Falling stock market and mortgage rates

Falling stock market and mortgage rates

Nations Lending loan officers know that economic news can impact stocks and bonds positively, negatively, or inversely. Some believe that there is an inverse relationship between stocks and bonds, when stock prices go up, bond prices go down and vice-versa, remembering that when bond prices go up rates go down, when bond prices drop rates rise. If stock prices drop, traditionally bond prices rise which means interest rates drop.

This is not always true. All one must do is look at the last 30 years, when both bond prices and stock prices have been improving. (The bond price improvement means that rates have been dropping.) But stocks are inherently volatile, and bonds are inherently stable. When you purchase a bond, specifically backed by a mortgage, keep in mind the home loan is someone else’s investment that acts like a bond, and the investor is buying a fixed return for a fixed period.

Because of the volatility of stocks, when there is an “event” that creates uncertainty, investors will engage in “flight to safety,” often taking their money out of stocks. These monies can either be parked in cash or used to purchase fixed-income securities – like bonds. Supply and demand: selling stocks puts excess supply in the market causing prices to drop; buying bonds puts excess demand in the market causing prices to rise-and rates to drop.

Fundamentally, when there is a large sell-off, or correction as we appear to be having, in stocks investors selling their stock holdings purchase bonds causing rates to drop.

Recently however, Investors have been selling both stocks and bonds. The Fed has been taking actions to create higher short-term interest rates. With the expectation for higher rates, with the action by the Fed to slow down its purchases of fixed-income securities, mortgage-backed securities (MBS) have seen prices drop, causing rates to rise. As a reminder, MBS are the financial instruments that are bought and sold, thus determining mortgage rates.

Nations Lending’s clients want to know the impact of falling stock prices on mortgage rates. In this current cycle, there is no impact on mortgage rates from falling stock prices. Falling bond prices (which means higher rates) have had an impact on stock prices, however, causing them to fall. Put another way, the stock market is not a fan of higher rates.