General Question

gorillapaws's avatar

What are the macroeconomic forces that influence mortgage rates?

Asked by gorillapaws (23009points) November 17th, 2010

I have a pretty solid understanding of basic macroeconomics, but I’m unclear how the mortgage rates factor into the bigger picture. Most bonds tend to have an inverse relationship with the major stock indexes as I understand it (when the market is bullish, people want stocks, and when it’s bearish they want bonds). Demand for bonds usually drives up rates. Does this logic also apply to the mortgage market as well?

If I’m hoping lending rates fall back to where they were last week, what should I be tracking in the market? Is there a ticker? Do I want to see the DJIA go up? If you had to guess, what are the odds that rates will go up vs. going down over the next week or so?

Observing members: 0 Composing members: 0

7 Answers

Cruiser's avatar

Personally I don’t see rates going up anytime soon. Check with your local Realtor and review the numbers of houses for sale. Right now there are a LOT in my area and the ratio of house for sale and qualified buyers is way off. This is a major factor at play. The glut of homes for sale is keeping home prices low, mortgage rates low and thwarting new housing starts. All 3 factors under so much pressure IMO will keep things stagnant for a good while longer. I think the Fed will have to do something in terms of tax incentives or lending incentives to get things moving again.

Other forces is simply jobs and pay. People have not had raises that I know of and the lack of good jobs with all the layoffs and such a huge part of our work force underemployed have stifled the housing market bug time!

zenvelo's avatar

Funds available by banks for lending depend on the relative return compared to all other possible investments by the bank, and the ability to layoff risk, such as by securitizing the mortgages and buying credit default insurance. So funds are available at current rates, but the second part, risk reduction, has been severely impaired, and thus only the most credit worthy are able to get a mortgage.

wundayatta's avatar

Google provides a comparison service, as does LendingTree.

I don’t know if there’s anything you can track in the markets to give you a heads up. People watch the Fed’s behavior with interest rates and making money available. The mortgage rates follow a different pattern compared to bonds. They aren’t as linked to the stock market, I don’t think. It has more to do with money supply. When there’s a lot of money lying around, mortgage rates tend to be lower. When people are all borrowing and there’s less money lying around, the mortgage rates go up.

I’m just guessing here. I’ve never really thought about mortgage rates until lately, when the Fed started pumping money into the system in order to reduce mortgage rates.

gorillapaws's avatar

@wundayatta I’m following your logic, but there’s one aspect I don’t quite understand. If the money supply increases, that tends to cause inflation to rise. Knowing this, why would banks be incentivized to make loans locked in at rates that might get repaid with devalued dollars?

wundayatta's avatar

Well, it all depends on the current market conditions, as well as events around the world. The Fed just threw a lot more money to the banks. Turns out inflation worries were badly off. The dollar’s value, instead of declining, is increasing. This has to do with the European debt situation. People are flooding towards dollars.

Even if we hadn’t had the European situation, the economy is close to or in deflationary mode. That’s worse than inflation, because everyone holds off on spending until their dollars are worth more. Inflation encourages people to spend now, while their dollars are worth more, instead of waiting. And we need spending like a drunkard needs a pissoir.

You want a little inflation. I don’t know what the ideal level is. Maybe two to three percent. We have barely one percent, if that, right now. We need to prime the pump, make loans cheaper so that people will be encouraged to buy now, before rates go up, perhaps due to inflation.

Inflation is not always your enemy. There can be too much fiscal tightness. We are in complicated times, and events such as the recent dumping of new money into the system, which we would expect to lead to inflation and devalue the dollar has had the opposite impact.

It’s all relative. Relative to so many other things that even the best economists are surely guessing most of the time. Who would have predicted the European debt crisis (or whatever it is) would come along just when we want the dollar to get cheaper?

Oh, as to banks making loans in times of inflation—that’s the risk they take. Inflation is always rising or falling, and lenders and borrowers are always making bets on which way inflation will go. It never stops lending from happening. What stops lending is lack of confidence. Inflation is not a problem, per se. Banks just raise rates or lower them, depending on the markets. Inflation gets to be a problem when it exceeds five percent (I’m guessing). We are far from that, now.

gorillapaws's avatar

@wundayatta thanks, that explanation made a lot of sense.

zenvelo's avatar

30 yr mortgage rates are no longer as closely tied to 30 yr treasury rates, because the banks don’t hold the mortgage that long. Once they have enough to bundle, they are securitized and the bank gets its capital back. That’s why they will lend money during times of inflation.

Answer this question




to answer.

This question is in the General Section. Responses must be helpful and on-topic.

Your answer will be saved while you login or join.

Have a question? Ask Fluther!

What do you know more about?
Knowledge Networking @ Fluther