One of the most common questions that people ask me is…

“What causes Mortgage Interest Rates to go…

UP or DOWN?”

THE ANSWER, unfortunately, is not exactly straightforward. The Economy is a complex animal, and there are many factors that influence Mortgage Interest Rates.

Mortgage Interest Rates are influenced on a daily basis more by Market PERCEPTION than Particular Numbers or Data. Rates can change daily, and sometimes even during the course of a day based on Economic Events that happen throughout the day.

Generally speaking, if commentary by key Government Agencies or Economic Data that is released indicates a weaker Economy, Mortgage Interest Rates will get better during that day. If commentary hints toward a strengthening Economy, Mortgage Interest Rates will get worse.

Here are a few of the most important Economic indicators that are released each month:

• Consumer Price Index- A measure of the average price level paid by consumers on over 200 goods and services.
• Retail Sales- A measure of total receipts of retail stores, adjusted for seasonal variations.
• Chicago PMI- Opinion surveys of over 200 Chicago purchasing managers regarding the manufacturing industry.
• Employment Report- Measures of Jobless Claims, Continuing Unemployment Claims, Hourly Earnings, and Job Creation.

So why do these indicators influence Mortgage Interest Rates?

Home Loans are secured by Mortgage Bonds. Bonds are safe Investments in difficult Economic times because they offer investors a Safe, predictable, Rate of Return.

So, when the Economy is WEAK, investors tend to put their money in Bonds and pull it out of riskier Investments such as the Stock Market.

As the demand for Bonds goes up, Bond issuers do not have to pay as high of a Yield to attract investors, hence Bond Yields fall.

Since Mortgage Interest Rates are tied to Mortgage-Backed Bonds, Mortgage Interest Rates therefore fall.

The opposite is true when the Economy is HOT.

Investors are flocking to the Stock Market and other riskier Investments in an attempt to make a greater return on their money.

Therefore, Bond issuers must offer higher Yields in order to attract investors to their lower-yield alternative. Hence, Mortgage Interest Rates rise.

Another important thing to understand is how inflation influences Mortgage Interest Rates. Inflation erodes the value of the Dollar, and hence, erodes the value of a long term Investment relative to today’s Dollars.

Mortgage companies must charge higher Interest Rates in order to offset the long term Economic effect of the erosion of the value of their Investment which is backed by Mortgage Bonds.

Therefore, when inflation is higher than “normal,” Mortgage Interest Rates tend to go UP.

One common misconception is that when the Federal Reserve Board raises Rates, Mortgage Interest Rates correspondingly go up.

This is a Myth and is simply NOT TRUE.

When the Federal Reserve raises Rates, they are raising the Federal Funds Rate- the Interest Rate on overnight loans between Banks.

The commentary of the Federal Reserve and the Market perception of their stance on the Economy is more important. The Federal Funds Rate is NOT TIED to Mortgage Interest Rates.