With Independence Day behind us and the second half of 2015 now underway, it’s a good time to think about what the mortgage market has in store for home buyers and owners in the next few months. But first, it’s important to understand how rates rise and fall each day.
How mortgage rates markets change
Most U.S. mortgages loans up to $417,000 are packaged into bonds called Mortgage Backed Securities (MBS), and these bonds trade daily in global bond markets.
Rates fall when bond prices rise, and rates rise when bond prices fall.
This happens because bonds are a “fixed income” investment, meaning they pay a fixed rate of return annually to their investors, and this “rate” rises and falls inversely with a bond’s price.
Bonds are considered safe investments because of this “fixed income,” and MBS are considered among the safest bonds because of their U.S. government backing.
When global economic sentiment worsens, global investors buy MBS, driving prices up and rates down. But when global economic sentiment improves, global investors sell MBS in search of higher-return investments, driving prices down and rates up.
2015 rate recap
Rates on “conforming” loans up to $417,000 held near or below 4 percent for much of early 2015, but started rising in May and June as MBS sold on U.S. economic sentiment improved.
Then, while we celebrated Independence Day in the U.S. last weekend, Greece’s citizens declared their own form of independence by voting against harsh terms attached to the latest bailout offer European creditors offered to the troubled nation.
How events in Greece can impact U.S. mortgage rates can be confounding until you understand the bond market basics outlined above.
In this case, global investors worry that instability in Greece will trigger instability in the rest of Europe and beyond, and the short-term reaction is to buy MBS (and other safe investments), which has helped pushed rates back below 4 percent.
Also contributing to this rate dip is bond buying in reaction to China’s stock market plummetting 30 percent since early June, and the latest U.S. jobs growth data released July 2 coming in less than expected.
Rate outlook
In the next few months, rates are unlikely to dip considerably more than they already have, but the rising trend from May and June may not resume due to renewed global uncertainty.
The Greek drama that began in 2012 will continue in the coming months as the fate of Greece’s membership in the Eurozone is ultimately decided by its creditors, and global bond investors react to the impact this will have on the rest of the Eurozone.
The Chinese stock market falling 30 percent may not turn out as bad as it might look, considering it rose 150 percent in the 12 months leading up to the reversal.
And in the U.S., we’ve got little inflation risk, a neutral job market, home prices leveling, and strong consumer confidence.
All of these factors should keep rates near the 4-percent range, which makes home buying very affordable in a historical rate context. But just remember that uncertainty also leads to daily rate volatility along the way.
Watch rates daily
Rates move daily based on national and global factors. But the best home-buying deals require specific local focus and expertise.
Monitor rates specific to your profile daily, and get pre-approved by a lender before you start home shopping.
Then find a local real estate agent to help you identify the best deals in your target neighborhoods.
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