There are probably not a lot of people who watch mortgage rates on a daily basis. At least when compared to the general public who have their daily lives to manage and current mortgage rates are the least of their concerns. But when someone is thinking of refinancing their current home loan or hoping to qualify for a bigger mortgage, watching interest rates is very important indeed.
For those who really pay attention, poring through the daily economic news, reading forecasts from the “experts” and talking about rates with their loan officers is a regular occurrence. But why don’t lenders just keep their interest rates where they are for a while? Why do they always change so much? And most importantly, why do rates seem to shoot through the roof in a day’s time but takes weeks to fall by a similar margin?
Mortgage Rates move like Stocks and Bonds
Lenders would very much like to set an interest rate and leave it there. Every one of them but they can’t do that. Instead they hire individuals to staff what is called the “secondary” department because that’s who establishes the lender’s rates for that day. Or even change them during the course of a day. Their rates have to march lock step with the appropriate index. Here’s how it works for a conventional 30 year mortgage: Today for example, as markets open, a lender looks at the FNMA 30yr 4.0 mortgage bond. What’s that? It’s the vehicle that traders use to buy and sell the bond.
And just like any other bond, as the demand for the bond increases, the price goes up. And when the price goes up, rates go down. The bond will return a predetermined amount at the end of its cycle and the buyer knows what the return will be. Meager mind you, but a guaranteed return nonetheless.
Equities, or stocks, can provide greater returns but there is no guarantee of a return. In fact, an individual stock could be worthless should the corporation go out of business. There’s risk but there’s also the reward. When investors are confident in the growth of the current economy, they will typically invest in stocks. On the other hand when they’re not so confident, investors can pour money into bonds and mortgage bonds fall into that category. In good times money goes to stocks and in not so good times money is transferred to the more secure bonds.
What Makes Mortgage Rates Rise and Fall?
Okay, so during a period of volatility, what does the stock market generally do? Say an economic report is released and it’s terrible news such as the unemployment rate goes back up or thousands of jobs last in the previous month. In a wink, there’s a selloff in stocks and the Dow could lose hundreds within minutes. In fact, the stock market can lose so much so fast that there are rules that shut the markets down temporarily during a major sell-off to allow cooler heads to prevail. In this example, when investors pull money out of stocks what can they do? For one, they can simply turn their funds into cash or they can invest in the security of a bond. The returns aren’t as sexy but it’s better than nothing, right?
Now let’s flip the coin. Say that the very same report is released but this time the unemployment rate goes down more than expected and there are hundreds of thousands of new jobs created. Now what happens? Investors see an opportunity and quickly pull money out of bonds and cash accounts and get in on the stock market boom. When bonds are sold and there is less demand for them the price goes down and, you guessed it, rates go up.
Rates Go Up Quickly, Down Slowly
As strong economic numbers are released, bond selloffs occur in all categories from U.S. Treasuries to mortgage-backed securities. It happens rather fast and when the selloff begins by the time you hear about it mortgage rates have already left the station. That happened last summer when the Fed made an announcement about the end of the current Quantitative Easing program that kept rates below 4.00 percent. The announcement really spooked the markets and in one day, mortgage rates leaped by almost a full percentage point on the 30 year fixed rate loan. A major selloff in the bond market.
On the other hand, when the economy appears to be in the doldrums, bonds are more of a strategic move to protect assets and not as an investment for significant returns. Bonds aren’t designed that way. They’re rather boring because the end result is always known by the investor. This back-and-forth between stocks and mortgage bonds is the reason why rates move and why they can move up quickly but take their own time to fall back down. If you or someone you know is in a position to lock in a rate but are waiting around for just one more tick downward, that’s not the most prudent decision.