Rates / Stock Market

Mortgage Rates and the Stock Market: Understanding the Relationship

(6/21/2013) When the stock market is volatile, homebuyers and potential borrowers alike may feel a sense of anxiety.

Recent news that the Dow suffered its largest loss of 2013 and the Nasdaq continues to fall has made many investors and economic analysts start to panic. What does this mean for mortgage rates? Will interest rates, and our monthly payments, skyrocket?

The actual relationship between mortgage interest rates and the stock market is complex, but something that borrowers should understand to feel comfortable with the current housing market.

How are interest rates determined?

At its most simple, interest rates for mortgages are determined on the basis of various economic reports. Data on stock and bond behavior in the stock market, the amount of buyers to sellers that affects the movement of money in and out of the stock market, unemployment percentages, and more can affect interest rates. Generally, if data shows hesitancy or confusion, mortgage rates may fall. If data shows a strong economy and low unemployment, rates may rise.

How do interest rates and the stock market interact?

There's a difference between the interest rate charged when you buy a home versus the interest rate referred to in terms of general economic strength and the stock market.

The interest rate that applies to investors is the U.S. Federal Reserve discount rate. This is the cost that banks are charged for borrowing money from Federal Reserve banks. Why is this number so important? Basically, to control inflation, the Fed can increase the discount rate and attempt to lower the supply of money by making it more expensive to obtain.

When the Fed does this, it becomes more expensive for banks to borrow money. Banks increase the rates they charge their customers for loans, increasing credit card and mortgage interest rates. Monthly payments increase, and households have less money each month to spend.

Businesses are affected by people spending less money, but they are also unable to borrow as much due to higher interest rates. This decrease in spending can slow the growth of a company, resulting in decreases in profit.

Now comes the stock market. Valuing a company and its stock is partially dependent on future cash flows. If a company is making less profit or spending less on growth, this lowers the company's stock. Investors don't want stocks that are decreasing in value, so stock ownership is less desirable. The market goes down.

In this very simplistic summary, you can see then that higher mortgage rates may affect the stock market adversely as part of a general economic trend.

Can a volatile Stock Market influence mortgage rates?

Increased mortgage rates often mean a decreased stock market. But it's not always that simple.

As noted earlier, one of the determining factors of interest rates for mortgages is the movement and relationship of stocks and bonds. Stocks and bonds compete for investment money, as only so much money exists in the market.


Other related articles:

The eRate Resource Guide to No-Closing-Cost Refinancing

High-cost areas benefitting from jumbo loan boom

Mortgage credit slowly loosening, but many restraints still in place

Poorly Rated: A Look at the Landmark Lawsuit Against S&P

Erate Update: Which Way Mortgage Rates?

Mortgage rates forecast to rise, albeit slowly in 2013

Fannie Mae & Jumbo Mortgage Rates

Just One Click! = Current Rate Chart

Pennsylvania Mortgage Rates Current Mortgage Rates - Hawaii Current Mortgage Rates - Alaska West Virginia Mortgage Rates Virginia Mortgage Rates District of Columbia Mortgage Rates Maryland Mortgage Rates Delaware Mortgage Rates New Jersey Mortgage Rates Connecticut Mortgage Rates Rhode Island Mortgage Rates Massachusetts Mortgage Rates New Hampshire Mortgage Rates Vermont Mortgage Rates New Hampshire Mortgage Rates Maine Current Mortgage Rates Vermont Mortgage Rates Current Mortgage Rates - New York Current Mortgage Rates - Michigan Current Interest Rates - Wisconsin Current Mortgage Rates - MINNESOTA Ohio Mortgage Rates Current Mortgage Rates - Kentucky Current Mortgage Rates - Indiana Illinois - Current Mortgage Rates Current Mortgage Rates - Iowa Missouri Mortgage Rates Current Mortgage Rates - North Carolina South Carolina Mortgage Rates Current Mortgage Rates - Florida Current Mortgage Rates - Georgia Current Mortgage Rates - Tennessee Current Mortgage Rates - Alabama Current Mortgage Rates - Mississippi Current Mortgage Rates - Louisiana Current Mortgage Rates - Arkansas Current Mortgage Rates - Oklahoma Current Mortgage Rates - TEXAS Current Mortgage Rates - New Mexico Current Mortgage Rates - Arizona Current Mortgage Rates - Kansas Current Mortgage Rates - Nebraska Current Mortgage Rates - Colorado Current Mortgage Rates - Wyoming South Dakota Mortgage Rates Current Mortgage Rates - North Dakota Current Rates - Montana Idaho Current Rates Washington Mortgage Rates Current Mortgage Rates - Oregon Current Mortgage Rates - Utah Current Mortgage Rates - Nevada Current Mortgage Rates - California

Start by selecting your state

Get the Updated and Improved Mortgage Rates App from ERATE.com

iPad for Mortgage Rates

Get the Updated and Improved Mortgage Rates App from ERATE.com

ERATE iPhone App - iTunes

FREE Mortgage Rate Widgets
Your State's Rates or National Rates
Get this Widget for any State you want