Mortgage rates are influenced by a variety of factors, rather than moving in lockstep with any one economic indicator.
Equity markets compete for the same investor dollars as do mortgages and bonds, and a rising stock market may see investors selling some bond holdings in order to capitalize on stock gains. To the extent that money is shifted–bonds sold to free up cash–this can cause mortgage rates to increase somewhat.
That said, the stock market does not have any direct influence on mortgage rates, but watching stock market movements can sometimes offer clues about other issues that might push mortgage interest rates up or down. As well, there's a lot to know about what moves mortgage rates.
Mortgage rates and the stock market
The stock market rises and falls for a wide variety of reasons, including global, economic and political issues, but as a broad rule of thumb, a rising stock market indicates optimism among investors about the economy. When negative financial news is released, such as an uptick in unemployment or renewed concerns about the debt crisis in the U.S. or abroad, stock prices often drop.
When investors sell stocks, they often turn to bonds, at least for a time. While not the only influencing factor, the bond market offers a stronger indication of the likelihood of rising or falling mortgage rates. When demand for bonds is high, bond yields drop.
Mortgage rates and the economy
While stock prices change because of a broad range of influences, mortgage rates are impacted mostly by investors in mortgage-backed securities. Although some mortgage funds come directly from the books of banks and credit unions, most mortgage money is supplied though the sale of loans to those who create mortgage bonds (like Fannie Mae and Freddie Mac).
In turn, demand among investors to purchase these bonds will influence mortgage rates. If demand is low for mortgage bonds, mortgage rates may be raised to entice more investors. In periods of high demand or limited supply, mortgage rates stay low.
Mortgage rates and inflation
Inflation erodes the value of a long-term, fixed-rate investment, so if price pressures are rising, investors look to offset any potential loss of value that may occur by requiring a higher rate of return, and this is passed along to you in the form of higher mortgage rates.
Rather than following the stock market, borrowers who want to understand where mortgage rates are going should watch the rates on Treasury bonds and keep up with today's mortgage rates.
