After two weeks of steadily increasing mortgage rates, from the mid 4's to the mid 5's, volatility in the mortgage market has show signs of stabilization. Last week mortgage rates topped out near 5.625% before a late week MBS market improvement allowed lenders to lower the par 30 year conventional fixed mortgage rate closer to 5.25%. This week begins with MBS trends continuing to indicate that mortgage borrowing costs should continue to moderate.
For new readers and as a reminder for long standing rate watchers, the foundation for how mortgage rates are generated is built upon trading in the secondary mortgage market, specifically mortgage backed securities (MBS).
If investor demand for MBS is high, prices are generally moving higher which helps mortgage rates tick lower.
If investor demand is weak for MBS, that drives prices lower, which increases mortgage rates.
Investor demand is determined by their perception of the overall economy and the gyrations for the yield curve. If investors believe the economy is strong and growing, they tend to move their funds into higher yielding stocks as a growing economy tends to lead to higher corporate profits and higher returns for their investment dollar. When our economy is struggling, investors tend to move their money into safer lower yielding investments such as MBS and treasuries to avoid losing money by holding stocks.
During a struggling economy, corporate profits tend to decrease or disappear thus the flight into safer assets. Investors make their investment decisions based on many factors including economic reports that are released almost on a daily basis.
(Read More: HOW ARE MORTGAGE RATES DETERMINED?)
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