How does a Volatile Equity Market Impact Mortgage Rates?

How does a Volatile Equity Market Impact Mortgage Rates?

Traditionally, stock and bond markets maintain an inverse pricing relationship with one another. That is, when stock prices weaken, bond prices strengthen. Bond price increases ultimately cause rates in general, (including mortgage rates) to fall. When stock prices begin to show indications of a Bear Market (a market in decline), investors sell their stocks and seek the safety offered by bonds. Simple economics tells us that when there is a strong demand for bonds, their prices will rise, and the rates they return to investors are adjusted downward accordingly. Here is an example:

Investor Jones buys a $10,000 bond (at par value) with a rate of return of 10% per year, or $1,000/year income.

Investor Smith buys the same bond but is required to pay $11,000 for the same yearly income. What is the rate of return for Investor Smith?

$1,000/$11,000 = Earning returns are lower for Smith than for Jones, at 9.1%, due to the premium price Smith paid because of strong bond demand.

When something disrupts the stock market’s bear trend, investors then transfer bond investments back to their preferred stock investments. This stock buying frenzy generally sends stock prices higher, and, as one would expect, bond prices lower. When histrionic pricing trends occur on a daily basis, the stock market has entered a volatile market pattern.

In early February 2018, stock market fluctuations, on a daily basis, swung far and wide. These are the type of volatile stock movements that create a frightening financial marketplace. When a stock investment becomes a nauseating ride on a roller coaster, investors make decisions from fear and uncertainty, which are the worst places from which to make decisions. However, these volatile times cannot be overlooked as one of the recent volatile trading days has the claim to fame as being one of the largest one day point decline ever.

Equity markets manage themselves through a series of corrections or pullbacks. The reality is market corrections are a part of the market cycle. By definition, a market correction, has a minimum decline of 10%. These corrections occur approximately once every year. While there are many guesstimates as to why this volatility began, it is still more important to keep your real estate/mortgage objectives in mind as you decide if and when to buy a home. When working within volatile equity markets, you are advised to act prudently, and cautiously.

Remain focused upon you defined objectives. Confirm your risk tolerance has not changed. Maintain cash liquidity to meet short term needs. Verify that your current investments match your risk tolerance and investment timelines.

An investor’s personal goals always outweigh the general market conditions.