I spend a lot of time with our franchisees discussing both macro and micro economic trends in various parts around our great country.\u00a0 During a recent conversation regarding home affordability, a sales associate asked what causes mortgage rates to change so quickly.\u00a0 This particular sales associate is newer to the business and apparently, just had an irate buyer who \u2018floated their lock\u2019 and \u2018caught themselves short\u2019 when forced to lock in time for their closing.\u00a0 Her question, and the associated conversation, inspired me to share what drives\/influences mortgage rates.<\/p>\n
You may remember that when it comes to bonds, prices and yields\/rates of return move opposite one another.\u00a0 When bond prices rise, their associated yields fall; and when bond prices fall, their associated yields rise.\u00a0 Keeping this inverse relationship between prices and yields in your mind helps to explain why mortgage rates (based upon the Mortgage Backed Securities market) can change rapidly.\u00a0 So, let\u2019s look at a typical market change:\u00a0 the US Stock Market falls (for example).<\/p>\n
When the US Stock Market falls, what typically happens is that investors, who are nervous about owning risky stocks, allocate their money into much less risky US Treasuries that provide them the security and some degree of returns that they are comfortable with.\u00a0 As US Treasuries become more popular, their price increases (remember the old supply and demand curve?)- thereby making their yield\/rate of return lower (inverse relationship).\u00a0 The Mortgage Backed Security market trades closely with the US Treasury market.\u00a0 So, when MBS prices are up (trending with Treasuries,) the mortgage rates that banks can offer qualified customers can go down.<\/p>\n
As with all other debt\/bond investments, the inverse is also true, when the US Stock Market rally\u2019s and investors move more money into the stock market, and away from investments like US Treasuries and Mortgage Backed Securities, prices of these type of investments go down (i.e. weaker demand).\u00a0 The lower prices in the MBS market causes banks\/lenders to increase (raise) consumer mortgage rates.<\/p>\n
To demonstrate how rapidly prices and yields\/rates can change, just consider the impact the European market had on our US market last week.<\/p>\n
Monday: <\/strong>As investor sentiment changed from the past weeks European Union announcement to address the debt problems of certain EU members, the stock market rally forced US Treasury Yields higher and MBS yields higher as well (meaning higher consumer mortgage rates).<\/p>\n Tuesday:<\/strong> Stocks opened lower and then gained ground as the day progressed.\u00a0 The net effect is that mortgage rates stayed predominantly the same as they ended on Monday.<\/p>\n Wednesday:<\/strong> The US Treasury Department auction of $24 billion of 10 year notes came and went as expected \u2013 a view that US debt remained healthy.\u00a0 Since everything happened as expected, rates once again remained fairly consistent.<\/p>\n