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IWP!, flagship product is Chicago's premiere real estate Investment
magazine. Entitled Invest With Passion!, it is the tool for investors and professionals in the
Mid-West. The publication seeks to grow it's market share by providing
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person.
Since it's release in January of 2006, the magazine has been well received and
continues to gain momentum and support. The education, information, and
networking opportunities for the real estate investor has been long neglected.
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WHAT DRIVES MORTGAGE INTEREST RATES
By Marla Barch
At cocktail parties, one often
hears discussions of the stock market trends, with guests professing
expertise on the reasons for market movement and predicting the future
direction. While many believe they've deciphered the stock market, the
majority will still admit that the movement of mortgage interest rates
remains a mystery to them. This is the article they need.
To crack the mystery of the
interest rates, we must first understand the source of mortgage funds.
The money in any real estate deal
often travels a winding road, with many stops before arriving at the
closing table. The mortgage broker or banker is not the final source of
funds. Instead, he/she serves as one of potentially many intermediaries
in the process of the mortgage being originated, funded, bundled and sold
to investors on the open market. While there are several money trees that
feed mortgages, the majority of funds lent to purchase homes ultimately
comes from fund managers and traders purchasing mortgage-backed securities
(bonds).
Every morning, lenders determine
the interest rates on their fixed rate mortgages by analyzing the price of
the mortgage-backed securities, such as Fannie Mae bonds, since this is
likely where the loans will be sold. The bonds have an inverse
relationship to interest rates. If the bonds are lower/worse, interest
rates will be higher/worse and vice versa. If the bonds move tremendously
during the day (more than 30 basis points), lenders will often re-price
midday.
So we've established that
mortgage-backed securities determine the mortgage interest rates. But
what moves the mortgage-backed securities?
In an open market economy like
ours, bond prices move up and down based on traders, fund managers, and
others buying and selling that particular security. In order to limit
their own risk, traders diversify their investments by dividing the
majority of their limited capital between stocks and bonds. Various
indicators such as economic data, stock movement, monetary policy,
international politics, and technical data cause them periodically to
shift more funds either to stocks or to bonds; thereby, creating a seesaw
relationship between the two.
Several times per week, economic
data is reported by the government and academic institutions, favoring
positive returns in either stocks or bonds. If an economic report will
likely be interpreted as good for the economy, the stock market will
benefit and smart investors will shift their attention that way. On the
other hand, if the interpretation suggests the opposite, money will be
driven into the safety net of bonds - causing mortgage interest rates to
improve. For instance, reports indicating that unemployment is higher than
expected or desired will be interpreted as bad news for the economy. This
will result in a downturn of stocks and a favorable return for bonds - and
thus better mortgage interest rates.
Because they are directly affected
by stocks, bonds also respond to corporate profit reports, losses,
mergers, bankruptcies and more. For instance, March 17, 2008 saw an
improvement of the 5.5 Fannie Mae bond by 116 bps (basis points),
significantly improving mortgage interest rates. This was triggered by the
news of Bear Sterns' plan to sell stock to J.P. Morgan at $2/share, an
enormous decrease from $90/share a few weeks earlier. As stock prices
fell, investors shifted capital to bonds. Bonds have also improved after
each report of large bank write-offs. Conversely, bonds performed poorly
in response to banks being infused with new money by both the government
and the private sector.
Based on the inverse relationship
of stocks and bonds, let's consider the impact of the Federal Open Market
Committee (FOMC) and others in a position to influence monetary policy.
Any actions designed to stimulate the economy will result in mortgage
interest rates suffering. Despite the media's constant assertion that Fed
rate cuts will improve mortgage interest rates, the opposite can be
evidenced by studying the historical responses of the mortgage-backed
securities to Fed rate cuts and hikes. The day following the January 23,
2008 surprise .75 Fed rate cut saw a 94 bps worsening in the 5.5 Fannie
Mae bonds and another 50 bps decrease the next day, for a total loss of
144 bps.
In today's globalized economy,
news from abroad sometimes impacts the U.S. market as strongly as domestic
events do. Beginning on December 28, 2007, just prior to that surprise
cut, bonds had increased about 200 bps over 4 weeks in response to the
assassination of the Pakinstan opposition leader, Benazir Bhutto. Fear of
political instability drove traders to the safety of bonds. On the
contrary, the U.S. welcomed the news of Fidel Castro stepping down as the
president of Cuba in February 2008, hoping that trade would open between
the U.S. and Cuba. This news acted as a stimulus to our economy, hurting
mortgage interest rates.
One final indicator of mortgage
interest rates that needs explaining is technical data. Many methods have
been devised in an effort to predict the direction of stocks and bonds.
For instance, Japanese “candlestick” charts are often used to assess
trends, determining floors of support and ceilings of resistance. This
method makes use of moving averages, peaks, and troughs to anticipate
change. Another common chart is the stochastic oscillator, which was
designed to reveal when a stock or a bond is “oversold” or “overbought,”
denoting a likely shift in the opposite direction, particularly when
there's a “negative stochastic crossover.” Learning to read these charts
will be useful to investors beginning to follow the mortgage-backed
securities. By observing changes on these charts, one can begin to draw
connections to the causes.
As if suspended in a spider's web,
mortgage interest rates are tangled in an intricate network of economic
reports, the stock market, national financial policy, international
politics and the technical charts. But if you remember the rule of thumb
that news that's bad for the economy is good for mortgage rates and vice
versa, you may be able to glimpse the mortgage interest rate trends.
You'll feel like a genius at that next cocktail party.
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Marla Barch is an investor and a
mortgage planner with America's Mortgage Choice. She specializes in
helping investors reach their financial goals through effective management
of their equity and cash flow, using advanced strategies to propel their
wealth building. She can be reached at mbarch@amchq.com. |
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