You’ve seen it before: The economy is booming, stocks are rising, and mortgage rates follow suit. But then, stocks fall, and mortgage rates are falling, too. Is there a connection between the two? If stocks move, are mortgage rates guaranteed to move in the same direction?
The stock market doesn’t have a direct influence on mortgage rates, but noting the direction can usually provide insights into what’s happening overall with the economy and where we can expect things to move.
Read on to learn the factors that influence mortgage rates, the relationship between the stock market and mortgage rates, and the Federal Reserve’s connection to the two.
What kind of factors influence mortgage rates?
There are several factors that influence mortgage rates. Generally, larger economic factors are more of a driving force than anything. These influencing pieces include the following:
- Economic growth
- Federal Reserve actions
- Mortgage-backed securities (MBSs)
- Home sales
- Individual factors (credit score, debt-to-income ratio*, etc.)
During periods of economic growth, where the job rate and consumer spending is high and home sales are rising, mortgage rates tend to be higher. The opposite happens when the economy is struggling. This is what we saw in 2020 due to the COVID-19 pandemic: The unemployment rate was high and consumer spending was low. This lessens the home loan demand and brings mortgage rates down.
Lenders only have so much money available, and when home sales are low, mortgage rates are forced to go low.
The largest influence for mortgage rates, however, comes from MBSs. These are asset-backed securities that work similarly to a bond, made up of a bundle of home loans. Read on to learn more about MBSs.
*Debt-To-Income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
What are mortgage-backed securities?
Once a bank or mortgage company makes a loan, they sell it to an investment bank. They then can make new loans with the money they get from selling the loans. Investment banks bundle loans with similar interest rates together, and these bundles are MBSs.
These complex investments essentially determine mortgage rates. When the price of MBSs increase, mortgage rates drop. When they decrease, rates rise.
Investors most often choose to invest in stocks or bonds. When the stock market is on the rise, investors often will sell some of their bonds to invest in stocks, and vice versa. This push and pull is one way the stock market and mortgage rates relate to each other.
How does the Federal Reserve impact mortgage rates and the stock market?
The Federal Reserve is another indirect influencer for mortgage rates, but it has a fairly direct impact on the stock market. This agency is essentially the nation’s bank, and it needs to maintain a stable economy. Since the Fed needs to maintain the dollar’s value, if inflation gets too high, it might need to raise its funds rate. This will push other rates up as well.
On the other hand, the economy will fall into a recession if it slows down too much. So the Federal Reserve makes adjustments to help stabilize the economy through interest rates. Rising rates help a fast-growing economy, and lowering rates helps boost a slow economy. Low rates encourage consumer borrowing and spending.
With mortgage rates, however, the Federal Reserve does not directly set rates, but its actions do indirectly affect the rates for fixed-rate mortgages when it comes to refinancing or taking out a new mortgage. Changes made to the federal funds can potentially move the rate on the 10-year Treasury, which are government-issued bonds. Mortgages more closely track the 10-year Treasury rate.
The relationship between the stock market and mortgage rates
Overall, despite the different direct influences, the stock market is affected by the same economic factors affecting mortgage rates. Witnessing a rise and fall from either end can provide clues as to how the other may move.
When the economy is booming, your stocks will be rising, but it might be more expensive to get a mortgage. And if the economy is struggling, you’ll be losing money on your stocks but get a great rate on a mortgage loan.
This should not be the defining factor driving important mortgage decisions, though, because there are many moving parts. If you’re looking to get a mortgage or refinance, it’s best not to look to stocks, but instead to examine more of the economy basics: unemployment rate, wage growth, and inflation.
Also, examine the 10-year Treasury bonds. When bond yields fall, mortgage rates generally do, too.
Get support for your mortgage decisions
Navigating all the various markets and deciding when is the best time to get a mortgage or refinance can be difficult and confusing. Plus, your own individual factors affecting your personal rate within the current mortgage rate range is a whole other aspect to work through, and one that you have much more control of.
The good news is you’re not alone throughout this process. The professional, experienced loan officers at Homefinity are ready and excited to help you navigate the entire process from start to finish, with as much involvement as you desire. Whether you are completely comfortable and familiar with the process or need support and guidance every step of the way, we will meet you where you are.
Plus, if you want advice on how to get the best rate for you, we can help you get to where you want to be. Your situation is unique, and with our analytical industry knowledge, we can offer you the honest recommendations you need.