The Economics of Interest Rates & How They Work

Toni (a client of mine) asked me an interesting question today,

"It's great that interest rates are low. But how do we know whether they'll remain this low?"

It's such a great question I thought I would hi-light it here along with the answer.

Now we all know that mortgage interest rates fluctuate daily! But here's why and how it works...

Stocks and Bonds compete for the same investment dollar. This means that investors can choose to invest their money in the Bond Market or they can choose to invest their money in the Stock Market.

When the economy is doing bad, it creates negative consumer sentiment; or in this case, negative investor sentiment. So in the face of negative economic news, such as a poor Jobs Report for example, investors look for a safe harbor; in this case Bonds!

Since there now exists additional money being invested into these vehicles (Bonds via Mortgage-Backed Securities), interest rates no longer need to be as high in order to attract the investment (in other words, rates don't need to be sold at a higher premium, a.k.a. higher rate, to attract investors). Thus, INTEREST RATES ARE LOWER and Lenders see better pricing on their rate sheets!

So although bad economic news seems contradictory, we're all almost silently rooting for a slightly bad economy as in translates to greater purchasing power by way of lower interest rates.

My guess is you're wondering, or rather hoping, that rates will remain low as we move on ahead. Am I right?

Well, if you're wondering what daily mortgage rates look like,

Visit the "Daily Mortgage Update" section here on The Industry Report

or

Visit The Industry Minute for a more condensed version of these reports (don't worry, it's free to join and follow The Industry Minute).

Comments

[Darrylgc]

thats for sure, dude

[Bill Gassett]

Ricardo Excellent work. There are many that do not realize how the bond market can have a great impact on mortgage rates!

[Ricardo Bueno]

Bill,

Thanks for the feedback! The Bond Market certainly drives rates so it's always important to stay updated.

Thanks again for visiting. Will be glad to have you back again.