I don’t think it would come as a surprise to anyone that mortgage interest rates have been mostly going up since the beginning of the year. Most people, including some in my industry, lack a basic understanding of what moves the needle when it comes to market mortgage rates. Understand that while there are things that impact your ability to get the best rate available at the time you purchase a home; we really have no control over the overall rate environment.
So what makes mortgage rates move? Is it the Federal Reserve Rate, the stock market, unemployment, or something else? The long answer is all of those have an indirect impact on rates as they play a role in the one thing that directly impacts mortgage rates; Mortgage Backed Securities or MBS. MBS are bonds that are traded on the open market and are considered relatively safe investments. The higher the price of MBS the lower mortgage rates go. So the reason we’ve seen a fairly drastic rise in interest rates since the beginning of the year is that the price of MBS has fallen sharply in that timeframe. Still mortgage rates still sit well below historical averages. So what makes MBS prices move?
Bond traders look at a wide range of economic factors, both domestically and globally, to determine whether they will continue to buy or unload their mortgage bonds. An example of this was in 2016 in an event known as “Brexit”. When Britain voted to leave the European Union MBS prices skyrocketed for several months, bringing rates to their lowest point ever. Fear that European markets would collapse drove investors towards safer investments. When Donald Trump unexpectedly won the U.S. Presidential Election in 2016, many investors saw this as a positive for the economy and MBS started a large sell-off. The result was a pretty rapid increase in mortgage rates.
Generally it takes a major, shocking event such as the ones cited above for MBS prices to move quickly in one direction or the other. So does the Federal Reserve Rate play a role in MBS? Yes! However, it’s not what most people think. Bond traders get a sense of the direction that the Federal Reserve is going with future rate hikes and those are typically priced into MBS way ahead of the actual hike. Example, MBS traders are forecasting a 100% chance of a rate hike in September so when the Fed announces the hike it won’t impact mortgage rates. Bond traders will be paying attention to the rhetoric coming from the Fed chairman and other voting members regarding future hikes. At the last Fed meeting the .25% hike was expected, but when Jerome Powell stated that a 4thhike this year was on the table MBS prices fell because earlier in the year the Fed had projected 3 hikes for the year.
So as you can see MBS react to a number of different economic indicators. Sometimes it’s the Fed, sometimes it is employment data, and sometimes it’s major events. Although higher mortgage rates can be a bummer they are an indicator of a healthier overall economy.
Written by: Mike Tizzano, Fairway Independent Mortgage
Mike Tizzano NMLS #1015837 is a Senior Loan Officer with Fairway Independent Mortgage. Opinions stated in this article are solely that of Mr. Tizzano and do not necessarily represent the opinions of FIMC.