Valuation Management Group, as part of our appraisal management services, strives to write articles of interest to our industry partners. Our clients certainly understand the effects of rising and falling interest rates as they relate to their volumes and managing their pipelines, but we felt the timing of this blog was appropriate given recent trends in long-term mortgage interest rates.
Long-term mortgage interest rates are determined by investors in the secondary market and interest rate fluctuations are beyond the control of lenders.
FannieMae and FreddieMac are government sponsored entities (GSE’s) that buy mortgages and bundle them into securities, which are then sold as “mortgage-backed securities” (bonds) to investors. Investors buy these securities (bonds) because they desire stable payments for a long period of time.
As with stock and bond markets, prices and yields move up and down. When the economy is strong, investors command higher yields on mortgage bonds, which in turn forces interest rates to rise. In a market downturn, interest rates generally decline.
Some factors that influence long-term mortgage interest rates are:
- When stock prices fall or are stagnant, rates will generally fall.
- When unemployment rises, rates will generally fall.
- When foreign markets are unstable, rates tend to fall.
- When U.S. stock prices rise, rates tend to do the same.
- When unemployment is down and wages are growing, rates tend to rise.
- When foreign markets are stable and growing, rates will often rise.
- When inflation accelerates, rates will often rise.
- When inflation is expected to slow, rates will often fall.
One of the best indicators of whether interest rates will rise or fall is the movement of the 10-year Treasury bond. When yields go down, rates generally follow.
To illustrate, the recent turmoil many attribute to the Brexit vote caused yields of long-term bonds to plummet; the 10-year Treasury bond dropped to a record low of 1.37 percent, which in turn led to near-record lows in mortgage rates.
Many are amazed that the mortgage interest rates have been low for an extended period of time. It will be interesting to see where the mortgage interest rates go within the next year.
Valuation Management Group is a national, full service appraisal management service company that manages the appraisal process for financial institutions, banks, mortgage bankers, and credit unions. We offer the full array of commercial and residential appraisal products and services. We take the appraisal process from ordinary to extraordinary.