What Moves Mortgage Interest Rates?

Yes, mortgage interest rates are near all-time lows but they still jump around quite a bit. Why do they move?

Investors buy mortgage-backed bonds. When this demand is high, then the interest rates necessary to attract investment fall. When such demand is weak, then interest rates go up to attract more investment.

Bad news, for instance, typically increases demand for mortgage backed security. Investors want safety. They may pour of Japan, for instance, after its earthquake and tsunami, and they need a place to park their money.

These moves are typically short-term but they can produce more durable effects on interest rates.

USNEWS.com reports: One of the most important elements driving mortgage rates is investor confidence. In general, natural disasters or political and economic instability undermine that confidence and make the investors who supply the capital needed for home loans nervous.

For example, the recent earthquake, tsunami, and nuclear crisis in Japan raised a host of questions among investors, not only about the future of the Japanese economy, but how an economic slowdown there could potentially impact growth in the United States. Many times, these generalized concerns cause a “flight to quality,” experts say, in which anxious investors move money out of riskier asset classes such as stocks and into those with greater perceived safety—bonds such as mortgage-backed securities and U.S. treasuries.

Heightened demand for these “safer” investments drives down interest rates.

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (Alexander90210.com), he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Alexander90210.com. Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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