Last week, after the Federal Reserve announced it would cut the fed funds target rate and discount rates by 25 basis points each, equity prices plunged, with the Standard & Poors dropping 2.5% on the day. Investors and many analysts, worried that the Fed needs to do more to stem the threat of recession, hoped the Fed would cut the discount rate by 50 basis points. The markets ultimately reflected their disappointment. When the stock market shows this kind of volatility, how does it impact the overall financial picture? And will it affect mortgage interest rates for potential borrowers in the market for new homes?
A fluctuating stock market may cause many new home buyers and borrowers to feel anxious about the housing market and the mortgage industry. Will interest rates soar and monthly mortgage payments rise? Not necessarily. The relationship between the stock market and mortgage interest rates are not as directly correlated as one might think. To understand the relationship between the two, let’s first look at how interest rates are determined.
Many different economic factors and reports can impact whether mortgage interest rates will rise or fall. Economic data on unemployment percentages, consumer confidence and spending, the movement and relationship of stocks and bonds and the ratio of buyers to sellers and the flow of money in and out of the stock market (and much more) can all affect interest rates. Basically, if the data shows tentativeness or caution about the economy, mortgage rates may fall. If reports indicate a strong economy and low unemployment, rates may rise.
The interest rate that the Federal Reserve charges banks who borrow money is called the discount rate. If the Fed increases the rate for banks to borrow its funds, it essentially decreases the supply of money available by making it more expensive to obtain funds. The Fed might raise its discount rate to decrease the amount of liquidity in the financial system and control inflation. When this happens, banks then increase the rates they charge for consumer loans, increasing credit card and mortgage interest rates. When homeowners monthly mortgage payments increase and credit becomes more expensive for the consumer, households have less discretionary funds to spend in support of the economy.
Businesses feel the pinch from both sides; they are directly impacted when people spend less money, and the higher interest rates mean they can’t afford to borrow money either. When a company tightens its belt and decreases spending, it can slow company growth and decrease profits. This is where the stock market comes into play. Future cash flows are considered when analysts value a company and its stock. When a company makes less profit or curbs spending on growth, the value of the company’s stock goes down, catching the attention of investors. When investors are concerned that stocks are decreasing in value, they choose not to invest their resources in the stock market, and the market falls.
As a general economic trend, a rise in mortgage rates may adversely impact the stock market. But conversely, the stock market can also negatively impact interest rates on mortgage loans. As we discussed, the relationship and movement of stocks and bonds influences mortgage interest rates. There is a finite amount of resources available in the financial system at any given time, and stocks and bonds must compete for investor money.
To compare mortgage interest rates or to get free pre-approval on home loans, contact the loan officers at New Homes Central Lending toll-free at (866) 439-6549, Monday – Friday from 8:30 a.m. – 8:30 p.m. or Saturday and Sunday from 9:30 a.m. – 6:30 p.m., or apply online anytime.
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The Author: Sandra Tuell Website: http://www.newhomes.com About: As weblog author for Homes Advisory, the blog for New Homes Realty, Inc., Sandra Tuell covers topics that run the real estate gamut, written expressly for the home buyer. On the blog, home buyers will find practical information and advice on preparing their existing homes for sale, enlisting the services of a buyer’s agent, searching for new homes, making an offer and closing the transaction. Sandra regularly presents real estate news from the perspective of how events will impact home buyers and the real estate industry in general. Trained as a journalist, Sandra stepped into the real estate industry as an accredited home staging specialist, interior arranger and color expert. Since March 2007, Sandra has researched, commented on and explored happenings in the real estate industry, including home building, home mortgages and financing, real estate investing, and the economy. With a passion for all that is pertinent to the design, comfort, livability and marketability of the home, Sandra also provides tips and insights for homeowners who wish to maximize the potential of their personal spaces and turn their new houses into homes. For the past four years, Sandra has operated her own interior arrangement and home staging company, Roomscapes, servicing clients in Pinellas County, Florida. Previously, Sandra worked in the corporate world as a marketing professional, applying her creative energy in a variety of roles including advertising, promotions, special events planning and web content creation. Her current position as a writer for New Homes Realty allows her to bring together her love of design and her educational training as a journalist. "It's really the best of both worlds," says Sandra.
This entry was posted by Sandra Tuell, on Monday, December 17th, 2007 at 1:08 pm and is filed under Mortgage/Home Financing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Comment by Mortgage Blog
Its interesting to see your comments on the housing market in the US. I write and blog and run a mortgage brokers in Wales UK and we are starting to see the after effects of your subprime problems. You guys think its going to get worse before it get better?
Comment by Sandra Tuell
Hello Daniel, the concern now is how many homeowners with subprime loans will end up in foreclosure when the ARMs reset this year. If the economy holds up, things may start looking up in the real estate industry. While many housing markets have seen double digit drops in home values, there are actually markets that are seeing an increase in values and little to no inventory backlog. Overall, most economists and analysts predict that 2008 will be another tough year.
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