
Stocks and Mortgage Rates Both Mimic the Economy
While the stock market is not directly related to mortgage rates, both are based on the basic movement of the economy. When things are going swimmingly, both stock prices and mortgage rates tend to rise. They both generally fall when the economy is faltering. When investors are concerned about national or global financial health, they move their money to safer investment products like bonds. Bonds have guarantees of repayment and interest from government entities, whereas stocks make no promises. It is possible for stock prices to fall to zero, creating a total loss for investors. As more investors flock to bonds and pull out of the riskier stock market, demand for stocks falls and so do their prices.
Mortgage Rates Are Related to Bond Prices
Mortgage rates are also closely tied to bonds, specifically 10-year U.S. Treasury bonds. When investors are fearful and make the jump to bonds, the increase in demand for bonds causes their prices to rise and their yields to fall. The 10-year Treasury bond yield is a benchmark for most other consumer interest rates, including mortgage interest rates. When bond yields fall, in general, so do mortgage rates, auto loan rates, credit card rates, etc. It may not be an immediate drop, but consumer rates usually follow bond yields.
Mortgage loans themselves are often turned into bonds. Most mortgage lenders sell their loans to the secondary market, where they are bundled together and turned into mortgage-backed securities. When there are plenty of mortgage bonds on the market, demand is lower and interest rates will be lower. And if demand increases and there are fewer mortgage bonds available, interest rates will climb.
Mortgage Rates Are Influenced by the Federal Reserve
The U.S. Federal Reserve is tasked with keeping inflation to a manageable level in order to stabilize the value of the dollar. If the Fed senses that inflation is getting too high, it may raise its own federal funds rate, which in turn pushes other rates up. Or mortgage rates may decrease when inflation is stagnant, and the Fed lowers its rate to stimulate economic activity.
Mortgage interest rates and the stock market are not related but they do seem to have parallel movement patterns. That means if the economy is doing poorly, you will be losing money on your stock investments but getting a sweet deal on a mortgage loan. If the economy is roaring, you face the flip: your stock portfolio will be soaring, but it will be much more expensive to get a mortgage.
Instead of watching the stock market to see what will happen to mortgage interest rates, you should pay attention to 10-year Treasury bond yields. Also keep an eye on more fundamental economic indicators such as the unemployment rate, inflation and wage growth.