If you’ve been paying attention lately to mortgage rates, you’ve probably noticed they’ve been on a downward trend. Over the past year as the economy showed gradual signs of healing, mortgage rates had been on a slight climb. If you want, you can follow rates and check out the trends at various sites but I use Freddie Mac’s weekly mortgage rate survey. It’s free and readily available with a couple of Google searches.
But recently, as in the past week or so, rates have taken a U-turn and are falling. In fact, within just a few days, 30-year fixed rates have fallen by nearly 0.25%. About one year ago, they were nearly a full percentage point lower. After a long climb, rates are beginning to soften. And this is without the Fed doing much of anything other than what has already been telegraphed.
But let’s step back and understand how mortgage rates rise and fall. And it’s not a direct result of anything the Fed did. To understand rates, you must understand bonds. The price of a bond can rise and fall based upon market conditions as well as investor expectations as to the performance of the economy. Investors primarily have a choice between a stock or mutual fund and bonds.
Bonds don’t really provide the investor with any substantial gains but investors don’t put money in bonds for a financial return. Instead, the value of a bond is safety. When investors purchase a bond, they know in advance what they’re going to receive. The bond’s yield to the investor won’t change. Mortgage rates are tied to bonds and when the price of a bond rises, the yield will then fall in the opposite direction.
Why would the price of a bond rise? Just like any other commodity it’s due to demand. When the demand of product or service increases, the price moves up accordingly. Right now, bonds look pretty attractive compared to more speculative options found in the stock market. Demand can rise and fall due to economic situations or predictions but can also be affected by geopolitical events.
In times of international uncertainty, money moves out of the more speculative investments and into the safety net of bonds. It’s easy to figure out these days when you turn on the news that we’re in the middle of some rather significant geopolitical concerns. As these concerns continue to mount, we can expect rates to continue to fall. It’s certainly an unfortunate way to have rates move down but that’s what we’re experiencing now. You can always count on sudden geopolitical instabilities to make investors seek the safety of bonds and away from Wall Street.
If you’re in a situation of watching rate moves with a purchase or refinance in mind, it’s a probably a prudent choice to lock in these rates and take advantage of the drop. This is something to go over with your loan officer. Remember, no one knows where rates are headed. All of these geopolitical actions could very well end tomorrow. But like I said, no one can tell you where mortgage rates are going to be both short or long term in today’s environment.
