When there are dramatic swings in the stock market, you may wonder how mortgage interest rates will be affected. What is the relationship between mortgage rates and the stock prices? Do they move together or in opposite directions?
Stocks and Mortgage Rates Both Mimic the Economy
While the stock market is not directly related to mortgage rates, both are based on the basic movement of the economy. When things are going swimmingly, both stock prices and mortgage rates tend to rise. They both generally fall when the economy is faltering. When investors are concerned about national or global financial health, they move their money to safer investment products like bonds. Bonds have guarantees of repayment and interest from government entities, whereas stocks make no promises. It is possible for stock prices to fall to zero, creating a total loss for investors. As more investors flock to bonds and pull out of the riskier stock market, demand for stocks falls and so do their prices.
Mortgage Rates Are Related to Bond Prices
Mortgage rates are also closely tied to bonds, specifically 10-year U.S. Treasury bonds. When investors are fearful and make the jump to bonds, the increase in demand for bonds causes their prices to rise and their yields to fall. The 10-year Treasury bond yield is a benchmark for most other consumer interest rates, including mortgage interest rates. When bond yields fall, in general, so do mortgage rates, auto loan rates, credit card rates, etc. It may not be an immediate drop, but consumer rates usually follow bond yields.
Mortgage loans themselves are often turned into bonds. Most mortgage lenders sell their loans to the secondary market, where they are bundled together and turned into mortgage-backed securities. When there are plenty of mortgage bonds on the market, demand is lower and interest rates will be lower. And if demand increases and there are fewer mortgage bonds available, interest rates will climb.
Mortgage Rates Are Influenced by the Federal Reserve
The U.S. Federal Reserve is tasked with keeping inflation to a manageable level in order to stabilize the value of the dollar. If the Fed senses that inflation is getting too high, it may raise its own federal funds rate, which in turn pushes other rates up. Or mortgage rates may decrease when inflation is stagnant, and the Fed lowers its rate to stimulate economic activity.
Mortgage interest rates and the stock market are not related but they do seem to have parallel movement patterns. That means if the economy is doing poorly, you will be losing money on your stock investments but getting a sweet deal on a mortgage loan. If the economy is roaring, you face the flip: your stock portfolio will be soaring, but it will be much more expensive to get a mortgage.
Instead of watching the stock market to see what will happen to mortgage interest rates, you should pay attention to 10-year Treasury bond yields. Also keep an eye on more fundamental economic indicators such as the unemployment rate, inflation and wage growth.
FAQs
Mortgage Rates Are Influenced by the Federal Reserve
Does the stock market affect mortgage rates? ›
Equity markets compete for the same investor dollars as do mortgages and bonds, and a rising stock market may see investors selling some bond holdings in order to capitalize on stock gains. To the extent that money is shifted–bonds sold to free up cash–this can cause mortgage rates to increase somewhat.
What happens to mortgage interest rates when the stock market crashes? ›
In summary though, stock market crashes tend to be good for the mortgage industry overall, as they result in lower rates and an immediate upswing in refis.
Does the stock market outperform the housing market? ›
Does the Stock Market Out Perform the Housing Market? Historically and generally the stock market outperforms the housing market, but the housing market is usually a bit more stable than the stock market.
Does the stock market impact interest rates? ›
In many circ*mstances, interest rate movements can affect stock prices. The biggest impact stock prices have on interest rates is on the demand for bonds. If stock prices decline, it may indicate investors are seeking to reduce portfolio risk and putting more money to work in bonds.
Does having stocks affect mortgage approval? ›
The lender will use this information to assess your overall financial situation and determine whether you're a good candidate for a mortgage. So, if you have stocks or bonds, you'll likely have to provide that information when you apply for a mortgage.
How does 10-year Treasury yield affect mortgage rates? ›
Factors that influence mortgage rates
Fixed-rate mortgages are tied to the 10-year Treasury yield. When that goes up or down, fixed-rate mortgage rates follow suit. The fixed mortgage rate isn't exactly the same as the 10-year yield, however; there's a gap between the two.
Should I buy a house now or wait for a recession? ›
What if There's a Recession? The odds of a recession in 2024 now stand at 45 percent, according to Bankrate's most recent survey. And as you might imagine, recessions are a risky time to buy a home. If you lose your job, for example, a lender will be much less likely to approve your loan application.
Do mortgage rates go down during a recession? ›
Lower rates: During a recession, the Federal Reserve will often lower interest rates to stimulate the economy. This can result in more favorable rates for borrowers getting mortgage loans.
What stocks will go up when interest rates go down? ›
Cyclical stock sectors
The consumer discretionary, technology, real estate, and financial sectors have historically been especially likely to outperform the market when rates fall and earnings rise. Financial stocks look particularly appealing, due to how inexpensive they've recently been.
It's harder to get rich off stocks than it is to get rich off real estate. The main reason why is due to the absolute amount of money you need to risk to get rich in stocks. Even if your $5,000 stock investment goes up 50%, that's only $2,500.
Will house prices go down if the stock market crashes? ›
The real estate market won't crash, and it especially won't crash in high-demand areas (Southern California, the Bay Area, Atlanta, SoFlo, Colorado, etc.). We'll likely see a steep-ish correction in "second-tier" markets, like the ones in Texas, Tennessee, and the Rust Belt (Pittsburgh comes to mind).
Does Warren Buffett invest in real estate? ›
Warren Buffett Doesn't Buy Real Estate Properties – But He Couldn't Say No To This Nebraska Farm. Warren Buffett generally buys real estate only in the form of real estate investment trusts (REITs). He sticks to stocks because he thinks they offer a more efficient way to build wealth.
What is the stock market prediction for 2024? ›
Overall, Yardeni Research forecasts S&P 500 operating earnings at $250 in 2024, up 12% vs 2023. He puts them at $270 in 2025 (up 8%) and $300 in 2026 (up 11.1%). These figures compare with analysts' consensus forecasts of $244.70 in 2024, $279.70 in 2025 and $314.80 in 2026.
What are the three main factors that affect interest rates? ›
How are interest rates determined? Market conditions and the risks associated with lending largely influence interest rates. Factors such as inflation, economic growth, and availability of funds also play a role in determining interest rates.
Will interest rates go down in 2024? ›
Yes, mortgage interest rates are expected to go down a little in 2024, then more noticeably in 2025.
Is it better to invest in stock market or pay off mortgage? ›
Since mortgages are tied to the value of your home, they often come with relatively low interest rates. If your interest rate is 4.5% or lower4, you may want to focus on investing. Alternatively, if you have a high interest rate, you'll want to make paying that off a priority.
Does a stock market crash affect house prices? ›
Buying a House as a Long-Term Investment
Property values can swing in the short term, but historically, they have increased over the long term. If you don't need to sell your home during the crash, it's often best to wait it out. The market typically recovers, and so will the value of your home.
Does owning stocks help get a mortgage? ›
Nevertheless, using stocks as collateral for a loan can be a great way to get your hands on more liquidity. The approval process may be quicker when you use stock as collateral, and you may even qualify for a lower interest rate.
