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What Influences Mortgage Rates?
Top 5 Market Factors That Influence Massachusetts Mortgage Rates
Trying to keep track of the market in hopes of the best opportunity to lock in a competitive mortgage rate is challenging for both borrowers and mortgage professionals [incitycommast].
Keep in mind that even though there are multiple generic interest rate trend indicators on the web, there is a difference between what is being promoted and available.
Rates can still change several times a day due to at least 50 different influencing factors in the market, as well as with each individual loan approval and program scenario.
What Causes Massachusetts Mortgage Interest Rates To Change?
The economy is a dynamic, volatile, living and fire breathing animal that borrowers cannot control.
Everyday mortgage lenders base their rates on the activities of the market conditions of Mortgage Bonds also referred to as Mortgage Backed Securities (MBS). On hectic days a lender may have to change their rate pricing several times due to market conditions.
A few other things you can pay attention to in order to help you track the rates for a possible 30 day lock you should take these factors into consideration, such as; Inflation, The Federal Reserve, Unemployment ratings, Gross Domestic Product and Geopolitics as well.
1.Inflation-
According to Wikipedia:
In economics, inflation is a rise in the general level of the prices of goods and services in an economy over a period of time.
When the price level rises, each unit of currency buys fewer goods and services; consequently, annual inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.
As inflation increases, or as the expectation of future inflation increases, the rates will rise higher. This concept is also true; when there is a decline in inflation, the rates will decrease.
Famous economist Milton Friedman said, “inflation is always and everywhere a monetary phenomenon.”
The Public enemy #1 of all fixed income investments, inflation and the expectation of future inflation is a key indicator of how much investors are willing to pay for mortgage bonds, and therefore high or low current mortgage rates will be in the open market.
When an investor purchases a bond, they receive a fixed percentage of the value of the bond as ‘coupon’ payments.
With MBS, the investor may buy a bond that pays out 5%, which means for every $100 that they invest, they will receive $5 in interest each year, usually divided up over 12 payments. For the of a mortgage bond, that $5 coupon payment is worth more in the first year, because it can buy more today than in the future, due to inflation. When the markets read signals of increasing inflation, it tells bond investors that their future coupon payments will be less valuable by the time they receive them. So basically, this is something that causes investors to demand a higher rate for any new bond that they invest in.
2.The Federal Reserve-
As part of of its 2008-2010 stimulus effort, the NY Fed spent almost all of its $1.25 trillion budget investing in mortgage bonds. Many people believe that it was this strategy that kept mortgage rates lower over a 15 month period.
There was a significant amount of change in the lending environment between 2008 and early 2010 that the Fed began its mortgage bond purchasing program, the market was then left to survive on its
own.
Mortgage bonds reacted immediately and quite dramatically when the MBS purchase program was announced in November of 2008. At this particular time, there were not any investors willing to take a risk in purchasing a mortgage bonds. The world economies and the meltdown in the housing market led many investors to stay away from the risks that had anything to do with MBS, this is why the Fed had to assist by stepping in and basically took on the role as the sole investor of mortgage bonds.
However, loan underwriting guidelines have drastically tightened up by 2010, which may have created a little more confidence in the mortgage bond market.
3.Unemployment-
When there is a decrease in unemployment, the mortgage rates will usually rise.
Typically, the result in lower inflation, is due to higher unemployment levels, which makes bonds safer and permits higher bond prices. For Example, the unemployment rate in March 2010 was at 9.7%, just slightly below its higher mark in the current economic cycle.
Every Month, the BLS releases the non-farm payrolls (aka The Jobs Report) which tallies the number of jobs created or lost in the preceding month.
There was an indication in a previous report of 36,000 job loss. Not necessarily a number that will move the needle on the unemployment gauge, but some economists suggest we need about 125,000 new jobs each month just to keep pace with population growth. So that negative 36,000 is more like negative 161,000 jobs short of an improving unemployment picture.
4.GDP-
GDP meaning Gross Domestic Product, is a measure of the economic output of the country. The increase of mortgage rates is signaled by high levels of GDP.
The Federal Reserve will slash short-term rates when GDP slows to encourage people and businesses to borrow money. When GDP gets too hot, there might be too much money floating around, inflation would then usually pick up. So when the GDP ratings are high, the market is made aware of it being so, and in result, the interest rates will rise in order to keep inflation concerns in balance.
Spiking GDP with flat/increasing unemployment begs some questions.
There are two major indicators that help provide more context:
1. Increases to worker productivity- employers are getting more work out of their current employees so they can avoid hiring new ones.
2. A surge in the inventory cycles- when the economy first started contracting, manufacturing slowed down on cutting costs, and sales were made by liquidating inventory.
This is very much similar to a rollercoaster cresting a hill, where one part of the train is going up, and the other is down. The other side will eventually catch up, the way inventories are rebuilt is by manufacturing more than is being sold (demand in supplies). Both surges can throw off periodic reports of GDP.
5.Geopolitics-
Unforeseen events that are related to global conflicts, political events, as well as natural disasters, these are events that tend to lower mortgage rates.
Anything that the market fails to see coming causes uncertainty and panic. When the market panics, money will generally be moved into stable investments (bonds), which reduces rates. Mortgage bonds pick up some of that momentum.
Tsunamis, earthquakes, Acts of terrorism, and recent sovereign debt crisis (Dubai, Greece) are all examples.
Putting it All Together:
There is a daily report on economic data, and some items may have a greater tendency to be of a concern to the market for mortgage rates. If you are involved in a real estate financing transaction, it is helpful to be aware of these influences, or to rely upon advice of a mortgage professional who is already dialed in.
