Why Do Mortgage Rates Fluctuate?
Mortgage rates can be a barometer for how well the housing market is performing and even the economy as a whole. Many factors can cause prevailing mortgage rates in a particular area or across the country to fluctuate, from simple supply and demand to government investments and stock market trading.
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Bond Prices
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Mortgage rates can be inversely affected by bond prices. A bond is a debt security that gathers interest over time. When the bond matures, the holder of the bond is entitled to ask the debtor for payment in full plus any applicable interest. When bond prices rise, mortgage rates decrease, and when bond prices are lower, mortgage rates rise higher, according to The truth About Mortgage's website. The rise and fall of mortgage rates is not directly equal to the rise and fall of bond prices, as other market factors can affect mortgage rates.
Government Financial Moves
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The federal government has a vested interest in ensuring consumers are able to secure the funds necessary to purchase a home. This is why the government chooses to invest in companies that create mortgages to encourage them to continue lending and at lower rates. When the government doesn't invest as much money into these companies, rates tend to increase, according to the Academy of Mortgage's website.
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Economic Conditions
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The state of the economy has a great effect on mortgage rates nationwide. When the economy is performing well and unemployment is low, mortgage rates usually increase as a method of fighting off inflation in the market. When the economy is performing poorly, mortgage rates drop to encourage people to buy and pump more money back into the economy. When a radio advertisement screams about a "buyer's market" it's usually due bad economic conditions in a given area.
Demand for Mortgages
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When people are buying homes left and right, mortgage rates tend to rise because banks and other lending institutions are taking on more and more risk in lending out capital. Conversely, when the housing market is slow and consumers are not purchasing homes in large numbers, rates drop to encourage buyers to join the market once again. These rate fluctuations are not sudden, and trends upward or downward may take months to play out to determine what condition the real estate market is actually in.
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