Forecast For The Week
With earnings season behind us, investors will be deluged with a slew of economic reports that will touch on many segments of the U.S. economy:
In addition to those reports, European headlines will continue to dominate the news as the debt woes in that region plague the global economies. Also, the minutes from the Fed’s April meeting of the Federal Open Market Committee will be released and this could move the markets.
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of Bond that home loan rates are based on.
When you see these Bond prices moving higher, it means home loan rates are improving — and when they are moving lower, home loan rates are getting worse.
To go one step further — a red “candle” means that MBS worsened during the day, while a green “candle” means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.
As you can see in the chart below, Bonds and home loan rates reached record best levels last week. I’ll be monitoring the markets closely this week to see what happens next.
Chart: Fannie Mae 3.5% Mortgage Bond (Friday May 11, 2012)
The Mortgage Market Guide View
Why Bad News Can Be Good for Home Loan Rates
It may seem odd that negative economic news can actually be good for home loan rates, but there’s a pretty simple explanation for this phenomenon. Here’s a concise explanation you can share with your clients or you can use to gain a better understanding yourself.
First, we need to remember that big money managers who are in search of higher returns avoid holding onto cash by investing in both Stocks and Bonds.
Second, we need to dispel the myth about how home loan rates are determined. Despite what it may sound like in news stories covering the Federal Reserve’s meeting, home loan rates are based on the performance of mortgage-backed securities — which are a type of Bond.
When we put those two points together, we see that whenever the economy is on fire and there are good economic news reports, investors tend to put more money into Stocks. That’s because Stocks offer higher returns, even though they are generally more risky. To put money into Stocks, however, investors must remove some of their money from less-risky Bonds. The result is a decreased demand in Bonds that causes Bond prices to worsen, which causes home loan rates to go higher.
Inversely, when the economy is sluggish and economic reports are negative, money managers tend to take money out of higher-risk Stocks to put it into less-risky Bonds. As demand for Bonds increase, Bond pricing improves and home loan rates go down.
So while it may seem odd that home loan rates improve when economic news is sluggish, it actually makes sense when you look at the big picture.
If you have any questions about how the economic news is impacting home loan rates, please just comment, call or email. I’m always happy to chat about what’s happening in the markets and what it means to home loan rates.
Economic Calendar for the Week of May 14 – May 18
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