When there is good economic news, mortgage rates tend to go higher. Conversely, bad economic news tends to result in lower interest rates. A common question of Opes clients is, “Why?”
Interest rates reflect a market in which money is lent and borrowed. Investors who lend money desire to get the highest return they can, while borrowers desire to pay the lowest interest they can on the money they borrow. Through the magic of the markets, the two usually meet somewhere in the middle. In an expanding economy, more people and companies want to borrow money, so the demand increases. The opposite occurs in a slowing economy.
Why, shouldn’t prices go down when there is an over-supply in a market? An over-supply of a product in a market causes prices to drop until demand is equal to supply. That is why an over-supply of interest-bearing financial instruments, like bonds and mortgages on the market for sale causes interest rates to go up. There is an inverse relationship between price and rate of return. Lower prices mean higher interest rates, and higher prices mean lower interest rates.
Since December 2015 the Fed has increased its funds rate for member banks four times for a total of one-percent. (The Committee left rates unchanged during its most recent meeting this month.) Why? Because it feels the economy has been strengthened enough that it can tolerate higher rates without being damaged, and to temper the growth so it does not increase so fast as to result in over-burdensome inflation which could be harmful to the economy, businesses and consumers.
An indicator of the future is the equity markets. If stock prices drop it is often because investors are guessing that poor economic conditions are in the future. Because stocks are more volatile in potential returns than bond and mortgages, investors engage in what is known as “flight to quality” and sell risky stock investments and purchase steady, safe, almost guaranteed returns from bonds and U.S. backed Fannie Mae/Freddie Mac mortgages. The result is lower mortgage rates.
Meanwhile, the U.S. economy, and areas where Opes Advisors is licensed, continues to gradually do well and is stable – not such bad things.
While Opes Advisors, a division of Flagstar Bank, Member FDIC, uses all reasonable efforts to ensure that this information is current, accurate and complete on the date of publication, no representations or warranties are made (express or implied) as to the reliability, accuracy or completeness of such information. Opes Advisors, a division of Flagstar Bank, Member FDIC, therefore, cannot be held liable for any loss arising or indirectly from the use of, or any action taken in reliance on, any information appearing in this email.