Mortgage Rates vs. Stock Market

May 10, 2010 No Comments »
Mortgage Rates vs. Stock Market

Mortgage match-ups: “Mortgage rates vs. stock market.”

With all the recent stock market volatility, you may be wondering what effect such events have on mortgage rates.

Well, put simply, when economic fears rise, as they did last week, investors flee the stock market and head toward safer U.S. Treasury bonds, like the benchmark 10-year bond.

As a result, yields for those bonds plummet because demand is so strong that a higher yield isn’t necessary to lure in investors.

And because the 30-year fixed tends to follow the direction of the 10-year bond yield, both up and down, mortgage rates fell.

Stock Market Fear = Lower Mortgage Rates

Last week, the stock market plummeted thanks to fears of major default in Europe, but after a bailout package was announced today, stocks surged higher.

Mortgage rates will also climb higher on the news, though they may stay lower longer thanks to the general uncertainty in the air.

This is good news for prospective homeowners, as mortgage rates were expected to keep climbing throughout the year while the economy supposedly improved.

But a bit of a catch-22, as lower mortgage rates mean more economic unrest, which translates to stagnate or even lower home prices, though a lower mortgage rate may mean a lot more long term than a lower home price.

(Home prices vs. mortgage rates)

Mortgage Rates Follow the Stock Market

As a rule of thumb, bad economic news sends mortgage rates lower, while good economic news pushes mortgage rates higher.

Stocks move in much the same way, except of course higher stock prices are seen as a positive and higher mortgage rates are viewed quite unfavorably, rightly so.

So when stocks rise, mortgage rates also tend to rise. And when stocks fall, mortgage rates generally fall as well.

This could lead to disappointment if you’re keeping one eye on your stock portfolio and another on mortgage rates, assuming you’re in the market to refinance. Your stocks may be up, but mortgage rates won’t be as low.  Conversely, your stock portfolio could be in the dumps while mortgage rates inch lower. Think of this as a bittersweet, but often unavoidable situation.

Keep in mind, however, that this is just one of many factors that determine mortgage rates, and a change in stock prices may not always indicate a similar change in rates thanks to the complexities involved.

Tip: What mortgage rate can I expect?

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