Why Bad News Can Be Good for Home Loan Rates
It seems counter-intuitive that negative economic news can actually be good for
home loan rates, but there’s a pretty simple explanation.
First,
remember that big money managers in search of higher returns avoid holding onto
cash by investing in both stocks and bonds.
Second,
despite what the financial media often report, home loan rates are based on the
performance of mortgage backed securities—a type of bond.
Third,
prices of stocks and bonds respond to a supply-and-demand dynamic, just like
anything else in the economy.
Putting
these facts together, it begins to make sense that when the economy is “on
fire” and economic reports are on the uptrend, investors tend to put more money
into stocks. That’s because stocks offer higher returns, even though they are
generally more risky.
However,
in order to put money into stocks, investors must remove money from less-risky
bonds. The result is a decreased demand in bonds causing bond prices to worsen,
and therefore home loan rates to go higher.
On
the other hand, when the economy is sluggish, world news is unstable, or
economic reports are negative, money managers tend to take money out of higher-risk
stocks and move it into less-volatile bonds. As demand for bonds increases,
bond pricing improves and home loan rates go down.
While it may seem odd that
home loan rates improve when economic news is sluggish, it actually makes sense
when you look at the bigger picture!
