A couple of weeks ago we were at 3.5%, now eveythng I see is close to 4%. What drives rates? by ShamusG from Midland, Texas. May 28th 2013
Many things drive rates, but the major driving force is the going price for mortgage backed securities (MBS).. When good economic news hits and wall street goes crazy, investors are flocking to purchase and sell stocks, and the bond market get's ignored.. to drive some business to the MBS, they have to lower the price which in turn raises the interest rates.. When wall street is having a bad day, and stocks are performing poorly, investors flock to the bond market, and it drives up the prices of the MBS, which in turn lowers the interest rates.. Bottom line.. Good economic news is usually bad news for low mortgage rates.. I'm a Broker here in Scottsdale AZ and I only lend in Arizona. If you or someone you know is looking for financing options, feel free to contact me or pass along my information. 480-287-5714 WilliamAcres.com
The simple story is this... The FED has been propping up mortgages by being the primary buyer of mortgage backed securities. Without them buying these securities, the entire mortgage system would collapse. While they have, and continue to say they will buy the securities for the immediate future, there are signs that this policy may be changing, with a pull back of the buying. This is mostly due to the slowly improving economy. Simply put, rates may be slowly starting to return to where the market should be if supporting itself, and not being propped up by the Fed.
Currently what is driving the rates up is the fact that more of the money is being put into the stock market, with its rising values, to try to get a better return. In many cases this means that people may be pulling money out of the bond market whose rates are pretty stagnant, but whose values are going down. This is all being driven by the "good news" about the employment picture and the lack of crises in European markets.
Hi Shamus, Mortgage rates are driven by the price of mortgage backed securities (MBS). The Price of MB Securities is a indicator on the perceived health of the economy. More news that is perceived as good the price of MBS are driven down and as a result interest rates rise. There are many other factors that drive the price of MBSes but in recent weeks it has been economic news mostly. The better the news the higher rates will goe.
Money is being moved into the stock market, pushing down the value of bonds, thus causing interest rates to increase.
Inclusive to all this is that in Bernacke's interview last week the simple question asked of him of "When will the Feds be ready to stop purchasing mortgage backed securities?" and he answered in the next couple meetings if the data shows comes out and shows that it would be sustainable for them not to. WHOA!! the Market wasn't ready for that and the there was huge rush of mortgage bonds investors that pulled out of the bonds market because there is a meeting Next month in June and then again in July and September. With him stating that struck fear in what is coming on the Horizon. With all that being said rates are still below the 52 week average.
The Federal Reserve is thinking to stop buying bonds
All these people are right to a certain extent. But what sparked this latest surge is the Fed's announcement that the Fed could ease up on its quantitative easing program. You see for the past several months the Fed has been purchasing bonds and that has kept the price of the bonds high and the rate low at artificial levels. The Fed has maintained it would keep purchasing bonds in an effort to spur the housing market, existing and new construction into 2015. The markets react to perception more so than fact. So when the Fed said that they could slow down or even stop the quantitative easing program of the purchasing of bonds well before 2015, that sparked speculators to think that the price of the bond will go down and force rate to go up. You don't want to be the person who bought the bond at a high price and had to sell at a low price and loose money. Because of the perception that the Fed will make a move everyone is selling there bonds before the price really drops forcing the rates to sky rocket. No one wants to be caught holding the proverbial hot potato.
Look at the 10year Treasury - It is over 2%- Stock Market is off a bit today, but still at historical highs, Mortgage Back Securities( MBS)are priced lower- Add this up, Higher interest rates -
There are multiple factors driving rates higher. However, the simplest answer lies in the Fed. There were statments made last week by Fed Chairman Ben Bernanke in which he indicated that the Fed MAY start TAPERING their bond purchases. That caused some panic selling in the bond markets as nobody wants to own those securities once the Fed begins unwinding their positions and this selling has caused rates to move higher. The Mortgage Backed Securites (MBS) market is the mechanisim that drives mortgage rates. These securities will cause rates to FALL when their price GOES UP and vice versa. MBS prices are down almost 500 basis point since the begining of May. While there may have been some valid concerns about the Fed exiting the MBS markets, we believe the selling is over done and we will see rates rebound from current levels. However, whether rates get back to the levels they were at at the begining of May is a question no one can answer. Simply put, if you were waiting to pull the trigger on a loan waiting for rates to improve, you should do so soon as you may not get another chance.
I agree with all the previos answers.
Just like the price of oil per barrel affects the price of gas at the pump, Mortgage Backed Securities drive the price of mortgage rates. It's not necessarily the corner gas station competing across the street that affects the price per gallon of gas. You might see a penny or two difference, but it is more related to the markets. Sometimes I wish we could set our mortgage rates once per day like the gas stations are forced to. (Otherwise the gas prices would go up before people went to work or after they got off work when the rush was happening, wouldn't it?) Anyway, there is the short answer... MBS market. The long answer? Knowing where rates are headed is the job of the market makers, hedge fund managers and our secondary marketing lock desk people... anticipating what the rates will do. I watch this stuff like a day trader... not jumping off any buildings this week, but it's been a bit brutal to say the least. Short theory... it's supply and demand. When more investors are buying MBS financial instruments, the yield (returns) can go down. When less are buying, the yield has to go up in order to entice more investors. Higher yields equal higher rates. Many times if stocks are suffering, investors are flocking to safer investments with lower returns like Treasury Bonds and MBS. Depending on the economic data released... if it's bad news for the economy, rates might bounce back a bit... or if good news, they may continue their decline. The Fed has a direct impact now as well, and threatening to pull out of buying more MBS caused a panicked sell off of sorts. (Less investors, higher yields to entice them back and higher rates...) This is WAY over simplified here, but it's a general truth. Doesn't always work that way, but most of the time it does. The trick to getting the best rate for your situation isn't always by shopping from corner gas station to station... It is being in the right position to lock your loan at the right time and working with someone who can help you strike while the iron is hot. Seeing rates published on the web or on the 5:00 news is too late. We work in real-time market activity and a morning rate published can change dramatically during the trading day. If you want more education on this and of course for your specific situation, let me know. Our company is licensed in TX and we have Loan Officers covering your area. Glad to help!
Quite frankly, its an oversold market. The FED whispered he might move up the easing process IF IF IF the economy continues on its slowly recovering path. Will that be the case, not so sure still at 7.5% UR, yes consumer sediment 2 months in a row is great, but look at the fine print and the main source of the polling are wealthier people. I feel there are a lot of bumps in the road ahead and a slow crawling recover is at best, due to not only our job loss, but the rest of the world, Europe still has major UE the UK just announced the are at 7.9% other countries are in the 20's %. China is slowing down, emerging markets also are slowing in LAR and Mexico. So the reason why we are oversold is that Bond traders can be on the wrong end with billions of dollars on the line, so the FED's whisper ad a few good reports in a row with a higher stock market was to much to overcome. I fee our new floor is 3.75% with rates jumping up to 4.25 ish for the next 12 months.
The economy is recovering, resulting in rising interest rates.
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