Why Bad News Can Be Good for Home Loan Rates
It's counterintuitive that negative economic news
can actually be good for home loan rates, but there's a pretty simple
explanation, and once you "get it" it makes perfect sense.
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 reports, home loan rates are based on the performance of Mortgage Backed Securities—a type of Bond.
Putting these two 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 some of their 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 and 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 increase, 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!
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 reports, home loan rates are based on the performance of Mortgage Backed Securities—a type of Bond.
Putting these two 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 some of their 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 and 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 increase, 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!
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