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Improving economy hasn't boosted mortgage
rates -- yet
By Greg
McBride • Bankrate.com
Mortgage shoppers trying to handicap the direction of rates have
traditionally used the adage, "What's good for the economy
is bad for mortgage rates." But this theory hasn't held water
lately: An improving economy hasn't boosted mortgage rates -- yet.
Despite continued improvement in the fortunes of the
economy, 30-year fixed mortgage rates reached the lowest point since
mid-November this week.
Traditionally, as the economy improves, investors
pursue higher returns in the stock market, dumping Treasury securities
in the process. A mass exodus from government securities pushes
yields higher, as well as mortgage rates. Mortgage rates are closely
related to yields on long-term Treasury securities.
In addition to the improving economy and low inflation,
continued accounting concerns have investors moving from short-term
to long-term Treasuries instead of stocks. This has been good for
mortgage rates, pushing the 30-year fixed mortgage down to 6.84
percent this week.
Like a wary sea turtle, signs of continued economic
improvement have investors peeking out of their shells. Rather than
sticking their necks out too far and venturing back into stocks,
investors have been opting for long-term Treasuries. With the continued
modest pace of inflation, investors aren't currently focusing on
the erosion in value of fixed income that higher inflation can bring.
With any Fed rate hikes still seen as being several months away,
professional investors aren't fearful of the collective devaluation
of bond holdings that interest rate hikes bring. The fear of dwindling
asset values seems primarily confined to stocks.
The preference for the safety and security of government
bonds over the bumpy ride in stocks signals that investors are still
unwilling to embrace the heightened uncertainty -- and higher perceived
risk -- of the stock market. This is not at all unusual in a market
environment that shows no evidence of compensating for that risk
through higher returns.
Home buyers and refinancing candidates have been the
gleeful beneficiaries. Thirty-year fixed mortgage rates have remained
within the range of 6.84 percent and 7.25 percent over the past
90 days. During that time, rates have not moved in the same direction
for more than three consecutive weeks. In the past six weeks, the
range has narrowed even more, to just 15 basis points. A basis point
is one-one hundredth of a percent.
Even as the economy has improved, accounting jitters
have kept a lid on mortgage rates. Barring a sudden lifting of the
dark accounting clouds currently hovering over investors and the
market, mortgage rates appear destined to remain in a narrow range.
Potential borrowers waiting on the sidelines can take advantage
of rate dips.
However, with rates confined to a range there is little
incentive in waiting to lock. Refinancing candidates may unwittingly
hang onto the higher rate they are attempting to refinance out of
by waiting on the sidelines for the next big drop in rates. As the
last three months have shown, that next big rate drop may not materialize.
Don't wait too long to lock as, like the stock market itself, mortgage
rates won't remain low forever.
Greg McBride is a financial analyst
for Bankrate.com.
For advice regarding your specific
situation, please e-mail one of Bankrate.com's
Q&A experts or visit the Personal
Finance Advice channel on Bankrate.com.
-- Posted:Feb. 22, 2002
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