I’ve touched on interest rates often in recent months b/c the most recent drop has been so surprising.
Borrowers and agents alike are nevertheless still asking if rates will stay low or move lower, so I thought it was time to repeat the major factors that move interest rates as a whole.
1) Economic Data.
Negative economic news like increasing unemployment, decreasing job growth, slow GDP growth and weak retail sales will typically push rates down, as investors move from stocks to bonds in response to negative news. Conversely, positive news usually pushes rates up. Full on recessions (a reduction in all major economic indicators over three to six months) usually bring rates down significantly.
Signs of looming inflation will push rates up. Investors want to make sure their returns exceed the rate of inflation. Weak inflation reports (or deflation signs) will push rates down.
3) Geopolitical crises.
Major economic crises or military confrontations (especially if they involve the U.S.) will usually push rates down, as investors move from stocks to the relative safety of bonds. A great example was the sovereign crisis in Greece several years ago when Greece threatened to default on its foreign debt obligations, as it held rates down for a long time. Another example was Russia’s invasion of Ukraine, as that too pushed rates down.
4) Supply and demand (of and for mortgages) play a role too.
Rates were held lower for a long time b/c the Fed artificially inflated demand for mortgage-backed securities by buying them by the billions. Currently, rates are probably a bit higher than they might be otherwise b/c so many borrowers want to refinance, allowing lenders with excess volume to push up rates. Excess demand for mortgage-backed securities pushes rates down, while excess demand for mortgages themselves can push rates up a bit. But either way, the supply and demand for mortgages and mortgage-backed securities definitely influences rates.
5) The Fed.
The Fed still can influence rates but just not as much as before, as explained in one of the blogs linked above. The Fed primarily influences rates by raising and lowering the Fed Funds rate (the rate that banks charge each other for overnight borrowing).
So, do I think rates will stay low for a while? Yes, but I was also certain that Hillary would win the Presidential election.
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