How Stock Market Affects Mortgage Rates And Housing Markets

There is the general par mortgage rates for prime borrowers. However, lenders will hit borrowers with loan level pricing adjustments, also referred to as LLPAs. LLPAs are pricing hits based on the individual borrower due to the following:

  • Credit scores
  • Loan to value
  • Type of occupancy
  • Type of property
  • Debt to income ratios
  • Loan amount
  • Property location
  • Manual versus automated underwriting system 
  • Other risk factors

Prime borrowers are folks with over 760 FICO, 80% LTV, lower DTI, and other compensating factors.

How Stock Market Affects Mortgage Rates According To Experts

In general, if the stock market drops or is in a bear market, mortgage rates also drop. With the recent stock market selloff and the coronavirus epidemic scare, mortgage rates are dropping. Uncertainty in the market also makes the mortgage rates drop since the stock market selloff.

Michael Gracz of Gustan Cho Associates said the following:

The mortgage interest rate available for an individual borrower is based on the borrower’s financial history and current status. When it comes to the range of rates available to all borrowers on a given day, several economic factors are involved, including conditions on the bond market, inflation, and housing demand. The correlation between mortgage rates and the stock market is less direct. Although there is no direct relationship between mortgage rates and the stock market, it can be argued that an increase in mortgage rates results in lowered levels of discretionary income and, consequently, a decrease in stock market investment. However, a variety of other factors, such as government intervention and the housing market as a whole influence this situation.

Bond Market Influence On Mortgage Rates

Mortgage lenders do not hold 30-fixed rate mortgages for the life of the term.

  • They package and bundle up the mortgage loans and create mortgage-backed securities (MBS)
  • Mortgage-backed securities are also referred to as mortgage bonds
  • These mortgage bonds are then sold on the secondary bond market
  • The bond market will have an impact on mortgage rates

Mike Gracz continues:

When there are a lot of mortgage bonds being purchased for investment, you are more likely to get a lower mortgage interest rate. When there’s lower demand for this type of bond due to competing investing opportunities, mortgage rates rise. The U.S. government has an interest in keeping inflation low since high levels of inflation cause a decrease in the value of the dollar on the international market. The Federal Reserve, the nation’s central bank, monitors the behavior of the bond market and will intervene to stimulate the economy by lowering the mortgage rate. This is accomplished by buying enough mortgage bonds to lower the interest rate. If raising the interest rate seems appropriate, the Federal Reserve will sell mortgage bonds while raising the Fed Funds rate, which is the rate at which banks borrow money from the Federal Reserve for investment. When there’s uncertainty in the economy, many investors look for safer places than the stock market to put their money. Bonds, in general, are seen as a safe investment, including mortgage bonds. When more investors seek the safety of mortgage bonds, the increased demand leads to a drop in interest prices. On the other hand, when the economy is doing well and the stock market is outperforming bonds, then mortgage bonds are sold off and the mortgage interest rate rises. In this case, the stock market is not driving the mortgage rate but it does play a role in whether it goes up or down.

Housing Inventory Versus Demand

What is the difference between housing stock and demand

Housing numbers, such as new construction housing starts and other housing data affect mortgage rates. Mortgage companies will increase mortgage rates when there is a shortage of housing inventory and housing demand is high. Excess and surplus of housing inventory and fewer demand for housing will yield lower mortgage rates. Mortgage rates are very volatile and affected when housing inventory is higher than the demand for housing.

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